In 2011, there was a much smaller estate tax exemption, compared to the $13.51 million exemption of 2024, leading many individuals to take a more modest approach while attempting to avoid it. With many estates currently not being subject to estate transfer taxes, now is a great time to devote time and effort in creating income tax savings plans for the heirs of your estate.

With this being said, it is important to note that the federal tax exclusion is scheduled to sunset at the end of 2025.

With the sunset, beginning January 1, 2026, the exemption is lowered to $5 million, adjusted for inflation. There is a chance that Congress could decide not to sunset and extend the higher amount or they may implement a new lower amount.  Outlined below are some strategies to consider given the current exemption amount.

During your lifetime, one way to save on estate tax is to make a gift of assets utilizing the annual gift. By making a lifetime transfer, both the asset and any unrealized appreciation from those assets are removed from the donor’s estate. With the large exemption amount, this may not be an issue for many, but can still be a useful strategy.  By making annual gifts (up to the $18,000 annual exclusion amount), a transfer of appreciated property/investment may result in lower cost/highly appreciated property being shifted to other family members.  The recipient also acquires the carryover basis in such gifted property.    This may result in the recipient facing income tax (in the form of capital gains tax) on the future sale/disposition of the gifted property.

Additionally, spouses now have more flexibility regarding the reporting of a taxable estate. Previously, spouses took on complicated tax strategies to equalize each spouse’s estate so each could benefit from the full estate tax exemption amount (i.e., often reported to as the two-trust plan).  Now, the surviving spouse has the ability to receive the unused spouse’s estate exemption.  For this to occur, an election must be made on the “first spouse to die” estate tax return.   This “portability election” allows the surviving spouse to apply the unused portion of a decedent’s exclusion amount, as of the year of the decedent’s death. This election gives married couples additional flexibility on how to use their exclusion amounts.

In some instances, especially for smaller estates, it may no longer be worth pursuing some complex estate exclusion or valuation discount strategies that often allow a discounted value to be included in a taxable estate.  With smaller estates, it would be better to have property included in the estate with no valuation discounts such that the property gets a full step-up in basis for the estate beneficiaries and/or surviving spouse.

Consult with Experts

In addition to your legal advisors, it is important to include your Wegner CPAs tax advisor in discussions that surround your estate and related income tax planning needs.