While tax updates might not be the most exciting topic, they can significantly impact your estate planning and financial future. So, let’s take a look at what’s changed for 2025.
Estate and Gift Tax Exclusion Increases Starting Jan. 1, 2025
The estate and gift tax exclusion increased from $13.6 million to $13.99 million per person. That means a married couple can now shield nearly $28 million from estate taxes if they plan correctly. The annual gift tax exclusion also increased from $18,000 to $19,000 per recipient. If you plan to make financial gifts to loved ones, it’s a good idea to do so earlier in the year rather than waiting until December. That way, the money is out of your estate, no matter what happens during the year.
The Effect of Higher Interest Rates on Estate Planning
Interest rates have risen since 2022. Since certain estate planning techniques work better in higher interest rate environments, we’ve shifted to using strategies that take advantage of these higher interest rates.
Qualified Personal Residence Trust (QPRT): A great way to transfer a residence to your heirs while minimizing estate taxes.
Charitable Remainder Annuity Trust (CRAT): If philanthropy is part of your plan, you can donate assets while still receiving income from them during your, or your beneficiaries’, lifetimes.
Upcoming Deadline for ‘Use It or Lose It’ Estate Planning
The Tax Cuts and Jobs Act of 2017 (TCJA) provided for the doubling of the prior $5 million per person estate tax exemption. However, since the TCJA did not receive enough votes to become a permanent law, it is only effective for 10 years. Therefore, unless Congress passes new legislation to extend the higher exemption, the current almost $14 million exemption will be cut in half to about $7 million per person on Jan. 1, 2026, less than one year from now.
If you have a large estate, consider using your exemption now. Making gifts today locks in the current higher exemption, ensuring the future growth of those assets happens outside your taxable estate and that the amount you pass to your beneficiaries is not eroded by estate taxes.
How to Make the Most of Gifting Without Changing Your Lifestyle
Not everyone feels comfortable giving away large amounts of money during their lifetime. If you’re concerned about how gifts will affect your lifestyle, consider gifting assets you don’t rely on to maintain your lifestyle, such as vacation homes, growth stocks, or valuable personal property such as jewelry and artwork.
IRS Notice 2024–2035 and Inherited IRAs
A recent IRS notice made some crucial clarifications regarding inherited IRAs. Under the SECURE Act, most non-spouse beneficiaries must withdraw all inherited IRA funds within 10 years from the participant’s death.
Many beneficiaries thought they could wait and take all of the IRA funds in year 10. However, the IRS has now clarified that distributions are required annually, even within the 10 year period. Thankfully, in 2024, the IRS waived penalties for missed required distributions.
If any of these updates affect you, let’s talk. We’re here to help you maximize the opportunities available under current tax laws. Contact our office today! After all, the best way to prepare for the future is to plan while you still have time!