The current estate tax exemption is up for review by the end of 2025, and it may revert to a lower amount. The Federal estate tax temporarily increased in 2019 to 11.4 million per person or $22.8 million for married couples due to the 2017 Tax Cuts and Jobs Act.
At the end of 2025, the higher exemption amounts are set to expire and revert to the 2017 levels (adjusted for inflation). This means that if no further changes are made, the exemption amount will decrease significantly, affecting wealth transfer strategies for high-net-worth individuals. Every one of your clients has a different goal – considering these upcoming tax changes, is now a good time to revisit a conversation about the benefits of an ILIT?
Topics to consider when discussing an ILIT with your clients
- An Irrevocable Life Insurance Trust (ILIT) may be a useful tool for your client to plan how to reduce their estate taxes. Of course, this will depend on both your client’s current and future asset worth. One should keep in mind which benefits they want to target. ILITs can be used as a tool for your client to pay estate taxes due at death, avoid forced liquidations, and equalize beneficiary inheritances.
- Most clients currently do not hold a taxable estate, as the exemption amount has skyrocketed to a record high. During your client’s lifetime and at death, they can leave up to $12.92 million in 2023 estate tax free. In addition to separate state taxes, gifts are currently taxed at a rate of 40% the moment they surpass federal exemption.
- Not only is the federal exemption set to sunset in 2026, but it will also revert to pre-2018 forms (adjusted for inflation). The exemption will be between $5.5 and $6.8 million in 2026. ILITs are a fantastic option to minimize exposure to this after one’s estate becomes taxable.
- Under the tax proposals of the Biden administration, many high-income earners may find the income tax benefits of life insurance extremely appealing. A personal ownership structured for either maximum cash accumulation potential or maximum death benefit is crucial for this demographic to consider. If Congress refuses to act to make current estate tax exemptions permanent, the insured party can consider several options:
- Gifting the policy to an ILIT. Under current law, the federal exemption for this measure is $12.92 million in 2023. As such, wealthy clients may be incentivized to gift now before the exemption drops to $5 million.
- Selling the policy to an ILIT, provided the sale meets an exception to the transfer for value and reportable policy sale rules. Under these conditions, the policy will receive maximum consideration.
- If a transfer is likely, one can discuss an estate preservation rider on survivorship policies along with their client, as well as a a potential standby trust.
With the changing estate tax landscape, individuals need to update their estate plans. You can help your clients ensure that their strategies align with the current and anticipated tax laws. If you maximize tax efficiency and reduce potential tax estate burdens, you can stay up to speed with the estate tax scene.
ESTATE TAX ISSUES
Unfortunately, some states levy their own separate estate tax. Luckily, the benefits of a Life Insurance Death Benefit will help cover both these and other sudden measures.
“In many states with an estate tax, the state estate tax exemption is lower than the federal exemption,” according to Northwestern Mutual’s Matt Johnston. “If you live in a state with a state estate tax, an ILIT is a very common estate planning solution.”
The estate tax exemption sunset introduces a level of uncertainty and potential challenges for wealthy individuals engaged in estate planning. If you understand the effect of the sunset, and proactively adjust estate planning strategies, you can help mitigate potential tax burdens and ensure the smooth transfer of an estate. As the only company in the nation focused exclusively on life insurance trusts, LITCO is strategically placed to stay up to date on industry changes such as the Estate Tax Exemption Sunset so that you and your clients don’t have to. We partner with advisors to discuss the best measures and strategies for administering life insurance trusts, including estate tax exemption maneuvers. Contact us for more information.