Planning your Estate? Consider these Strategies to Save in Future Taxes

Many people no longer worry about federal estate tax because the current exemption amount is $13.61 million for 2024. Before 2011, when the exemption was much lower, even people with smaller estates had to take steps to avoid the tax. Now, with fewer estates affected, it’s a good time to focus on strategies that can help your heirs save on income tax.

It’s important to remember that the federal estate tax exemption is set to decrease after 2025. Starting January 1, 2026, the exemption will drop to $5 million, adjusted for inflation. Congress might decide to keep the higher exemption or change it again, but nothing is certain yet.

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Here are some strategies to consider in light of the current large exemption amount.

Gift Tax Annual Exclusion

One advantage of using the gift tax annual exclusion to give away assets during your lifetime is that it can help reduce estate taxes. When you transfer assets, both the value of the assets and any growth in their value after the transfer are no longer part of your estate, which can lower your estate tax.

However, with the current high estate tax exemption, estate tax savings might not be a big concern. Additionally, gifting appreciated assets could lead to a potential income tax issue because the recipient inherits your original purchase price, or "basis," for tax purposes. This means that if they sell the gifted property later, they might have to pay capital gains tax on the difference between the sale price and the original basis. If you’re not worried about your estate being taxed, even if the property increases in value, you may want to consider other reasons for gifting.

For instance, you might want to give a gift to help a family member buy a home or start a business. But it's generally not a good idea to gift appreciated property because the recipient could face capital gains tax if they sell it. If the property is held until you pass away, under current law, the heir would get a "step-up" in basis, which would eliminate any capital gains tax on the increase in the property's value up to that point.

Portability for Married Couples

In the past, married couples often had to use complex strategies to ensure both spouses could fully use their estate tax exemption. This often involved setting up two trusts to reduce estate taxes. However, since 2010, the concept of "portability" has simplified things. Portability allows a surviving spouse to use any unused estate tax exemption from their deceased spouse. As long as an election is made, the surviving spouse can apply the unused portion of their spouse's exemption to their own estate or gifts. This change provides married couples with more flexibility in how they manage their estate tax exemptions.

Take Advantage of the Step Up Basis

Keep in mind that certain strategies to keep property out of an estate or to lower its value for tax purposes might no longer be worthwhile. It might be better to include the property in the estate or avoid valuation discounts so that the property receives a step-up in basis. For example, using special use valuation—where the value of property used for farming or business is based on its current use rather than its highest potential use—might not save enough in estate taxes to make it worth losing the step-up in basis. This step-up would eliminate any capital gains tax on the property's increased value up to the point of inheritance.

If you want to discuss estate planning or income tax saving strategies, contact us.