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Estate Tax Sunset 2025: Maximizing Exemptions and Securing Your Legacy

As discussions about the upcoming estate tax exemption sunset intensify, you may have heard from clients that they’re worried or confused about changes to the law that are slated for the end of 2025. Understanding the basics of how this change could impact your clients is an important part of the advisor’s role, including the ways charitable giving and a community foundation can play a role in smart planning.

The Estate Tax Exemption Sunset

Without legislative changes, the current estate tax laws will sunset at the end of 2025, drastically reducing the federal estate tax exemption from $13.61 million per person in 2024 to approximately $7 million in 2026 (including adjustments for inflation). This change is bound to affect many high-net-worth individuals and families, likely exposing more estates to federal estate taxes and clients who have not yet taken steps to plan for the sunset may face substantial estate tax liabilities, making early planning and strategic advice more critical than ever.

It is impossible to predict whether legislation will prevent the sunset. Without a certain outcome, it is essential for advisors to prepare for client discussions and start considering estate planning strategies now. This includes techniques that incorporate multi-generational gifts and charitable planning, ensuring clients can take full advantage of the current higher exemptions before they potentially decrease.

Leveraging Charitable Giving in Estate Planning

For charitably inclined clients, making larger lifetime gifts to charity and arranging for charitable bequests can help reduce the client’s taxable estate due to the charitable estate and gift tax deduction.

Charitable giving not only helps reduce estate taxes but also allows clients to leave a lasting legacy by supporting causes that matter to them. By incorporating charitable strategies into their estate planning, clients can make a meaningful impact on their community while achieving their financial goals.

Exploring Key Tax-Planning Vehicles

For some clients, it may be beneficial to begin exploring a comprehensive, multi-generational wealth transfer plan, potentially using key tax-planning vehicles:

Charitable Lead Trust

Charitable lead trusts (CLTs) can be particularly effective in the current environment. These trusts can provide income to your client’s fund at the Community Foundation for a set period, with the remaining assets passing to family members. The higher exemption currently allows for potentially significant initial funding of such trusts since the value of the remainder interest counts toward the client’s estate and gift tax exemption.

By setting up a CLT, clients can support their charitable interests while transferring wealth to their heirs in a tax-efficient manner. The trust can provide a steady income stream to charitable organizations for a specified period, after which the remaining assets are transferred to the client’s beneficiaries, potentially minimizing estate tax liability.

Generation-Skipping Trust

A generation-skipping trust is an irrevocable trust that can benefit a client’s grandchildren and later generations. This trust utilizes a client’s generation-skipping transfer (GST) tax exemption, which parallels the estate and gift tax exemption. This type of trust could allow a client to take advantage of the higher exemption before it potentially decreases in 2026.

Under some states’ laws, these trusts can continue for many generations in a “dynasty” format, allowing each generation to benefit from the trust’s income (and potentially principal for health and education) without the trust’s assets being included in the beneficiaries’ estates for estate tax purposes.

Setting up a generation-skipping trust can be an effective way to preserve wealth for future generations while minimizing estate taxes.

Multi-Generational Fund at the Community Foundation

Alongside a charitable lead trust or generation-skipping trust, or as a standalone option, a client can establish a donor-advised fund at the Community Foundation. This fund can function much like a family foundation, with successive generations serving as advisors. Alternatively, the community foundation can step in after the first or second generation to recommend grants from the fund, carrying on a tradition of supporting causes that were important to the client during their lifetime.

When clients involve future generations in the grant-making process, they can instill a sense of responsibility and commitment to charitable giving in their heirs.

Partnering with the Athens Area Community Foundation in Uncertain Times

By preparing now and exploring strategic planning options, you can help your clients lock in higher exemptions and unlock a legacy. With careful planning and the right strategies, clients can navigate the estate tax sunset and ensure their wealth benefits both their family and their community for generations to come.

The Athens Area Community Foundation is here to support you in this process, offering expertise and resources to help your clients navigate the complexities of estate planning and charitable giving.