There are many provisions of the Tax Cuts and Jobs Act sunsetting in 2025. One of the most notable is the lifetime gift tax exemption. As we approach 2025, there is a genuine estate planning opportunity, particularly for those with substantial assets. With a shift on the horizon, proactive measures are necessary to optimize estate planning strategies and ensure a smooth transition of wealth.
Understanding the Gift Tax Exclusion
The gift tax exclusion is a provision that allows individuals to transfer a portion of their wealth without incurring federal gift taxes. As of 2021, due to the Tax Cuts and Jobs Act of 2024, this exclusion was set at $13.61 million per individual. In 2025, there will be another adjustment for inflation, which should be released later this year. This significant threshold has enabled the wealthy to transfer substantial assets, including real estate, without a hefty tax burden.
However, this provision is slated to sunset at the end of 2025. Without new legislation, the exclusion amount will revert to pre-2018 levels — approximately $5 million per individual, adjusted for inflation. This reduction signifies a crucial change in the financial landscape, particularly affecting estate planning for high-value properties.
Implications for Real Estate Owners
The impending reduction in the gift tax exclusion rate has significant implications for real estate owners. Assets that can be transferred tax-free under the current generous exclusion rates may be subject to substantial gift taxes if transferred post-2025.
Key Considerations
Asset Valuation: Real estate appreciates over time. Accurate valuation of real estate assets provides clarity on current worth, which is vital for assessing the potential future tax impact of transfers. In the current economic environment, some real estate values have decreased, creating a good time for gifting.
Gift vs. Inheritance: Gifting real estate now instead of transferring it through inheritance later has different tax consequences. Gifts can reduce the taxable estate size; however, inherited property benefits from a stepped-up basis, which may lower heirs’ capital gains tax liabilities.
Utilizing Trusts: Trusts offer an effective mechanism for managing real estate transfers. They can lock in the current gift tax exclusion rates and ensure structured property management and distribution.
Generation-Skipping Transfers: For those planning to leave assets to grandchildren or beyond, it’s essential to consider that the generation-skipping transfer (GST) tax exemption will also decrease. Coordinating GST planning with gift tax strategies is vital to maximizing tax benefits.
Strategic Actions to Take Before 2025
To take advantage of the current high gift tax exclusion rates before they sunset, real estate owners should consider the following strategic actions:
Early Gifting: Start the process of gifting real estate assets now. Transferring properties before the end of 2025 allows individuals to utilize the higher exclusion amounts and reduce future tax liabilities.
Utilize Family Limited Partnerships (FLPs): FLPs can be a crucial tool in estate planning for real estate. They allow the transfer of ownership interests in real estate to family members, potentially discounting the value of the gifts for tax purposes.
Review and Update Estate Plans: Regularly review estate plans with a financial advisor or estate planning attorney. Ensure these plans incorporate the forthcoming changes to gift tax exclusions and align with long-term financial goals.
Consider Spousal Strategies: Married couples can optimize their gift tax exclusion by each using their individual amounts. Coordinating gifts between spouses effectively doubles the exclusion available for real estate transfers.
The sunsetting of the gift tax exclusion in 2025 marks a significant shift in the estate planning landscape, particularly for real estate assets. By taking proactive steps now, real estate owners can secure current tax benefits and facilitate a smoother wealth transition for future generations. Consulting with your accounting and legal professionals is crucial to navigate these changes and develop a robust estate plan that mitigates tax liabilities and preserves the real estate legacy.
Sean Burke
Partner
Marcum LLP
Boston, MA
sean.burke@marcumllp.com
(617)807-5116
