Now is the time to start early and take advantage of some strategic opportunities to save on taxes for both you and your family this year.
Gift/estate tax exemption
The federal estate tax rate for larger estate transfers is 40%. Fortunately, we have a lifetime exemption that can help protect these transfers from both estate and gift taxation. Thanks to a generous adjustment for inflation for 2024, the exemption (the amount you can leave to your heirs or give away over your lifetime without tax) has now been increased to $13.61 million per individual and $27.22 million per couple. This is the highest level it has ever been. However, many pros in the field believe it is not likely to stay this way.
Tax Cuts and Jobs Act
When the Tax Cuts and Jobs Act (TCJA) became effective in 2018, the gift and estate tax exemption was immediately doubled. However, by law it is set to automatically decrease beginning in 2026 unless Congress acts. Individuals who have the means to make significant gifts should consider doing so before this opportunity sunsets.
Lifetime gifting now
Making gifts during one's lifetime can be a strategic move to both remove assets and the future appreciation of those assets from your taxable estate. These gifts can take different forms, such as outright gifts or funding special trusts. Gifts can be made of cash, securities, farmland or private businesses. Many business owners choose to gift minority, non-controlling interests and take advantage of valuation discounting allowed by the IRS to maximize the value of their gifting strategy.
Spousal lifetime access trusts
Spousal lifetime access trusts (SLATs) are particularly beneficial for those who are cautious about gifting too much. For married couples, a SLAT may allow a spouse to have access to the trust assets if needed, providing a safety net of access to funds while still taking advantage of the tax exemption now. For married couples, each spouse may create a SLAT for maximum flexibility and to take advantage of their lifetime exemptions. However, care must be taken to avoid something called the reciprocal trust doctrine. Make sure your attorney is well-versed in these designs.
Annual exclusion gifts
In 2024, each person can gift up to $18,000 annually to another person without affecting their lifetime exemption ($36,000 for married couples). These gifts can be made directly, into trusts for their benefit or into 529 college savings plans. The latter option allows for frontloading up to five years' worth of annual exclusions.
Qualified personal residence trusts
Qualified personal residence trusts (QPRTs) enable the transfer of a family home into a trust, with you retaining the right to live there for a period of time you designate. At the end of the term, the property is distributed to the beneficiaries, typically your heirs or a trust for their benefit. Current higher interest rates may result in a reduced, discounted taxable home value on paper, potentially enhancing the tax benefits of this strategy.
Grantor retained trusts
Grantor retained trusts (GRTs) are an estate planning technique once made famous by Walmart founder Sam Walton. The Walton family used it to pass significant wealth down to the next generation gift tax-free. Potentially, this technique allows for the transfer of all future income and appreciation on your wealth gift tax-free to the next generation while you still retain full ownership and control over the principal.
Tax loss harvesting
This strategy involves selling your losing investments at a loss to offset other capital gains. This underused tool is often effective for reducing taxes. If losses exceed your gains, you can use up to $3,000 to offset ordinary income, and any remaining losses can be carried forward.
Roth IRA conversion
Transitioning from a traditional IRA to a Roth IRA can be highly beneficial, especially during market downturns when values are lower before a potential market rebound. This conversion requires paying taxes upfront on the tax-deferred amount, but it offers the advantage of future tax-free qualified withdrawals (post age 59 ½ and held for five-plus years) and without any required minimum distributions (RMDs). This could be a smart tactical move to consider now. Higher-income taxpayers can take advantage of the lower top marginal income tax rates we have today before the income tax relief provisions of the TCJA are expected to sunset starting in 2026.
Making charitable contributions can provide significant tax benefits. Donating appreciated assets is particularly attractive and tax-efficient, as it allows you to potentially avoid capital gains tax. You can contribute directly to a qualified charity, or you can decide to exercise more control over your philanthropy by using donor-advised funds (DAFs) or setting up a private family foundation (PFF). One particularly flexible planning idea is the use of the charitable remainder trust (CRT). CRTs allow you to sell your low-basis, appreciated assets without triggering any capital gains taxes. They provide an immediate income tax deduction, reduce your taxable estate and converts the full value into a lifetime income stream. With higher interest rates, the charitable deduction increases, making CRTs more advantageous.
Required minimum distributions
Required minimum distributions (RMDs) may push you into a higher tax bracket. One option is a qualified charitable distribution (QCD) allowing you to direct up to $100,000 to certain qualified charitable organizations and reduce taxable income. This may allow you to once again deduct charitable contributions that were no longer deductible due to the so-called “SALT” limitations that were enacted in 2017.
Here is the bottom-line checklist for year-end income tax and estate planning
- Consider exploring the above gifting and planning techniques while we have this historic opportunity to use the highest lifetime estate and gifting exemption ever.
- Communicate. The involvement of your heirs in your plan before you pass away can be the key to avoiding family conflicts after you are gone, especially as it relates to the family business.
- Build flexibility into your plan so you can adapt to evolving goals over time and periodically update to reflect changes with your family or business.
- Seek out advisers who have experience with advanced tax and estate planning.
Martin Johnson is a registered representative of and offers securities and investment advisory services through Lincoln Financial Advisors Corp. (member SIPC). Lincoln Financial Advisors and its representatives do not offer tax or legal advice. Progressive Dairy, Progressive Cattle and Progressive Forage are not affiliated with Lincoln Financial Advisors Corp. This article is provided for information purposes only. Readers should consult their own professional advisers for specific advice tailored to their needs. Information contained in this article may be subject to change without notice.