2025 Estate Tax Exemption

Transcript

Dan Sharkey: Estate tax is one of the more complicated areas that our clients deal with, often ignored and misunderstood. More urgently, the rules are set to change in 2026. Here is what you need to know, how it impacts you and what you need to understand.

Welcome to Your Life Simplified. My name is Dan Sharkey, senior wealth advisor and certified financial planner here at Mariner. And today, I welcome back an extra-special guest. Scott Luhnau is the vice president of generational wealth planning at Mariner and the perfect person to help us understand estate planning and how that is going to impact all of our clients and those who are listening. So Scott, welcome back to Your Life Simplified.

Scott Luhnau: Thanks for having me, Dan.

Dan: So there’s been a lot of things that we’ve discussed. We talked about the SECURE Act 2.0, and there’s a kind of a whole alphabet soup of tax changes that occurred under the Trump administration. Specifically today, we want to talk about estate planning. To kind of just set the foundation for everyone listening. What changes occurred under the Trump administration? And what expected changes are going to occur here in the near future?

Scott: Right. So we’ve actually got a really nice graphic to show.

Dan: Scott, allow me to interject quickly. For all our audio listeners who would like to view the chart you’re referencing in more detail, please check out this episode on the Mariner YouTube channel for more detail. Okay, please continue.

Scott: On this slide right here, it’s called the History of the Estate Tax. And it’s a really good graphic version of what the estate tax has been and what it’s going to be. And I’m not going to date myself, Dan, but I can tell you that I was practicing law back when the exemption was towards the left side there in the $600,000, million dollar range.

And a lot more people had taxable estates back then. And consequently, the planning was a little bit more rigid. And as the exemption crept up and increased, we found that estate planning had to be more flexible. You had to add more flexibility in the language and the formulas and the documents.

And then with the Tax Cuts and Jobs Act in 2017, the estate tax exemption shot up—it basically doubled. You can see that happening there from 2017 to 2018. And what happened basically overnight was that a lot of people that did have estate tax exposure, all of a sudden did not. Okay?

Now, we all know that Washington is a sausage-making machine. And in order to get these tax cuts passed, they had to agree that they weren’t permanent. So on midnight, on December 31st, 2025, the law, unless it’s changed before then, is set to revert to what it was in 2017. So you can see this year, we’ve got a $13.61 million exemption per person in the U.S., which is fabulous. So if you’re married, it’s double that. You can have almost $27 million this year and not have any estate tax concerns. It’ll bump up a little bit more next year, and then you see that cliff on January 1st, 2026—it gets basically cut in half. So a lot of people that don’t have taxable estates now, it’s going to reverse, and you will have estate tax exposure in 2026.

So as usual, when something like this is happening, there’s a mad scramble to try to do planning before this happens. Right? And what happened a few years ago, when there was this threat of change, is that it was almost impossible to find an attorney to do any estate planning for you. So really, if you are in this category where you might have estate tax exposure, time is of the essence to do some planning. So where do you want to go from there, Dan?

Dan: And let me just push back a little bit and help better understand what’s included in that computation. So even at decreased levels, it’s a pretty sizable estate, but do we have to account real estate, vacation homes, small privately held businesses? What actually goes into that computation to figure out whether or not you actually will have a taxable estate?

Scott: Yeah, so the IRS says when a person dies, you have to add up everything that is in their gross estate. So every asset whatsoever, real estate, business, cash accounts, retirement accounts, life insurance—everything you own will be added up to see whether you have a taxable estate or not. And the estate tax is pretty punitive, it’s 40 cents on the dollar, so there’s a 40% estate tax. And the cool thing about my job is if I can save clients on estate tax, it’s an instant way to get a 40% return because every dollar you save in estate tax, there’s a 40% savings.

Dan: It’s a really interesting point and thank you for clarifying what goes into that computation because I think it’s really critical to think through this. So I happen to live in Massachusetts, you live in Colorado, two places in which people have a variety of vacation homes in the wonderful parts of the U.S. Those assets are counted.

