The “Tax Cuts and Jobs Act” of 2017 included many tax changes that were favorable to taxpayers for purposes of the estate, gift and generation-skipping transfer (GST) taxes as well as income tax. Many of those taxpayer-friendly provisions are set to terminate or “sunset” after December 31, 2025. See the chart below for a summary of some of the changes. While it is difficult to predict whether Congress will act before December 31, 2025, to prevent a sunset for some or all of these provisions, the good news is there are planning strategies that you can use now to take advantage of these taxpayer-friendly rules while we know they are still law.
 

Transfer tax planning

Under current law, the estate and gift tax exemption and the GST tax exemption are both $10 million, adjusted for inflation. For 2024, these exemptions are $13.61 million per person (or $27.22 million for a married couple). If the current law sunsets, these historically high transfer tax exemptions are scheduled to revert to $5,000,000, indexed for inflation, as of January 1, 2026. Given the possibility that these exemptions could be cut approximately in half, now may be a good time to use some or all of your exemptions.

If you have not used all of your gift and GST tax exemptions and would like to transfer some of your wealth to family or other individuals during life, the following are some planning strategies that may help you achieve your goals:

Spousal lifetime access trust (SLAT)

A spousal lifetime access trust may be appropriate for people who are hesitant to give away significant assets now but want to take advantage of the increased gift tax exemption amount. With this strategy:

• The grantor makes a gift to a trust for the benefit of the grantor’s spouse and, if desired, the grantor’s descendants or other individuals.
• The grantor and grantor’s spouse retain access to the trust property through the spouse's rights as a beneficiary.
• The grantor uses some (or all) of the grantor’s gift tax exemption so that no gift tax is payable and the trust assets, as well as any appreciation on those assets, remain outside the grantor's estate and spouse's estate for estate tax purposes.
• The strategy can be enhanced with the allocation of the grantor’s GST tax exemption, allowing the assets and future appreciation to potentially escape transfer taxes for generations.

Outright gift

An individual can make an outright gift to one or more individuals to take advantage of the increased gift tax exemption amount. With this strategy:

• The recipient has full access and control over the gifted assets.
• If the value of the outright gift is $18,000 or below, the transfer may be sheltered by the annual exclusion amount (assuming no other gifts were made by the donor to that gift recipient in that year).
• Any amount of the outright gift in excess of the annual exclusion amount can be sheltered by the donor’s remaining gift tax exemption.

Dynasty trust

A gift to a dynasty trust is similar to an outright gift in that it is a transfer of assets. However, with this strategy:  

• Assets are transferred to a trust that lasts for two or more generations.
• The grantor’s gift and GST tax exemptions are allocated to the trust to shelter the trust assets and future appreciation from estate, gift and GST taxes.
• A dynasty trust (like other types of trusts) can be used to protect wealth from creditors.
• The dynasty trust is designed to last much longer than many trusts and often lasts as long as the law in the state of creation allows, including in perpetuity.

2024 inflation adjustment amount

If you have already used a significant portion or all of your gift tax exemption in prior years, you can still make additional transfers this year and next by taking advantage of the inflation adjustment. As noted above, the gift and GST tax exemption amounts are indexed for inflation. For 2024, those exemptions were increased to $13.61 million from $12.92 million in 2023. Accordingly, each individual has an additional $690,000 of gift and GST tax exemptions that can be used this year, perhaps to make an outright gift or a gift to an existing SLAT or dynasty trust as described above. While we do not yet know what the 2025 exemptions may be, any additional exemption due to the inflation adjustment can be used in 2025 before the possible sunset.
 

Income tax planning

Following the sunset, income tax brackets are scheduled to change, with the highest income tax rate increasing from 37% to 39.6%. In addition, the standard deduction will be reduced. As a result, in 2024 and 2025, you may want to consider whether to accelerate income or defer deductions depending on what your income tax situation may be in 2026.

Another income tax planning strategy that you may want to consider is a  Roth conversion. When you convert a traditional individual retirement account (IRA) to a Roth IRA, you pay ordinary income taxes, and possibly the Medicare Surtax, on the amount converted in that year. If you convert a traditional IRA to a Roth IRA when income tax rates are lower than in future years, you could lower the income tax liability associated with the IRA. However, consideration should also be given to how paying income taxes on converted assets could impact other aspects of the tax return. Another benefit of a Roth conversion is that there are no required minimum distributions (RMDs) during the owner’s life, allowing more growth potential, and no income tax is payable when distributions are made to the beneficiaries after the owner’s death.
 

Moving forward

The closer we get to a potential sunset, the more important it will be to consider your planning goals and whether you should try to achieve those goals before January 1, 2026. There are many variations to the strategies outlined above, as well as additional planning opportunities. Since tax strategies can be complex, it’s critical to work with qualified professionals to determine which strategy or strategies may be the best planning option for you and your family.

Keri Pankow is a senior wealth strategist at CIBC Private Wealth in San Francisco and Newport Beach, with over 5 years of industry experience. 

Leslie Kehoe is a senior wealth strategist for CIBC Private Wealth in Atlanta, with more than 25 years of industry experience.