Imagine inheriting a fortune only to discover that a significant portion is lost to taxes that could have been avoided. This scenario isn’t far-fetched, especially with the federal estate tax exemption currently at a record-high $13.61 million per individual—a boon that could shield up to $27.22 million for married couples from federal estate taxes. But this golden opportunity is fleeting. Scheduled to sunset at the end of 2025, the exemption may be slashed unless Congress intervenes.
As you weigh your options, the pressing question becomes: Should you act now to leverage this exceptional exemption or take a cautious approach and see how the legislative landscape evolves?
Understanding the Concept: Estate Tax and Exemptions
The estate tax is a federal tax imposed on the transfer of wealth upon an individual’s death. It only applies to estates valued over the set exemption limit, currently $13.61 million per person. Estates below this threshold are not subject to federal estate tax. However, if the estate’s value exceeds this amount, any portion above the exemption is taxed at 40%.
In estate planning, individuals aim to protect their wealth from excessive taxation by either gifting assets or transferring them under the exemption limit. But many nuances must be factored in, like capital gains tax and the step-up in basis. If these are unfamiliar terms, don’t worry—we will explore them in more detail to help you make informed decisions.
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Current Estate Tax Exemption: An Unprecedented Opportunity
The federal estate tax exemption has historically fluctuated, but the current $13.61 million per individual represents an all-time high. For married couples, this exemption doubles to $27.22 million. This significant threshold allows individuals to transfer substantial wealth without incurring federal estate taxes, which are at a 40% rate on amounts exceeding the exemption.
With the exemption scheduled to sunset at the end of 2025 unless Congress acts, many individuals are rushing to leverage this opportunity. By making strategic estate planning moves now, you can lock in these exemptions and protect your assets from future estate tax liabilities.
The Role of Income Taxes: Capital Gains and Basis Concerns
While the estate tax exemption offers a valuable advantage, it’s essential to consider the implications of income taxes, particularly capital gains tax. When transferring assets with a low basis—meaning the original value is low relative to their current market value—future capital gains taxes may become a concern.
Here’s how it works: if you transfer assets today, their low basis is locked in, potentially subjecting future heirs to capital gains taxes on any appreciation if the assets are sold. Conversely, holding onto these assets until death provides a step-up in basis to their fair market value at the time of death, effectively eliminating capital gains taxes on appreciation.
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The Wait-and-See Approach: Weighing the Risks and Benefits
Given the high exemption, you might consider acting now or adopting a wait-and-see approach. This decision involves weighing the 40% estate tax rate against potential future capital gains taxes, which can reach up to 24%.
Immediate Action:
- Pros: Utilize the high exemption to shield significant wealth from estate taxes. This approach can be particularly beneficial if you anticipate changes in legislation that might reduce the exemption.
- Cons: Locking in low-basis assets could result in future capital gains and tax liabilities for heirs, potentially reducing the overall benefit.
Wait-and-See:
- Pros: Delay action to preserve low-basis assets and benefit from a step-up in basis upon death. This approach may be advantageous if you anticipate future legislative changes or if your assets have significant appreciation.
- Cons: If legislative changes occur before you take action, you risk losing the opportunity to utilize the current high exemption.
Avoid Estate Planning Fiascos with Expert Advice Just a Call Away
Deciding whether to seize the current exemption or wait requires carefully considering your financial situation and estate planning goals. Consulting with an experienced estate planning attorney can provide valuable insights and help you develop a strategy that aligns with your needs.
As we approach the end of 2025, the opportunity to utilize the $13.61 million federal estate tax exemption is a significant consideration for high-net-worth individuals and couples. While this exemption offers a substantial shield against estate taxes, it’s important to weigh this benefit against potential future capital gains tax implications.
Before deciding, consult a knowledgeable estate planning attorney to navigate these complex factors. Whether you choose to act now or wait, a well-thought-out estate plan can safeguard your assets and ensure your legacy is managed according to your wishes.
At SJF Law Group, we simplify estate planning, ensuring your legacy is protected with a plan tailored to every possible situation. You will feel valued and understood by us—today, tomorrow, and always.
Ready to protect your family’s future? Contact our Florida estate planning attorneys today for personalized advice. So why leave your family’s future to chance? With a customized strategy that fits your needs, you can rest easy knowing everything is in place. Whether you prefer a face-to-face meeting or a virtual consultation, we’re just a call away at 954-580-3690. Let us guide you through the estate tax maze, protect your assets, and give you peace of mind knowing your legacy is safe.