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What is Wealth Planning? – Transitioning Wealth and Estate Tax Planning

4 minute read

We understand the significance of the recent changes to estate and gift tax exemption amounts. Thanks to the 2017 Tax Cuts and Jobs Act (TCJA), these amounts were doubled, providing potential opportunities for individuals and married couples to minimize their estate tax liabilities. Given these time-sensitive changes, it is essential to have a flexible estate tax plan that can adapt to evolving laws.

Transitioning Wealth – Estate Tax Planning

I heard there were upcoming changes to U.S. Estate and Gift Taxes. Are there any strategies I should consider before the law changes?

As a result of the 2017 Tax Cuts and Jobs Act (TCJA), the estate and gift tax exemption amounts in 2017 were doubled. This substantial increase is beneficial because the higher the exemption amounts, the more likely an individual or married couple will not have to pay estate or gift taxes. Under current law, for 2024 the exemption per person is $13.61 million (or $27.22 million for a married couple). If a person’s net estate exceeds the exemption amount, that amount is taxed at 40% or in other words for every million dollars over the exemption there will be about $400,000 in estate taxes due if the bequest is to a non-spouse.

The current exemption amount is only temporary. Under the TCJA, the exemption is set to expire at the end of 2025 when it will return to an inflation adjusted $5 million amount (the tax rate is scheduled to remain at 40%). The inflation adjusted exemption in 2026 is estimated to be around $7 million which is currently about $6.6 million less than the 2024 exemption.  Also, since we are currently in an election year, the exemption could be reduced before the end of 2025 depending on the election results. As a result, one’s estate tax plan needs to be flexible and be adjusted as estate tax law evolves and changes.

The only way for a high net worth individual to utilize this higher exemption amount before it expires or is changed is to make taxable gifts (unless of course they pass away). One advantage of making taxable gifts is once a gift is made, and if it is properly planned, any subsequent growth on the amount gifted is excluded from the estate. As mentioned, an individual can currently give $13.61 million without incurring a tax liability. Even though most will not be able to make large enough gifts to take advantage of entire 2024 exemption amount, those who are able to may potentially be able to reduce their future estate tax liability.

Let’s illustrate this impact with an example. John, single, has a sizable net worth, so he decides to give $13.61 million of assets this year to an irrevocable trust for the benefit of his children and because this equals his available gift tax exemption, he does not have to pay any gift taxes because of the transfer. The consequence of this approach is that he likely used up all his exemption so there may not be any of it left when he dies. He then dies in 2026, and assuming there is no change made to estate and gift tax law, the exemption amount at that time is $7 million (due to the expiring tax law). By making the gift, he was able to remove $6,610,000 out of his taxable estate tax free ($13,610,000 - $7,000,000) that he would not have been able to after the current exemption level expires. This results in a tax saving of close to $2.64 million. This savings could even be greater if the value of the initial gifted assets appreciate since any related appreciation will also be out of the taxable estate and not subject to estate taxes.

Since there is a deadline as to this strategy (end of 2025), we have been having discussions with our clients if gifting the exemption amount makes sense for them and their current financial situation.  Although the end of 2025 may seem like a distant future, some thought should be given to making such a large gift.   Also, as the deadline approaches it may become more difficult for clients to find an estate planning attorney to draft necessary trusts because there could be a rush to attorneys as the deadline draws nearer.  It could also be that gifting such a large amount does not make sense, in that case we can discuss other possible strategies with our clients that could help them reduce their possible estate tax liability without having to give such a large amount.

Our goal is to help our clients preserve, protect, and transition their wealth.  What was mentioned in this article are some of the ways that we can help clients with their wealth planning to help them achieve this goal. If you are interested in exploring these strategies or if you have any other wealth planning issues or questions, please let your Relationship Manager know and they can set up a meeting with the Wealth Planning team. 


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Daniel Fan, J.D., LL.M., CFP®, Senior Managing Director – Head of Wealth Planning
About the Author
Daniel Fan, J.D., LL.M., CFP®, Senior Managing Director – Head of Wealth Planning
Daniel Fan serves as the Senior Managing Director – Head of Wealth Planning for First Foundation Advisors. In this role, he oversees the firm's Wealth Planning department and advises clients on sophisticated wealth strategies. Mr. Fan has over 15 years of experience as a Wealth Planner and specializes in evaluating and optimizing all clients' wealth plans to meet their financial needs. He works closely with all teams across First Foundation and ensures he delivers a personalized experience to support all clients. Prior to joining the firm, Mr. Fan was a Senior Vice President, Director of Wealth Planning and Insurance at First Bank Wealth Management, where he implemented the financial planning process for all business segments. He also worked as the Vice President, Regional Director, Senior Wealth Strategist at Union Bank Private Wealth Planning and as a Senior Vice President, Senior Wealth Planning Strategist at Wells Fargo Private Bank. Mr. Fan is a Certified Financial Planner® and holds his Juris Doctorate and Master's in taxation from Pepperdine University School of Law and Golden Gate University respectively. He earned his Bachelor's degree from the University of California, Los Angeles. Read more