Looming Changes: Understanding Sunsetting Provisions in US Estate Taxes

While the estate tax, often referred to as the “death tax,” is a hot-button topic in the US, it’s important to understand that its current form may not be permanent. Several vital provisions impacting the estate tax are set to sunset in 2026, potentially leading to significant changes in how estates are taxed. Sunset means that the laws expire on their own.

What are these sunsetting provisions?

• Increased Estate Tax Exemption: Currently, the federal estate tax exemption is a staggering $13.61 million for individuals and $27.22 million for married couples in 2024. This means estates valued below these thresholds are exempt from the tax. However, this exemption is scheduled to revert to $5.1 million (adjusted for inflation) in 2026, significantly increasing the number of estates subject to taxation.
• Top Estate Tax Rate: The current top estate tax rate of 40% is also set to sunset in 2026, potentially reverting to pre-2017 levels of 55%.

How significant is the Impact?

According to the Tax Policy Center, without these provisions, the number of estates subject to the estate tax could jump from 2,100 in 2022 to 58,000 in 2026. This dramatic increase would primarily impact middle-income families who own businesses or have accumulated wealth over time. These numbers could also be affected by an aging population and inflation. Asset inflation, such as stocks and real estate, make more people subject to estate taxes.

What are the implications?

The potential changes raise several concerns:

• Increased tax burden: Families facing the loss of a loved one would be hit with a substantial tax bill, potentially forcing them to sell assets to cover the tax liability. Not to mention increases taxes on real property which could affect the estate before the estate tax even kicks in.
• Impact on family businesses: Many family-owned businesses rely on inherited assets to continue operations. Increased estate taxes could force them to close or sell, impacting jobs and local economies.
• Uncertainty and complexity: The looming changes create uncertainty for individuals and families in estate planning, potentially leading to increased complexity and legal costs.

What happens next?

The future of these sunsetting provisions remains uncertain. Congress will likely debate their continuation or modification in the coming years, influenced by various factors, including the political landscape and economic conditions.

Understanding these sunsetting provisions and their potential implications is crucial for individuals and families to consider as they plan for their future and the legacy they leave behind.

We cannot predict what congress will do. Our crystal ball is broken. What we can do is offer estate plans based on what is known and what currently exists.

Conclusion

Understanding the complexities and implications of sunsetting provisions in US estate taxes is crucial for effective estate planning and wealth management. These provisions, set to revert to pre-2017 tax laws unless legislative action is taken, can significantly impact estate valuations and tax liabilities. Estate planners and their clients must stay informed and prepared for these potential changes to safeguard their financial interests. Consulting with knowledgeable professionals, such as those at Thomas & Ahnell, LLC, can provide valuable guidance and strategies to navigate these evolving tax landscapes effectively.

Sources:

Internal Revenue Service: https://apps.irs.gov/app/vita/content/globalmedia/4491_filing_status.pdf

Tax Policy Center: https://www.taxpolicycenter.org/