TCJA sunsets: why financial planning is critical for your estate
With the sunset of the Tax Cuts and Jobs Act (TCJA) quickly approaching at the end of 2025, more individuals and families are contemplating their estate planning, including many who are considering making big gifts to take advantage of the current limits that apply. The IRS currently allows you to gift $18,000 per year (this amount is indexed) to any other individual using the gift tax annual exclusion. Over and above the annual exclusion, the gift tax exemption of $13.61 million per person ($27.22 million for married couples) covers the amount given away during a person’s lifetime.
As a reminder, a gift occurs when you relinquish rights in money or property to someone else other than your spouse, or to a trust for their benefit. When contemplating making significant gifts, a comprehensive financial plan is essential to help address key considerations, such as determining the appropriate amount to give, ensuring that you can still maintain your current lifestyle and understanding the impact on your future estate and financial security. Typically, financial planning is pigeonholed by many as something that is only necessary when clients are concerned about running out of money in retirement, or to determine when they will be able to retire. While a comprehensive financial plan can provide insight into these concerns, there are a myriad of other benefits a plan would offer. Among them is a projection of the estate’s value – taking into account growth of assets and outflows, such as spending and gifting – to determine the amount of federal and state estate taxes that may be due upon the death of the second spouse, a cash flow analysis of inflows and outflows from various assets over the clients remaining lifetime and more.
What is comprehensive financial planning?
Comprehensive financial planning is an ongoing process that serves as the “roadmap” for all aspects of a client’s planning. It begins with fact-finding centered around a client’s goals and objectives and culminates in recommendations designed to move the client into action. The process includes a thorough review (or creation) of personal financial statements, conversations about budgeting and cash flow, assumptions about growth rates and longevity, the impacts of taxes and more.
If truly “comprehensive,” a financial plan will address every aspect of a client’s life, including their estate, business, retirement, charitable contributions, investments and insurance. It also takes into consideration the liquidity of the estate and how potential estate taxes would be paid. Finally, and perhaps most importantly, comprehensive financial planning should be revisited regularly as life circumstances change or every few years.
Comprehensive estate planning example and outcome
Bob, age 60, and Maureen, age 59, have an estate of $35 million. To date, they have not used any portion of their gift tax exemption and are concerned about the exemption reduction from approximately $14 million to $7 million following the sunset of TCJA at the end of 2025.
After conversations with their advisor, they are interested in the idea of one spouse utilizing their full exemption to make gifts to a spousal lifetime access trust (SLAT) for the benefit of the other spouse. A SLAT is an irrevocable trust in which the donor’s spouse is a beneficiary, and the trustee can make distributions to the spouse during his or her lifetime. In this case, the SLAT will be for the benefit of Maureen, their children and grandchildren, and Bob would make gifts of $14 million. The primary concern for Bob and Maureen in possibly doing so is whether they will have enough remaining assets to allow them to achieve their goals and objectives. Among these are spending, making gifts and charitable contributions.
After engaging in the process, Bob and Maureen’s comprehensive financial plan reflects that the value of their estate will be $80 million upon Maureen’s death at the age of 91 (this estimate is based on the average age for female life expectancy, which can be adjusted as needed to reflect the client’s personal or family health history). Using projected estate tax exemption rates and tax brackets, they determine that their projected federal estate tax will be $15 million. This current state – “do nothing” – is the first scenario reflected in the plan.
However, if Bob makes gifts utilizing his $14 million gift tax exemption, an alternative scenario reflects a significant increase in the amount projected to go to heirs instead of the federal government for taxes. More importantly, even after making the gifts, the plan confirms that there is a 99% likelihood that Bob and Maureen will not run out of money. After seeing this, Bob and Maureen decided to move forward with their plan for Bob to fund the SLAT.
Questions? Connect with our team to learn more about how Baker Tilly and Baker Tilly Wealth Management can help you prepare a comprehensive financial plan.
Baker Tilly Wealth Management, LLC (BTWM) is a registered investment advisor. BTWM does not provide tax or legal advice. BTWM is not an attorney. Estate planning can involve a complex web of tax rules and regulations. Consider consulting a tax or legal professional about your particular circumstances before implementing any tax or legal strategy. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Baker Tilly Wealth Management, LLC is controlled by Baker Tilly Advisory Group, LP. Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. ©2024 Baker Tilly Wealth Management, LLC
