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Navigating Changes to the Estate Tax Exemption: What Investors Need to Know

Navigating Changes to the Estate Tax Exemption: What Investors Need to Know

August 22, 2023

Navigating Changes to the Estate Tax Exemption: What Investors Need to Know


As a Wealth Advisor at Masonboro Advisors, we understand that staying informed about changes in tax laws is essential for effectively managing your financial portfolio and ensuring the well-being of your loved ones. One critical aspect that demands your attention is the evolving landscape of estate tax exemptions, particularly in light of the 2017 Tax Cuts and Jobs Act. This article aims to provide you with a comprehensive understanding of the potential impacts on your finances as these exemptions are set to change.


Understanding the Estate Tax Exemption


The estate tax exemption is a provision in the tax code that allows individuals to pass a certain amount of wealth to their heirs without incurring federal estate tax. The 2017 Tax Cuts and Jobs Act significantly altered this exemption, aiming to ease the burden on wealthy families while reshaping the financial planning landscape. Prior to the Act, the estate tax exemption was $5.49 million per individual, and this amount has seen substantial adjustments.


The Transition Under the 2017 Tax Cuts and Jobs Act


Under the 2017 Tax Cuts and Jobs Act, the estate tax exemption was substantially increased. The exemption amount was doubled to $11.18 million per individual, and has increased to $12.92 million per individual today, which means that an individual can pass on assets up to this value without triggering federal estate taxes. This change had an immediate impact on estate planning strategies, allowing many families to reevaluate their plans and potentially take advantage of this higher exemption.


Anticipated Changes and Implications


It's crucial to recognize that the estate tax exemption changes were not made permanent under the 2017 Act. While these changes provided a substantial breathing space for estate planning, they are set to expire at the end of 2025. This looming expiration has several potential implications:


  1. Reduced Exemption Amounts: Unless further legislative action is taken, the estate tax exemption is set to revert to its pre-2018 levels, adjusted for inflation. This would result in a lower exemption amount, potentially subjecting more estates to federal estate taxes.


  1. Estate Planning Reassessment: If your estate planning strategies were designed around the current higher exemption, it's advisable to review and potentially update your plans. A skilled Wealth Advisor can help you navigate this process, ensuring your financial goals are still achievable within the changing tax landscape.


  1. Opportunities for Gifting: The higher exemption provides opportunities for strategic gifting to heirs during your lifetime. Leveraging the increased exemption to transfer wealth now may help minimize potential estate tax liabilities in the future.


  1. Impact on Family Businesses: For those with family-owned businesses, changes in the estate tax exemption could have significant consequences. A lower exemption may necessitate careful succession planning to ensure the smooth transition of business ownership without undue tax burdens.


Maximizing the Current Exemption: Action Steps


As the current estate tax exemption is set to change in the coming years, there are several proactive steps you can take to safeguard your financial legacy:


  1. Review Your Estate Plan: Engage with your Wealth Advisor to review your current estate plan in light of the changing exemption. Determine whether any adjustments are needed to align with your goals and the potential tax implications.


  1. Consider Gifting Strategies: Explore gifting opportunities that utilize the current higher exemption to transfer wealth to your heirs. Strategic gifting can help minimize future estate tax obligations.


  1. Evaluate Life Insurance: Life insurance can play a crucial role in offsetting potential estate tax liabilities. Review your life insurance coverage to ensure it aligns with your current estate planning objectives.


  1. Stay Informed: Given the potential for legislative changes, staying informed about developments in tax laws is paramount. Regularly consult with your Wealth Advisor to ensure your strategies remain up-to-date.


In conclusion, the changing landscape of estate tax exemptions demands proactive planning and a keen awareness of potential impacts on your financial legacy. At Masonboro Advisors, we are committed to assisting you in navigating these changes and developing tailored strategies that align with your goals. By staying informed and engaging in thoughtful financial planning, you can navigate these changes with confidence and protect the well-being of your loved ones.