Introduction to the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (“TCJA”) that was passed and signed into law in December 2017, made significant changes across multiple areas of the tax code. Since the TCJA was passed via the budget reconciliation process, sunset provisions had to be built in for some of the major components. Unless legislative action is taken, many key provisions of the TCJA are expected to sunset (or expire) on December 31, 2025.
Lifetime Gift and Estate Tax Sunset
One critical provision that is scheduled to sunset is the lifetime gift and estate tax exemption (“the exemption”) – this is the amount any individual can either gift1 during their lifetime or leave to their heirs (other than a spouse2) after death, on a gift and estate tax-free basis. Any amount gifted or bequeathed above the exemption amount is taxed at a 40% federal rate3.
When the TCJA went into effect for tax year 2018, the exemption increased from $5.49 million to $11.8 million per person, and has since been adjusted annually for inflation. As of January 1, 2024, the exemption is $13.61 million per person. Without further legislative action, the exemption will be adjusted for inflation again for tax year 2025, and subsequently decrease on January 1, 2026, to the pre-TCJA amount of $5 million per person, adjusted annually for inflation. This amount is projected to be approximately $7 million per person for tax-year 2026.
Estate Taxation Analysis: Before vs. After the Sunset
Let’s assume that a married couple has a net worth of $30 million. If both spouses were to pass away and leave their entire estate to their heirs:
Note: calculations are approximate
Planning Opportunities
There are many significant opportunities available for individuals and families that may be impacted by the pending sunset of the TCJA gift and estate tax exemption. While the sunset is not scheduled to happen until January 1, 2026, below are some considerations when reviewing your current estate plan to determine if additional action steps are appropriate:
- Transferring4 assets may reduce the size of your taxable estate and potentially minimize estate taxes for your heirs
- Consider the possibility that future legislation may
- Further reduce the gift and estate tax exemption amount below current law amounts
- Limit the efficacy of strategies that are currently permitted
- Contain retroactive effective date(s) that may be earlier than January 1, 2026
- As the sunset approaches, there may be a shortage of qualified legal and tax professionals available to draft necessary legal documents and implement your strategic plan
In conjunction with your legal, tax, and financial advisors, City National Rochdale’s Private Wealth Solution team specializes in educating and assisting clients with making these important financial decisions with the Comprehensive Wealth Assessment. City National Rochdale’s Comprehensive Wealth Assessment is a complimentary, holistic service that focuses on identifying gaps and solutions, and empowers clients to make informed decisions that will serve to optimize their wealth. Reach out to your Financial Advisor if you are interested in learning more about how City National Rochdale can help.
More Information
For more information, check out our July 25, 2024 webinar on how our Comprehensive Wealth Assessment Team can help you and your HNW clients and prospects make smart financial decisions in advance of the TCJA sunset.
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1 Amounts above annual exclusion gift limit (currently $18,000 for tax year 2024).
2 Transfers to a spouse are generally free of gift and estate tax.
3 This does not include any state estate tax or Generation Skipping Transfer (GST) tax, if applicable.
4 Transfer may mean gift, sale, or loan.
IMPORTANT INFORMATION
This document is for general information and education only. It is not meant to provide specific tax guidance. The information in this document was compiled by the staff of City National Rochdale (CNR) from data and sources believed to be reliable, but CNR makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimates or projections given, constitute the judgment of the author as of the date of the presentation. CNR has no obligation to update, modify, or amend this document or otherwise notify you in the event any information stated, opinion expressed, matter discussed, estimate, or projection changes or is determined to be inaccurate.
CNR, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory, or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. Any strategies discussed in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies or information presented taking into account your own particular circumstances.
This presentation (or any portion thereof) may not be reproduced, distributed, or further published by any person without the written consent of CNR.
City National Rochdale, LLC, is a SEC-registered investment adviser and wholly owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank and City National Rochdale are subsidiaries of Royal Bank of Canada. City National Bank provides investment management services through its subadvisory relationship with City National Rochdale, LLC.
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