Authored by Mark Lobb
Most estate tax planners and their clients have been focused on the expiration of the Tax Cuts and Jobs Act (TCJA). The TCJA expires at the end of 2025. In 2025, the gift and estate tax exclusions will exceed $14 million per person. On January 1, 2026, the gift and estate tax exclusions will revert down to approximately $7.5 million per person.
The focus from a planning standpoint has been to complete lifetime gifting before the end of 2025 to use up the elevated gift tax exclusion. Importantly, in 2019, the IRS issued final regulations creating a rule which is known as the Anti-Clawback Rule. This rule clarifies that an individual or estate will not be taxed on completed gifts made before 2026.
Alert: The American Housing & Economic Act of 2024 (AHEA), which is backed by Elizabeth Warren and recently adopted by VP Kamala Harris, creates a need to rethink the timing on completing gifts to use up the elevated exclusion amounts. If VP Harris is elected, you need to be aware of the estate planning proposals in AHEA.
In summary, it proposes the following:
- Reducing the lifetime exemption from $13.61 million to $3.5 million.
- Increasing the estate tax rates to:
- 55% – for estates over $3.5 Million and under $13 Million
- 60% – for estates between $13 Million and $93 Million
- 65% – for estates over $93 Million
- Reducing the current $18,000 annual exclusion to $10,000 per person and limiting the total amount of annual exclusion gifts in any one year to $20,000.
- Implementation of a 10% surtax on estates over $1 billion.
- Requires GRATs to have a 10-year life and a remainder interest equal or greater than 10%.
- The deemed owner of grantor trust assets would include those assets in their gross estate; any distribution to a beneficiary during the term of the deemed owner would be treated as a gift, and if a grantor trust is turned off and it becomes a non-grantor trust during the deemed owner’s lifetime, it would be treated as a gift. Existing grantor trusts would be grandfathered.
- Impose the generation-skipping transfer tax on transfers to a family member not born as of the date the trust was formed.
- Limits valuation discounts on the transfer of non-business assets.
- Imposes a new income tax surcharge on high-income estates and trusts, consisting of a 5% tax on the portion of the modified adjusted gross income (MAGI) that exceeds $200,000, and an additional 3% tax on the portion that exceeds $500,000.
- The amendments shall apply to estates of decedents dying, and generation-skipping transfers and gifts made, after the date of the enactment of AHEA.
If you or your clients have a gross estate worth over $3.5 million, action must be taken to complete estate tax planning. Waiting to do estate planning until next year will be risky; especially if the Democrats carry one or both branches of Congress.
Meet the Author:
Mark Lobb is a founder of the firm and the Managing Partner of Lobb & Plewe. He focuses on matters concerning middle-market companies which are closely held and the owners of such companies.