So what I want to make sure that everyone understands is that if you own rental properties, vacation homes, things like that, that’s going to be counted as part of your estate and has the potential to be taxed. So it’s just being mindful of what goes into that is critically, critically important. And you’d be surprised just how quickly you can creep up on the total wealth number to really see what that would actually gets to.

So now that we kind of defined the environment that we’re working in, what can advisors, clients, what can they be thinking about to minimize that liability should they have enough wealth to be hit with a federal estate tax?

Scott: Yeah, good question. So real quick before we go there, you mentioned something that I wanted to point out. There are a handful of states in the U.S. that have their own state estate tax.

Dan: The Commonwealth of Massachusetts, our beautiful state right here. Perfect example.

Scott: Massachusetts is one of those, there’s a handful of other states. So what we’re talking about here right now is the federal estate tax. But if you live in one of those states that I mentioned, you also have to watch out for the state estate tax and plan for that accordingly. But for the rest of this podcast, we really want to focus on the federal estate tax.

So, the thing that you have to look at is whether you have a taxable estate now or you just have a barely taxable estate, you may say, “Ah, it’s not big enough, or the tax won’t be significant enough for me to worry about.” But you’ve got to be forward-looking, and this is why it’s so important to have a wealth advisor behind you because what you want to do is say, “If my assets continue to grow at the way they’re growing, or put whatever growth rate you want on it, 5, 6, 7, 8%, how much will my assets be worth in 10 years, 15 years, 20 years?” Right? The rule of 72.

The growth of your estate actually can astound you. It’s shocking how much your estate can grow. So the question is, “Can I be doing something or should I be doing something now to get ahead of that?” Right? So that’s how, Dan, I think you should be thinking about this is depending on your situation, should I be doing something proactively now? In other words, getting some assets out of my estate so that all future growth and appreciation in that asset will occur outside of my estate. That’s really the thinking right there.

Dan: And that’s such an important point because the devil is also in the details. Before you can even make that determination, it’s crucial that you understand your cash flow and you think about all the different ways that your estate will grow, which types of assets can I select? Your advisor can help you figure all that out because what you select, how you select it, all of those things really do matter. So again, making sure that your portfolio, all of your financial assets are in harmony with your estate plan is a crucial point that I want to make sure everyone takes away from this.

Let’s talk a little bit about gifting because I know that’s a common area in which people utilize to lower their estate tax liability. Can you just define for the audience what the difference between a taxable gift and the annual gifting exemption? And then we can talk a little bit more about what strategies you can utilize in gifting to reduce your federal estate.

Scott: Right. So the IRS allows us taxpayers to make annual gifts to anyone we want. And there’s a threshold under which there’s no tax consequences of making those gifts. And this year, it’s $18,000. They just gradually increase it a little bit each year. Last year, it was 17 and the 16, 15, 14, 12. This year, it’s $18,000 per person that you can give and there won’t be any estate tax consequences.

So if you’re married, you can actually give double that, so $36,000. So Dan, if my wife and I wanted to give you a gift, we could give you $36,000, 18 from me, 18 from my wife, and there’s no tax consequence. That’s great, right?

Dan: I’ll make sure I send you my address when we’re done so we can facilitate that off air.

Scott: Now, if you gift above that, you’re making a taxable gift. So that’s when, remember how I said in that chart that we showed you earlier, right now we’ve got a $13.6 million estate tax exemption per person? Well, if you make a taxable gift, all you’re doing is just using some of that exemption. So if you made a million-dollar gift instead of having $13.61 million, you’d have $12.61 million. Until you use up that exemption, you won’t have to pay any tax, you’re just using your exemption.

Now, the cool thing is I worked with a family not too long ago, they had four children and they were all married, and they had multiple grandchildren. And they were wide open to doing gifting to all of those people. So if you do the math, four children, they’re married, that’s eight. And then add all the grandchildren, there’s like 15 or 20 people. And they were able, through a gifting program over years, to lower their estate and not have any estate tax exposure. But not all the people are in that situation, so that’s when you need to consider, should I do any lifetime gifting over $18,000 to get ahead of my estate tax exposure that I’m likely to… That’s the way you should think.

Dan: It’s critically important, too, because you’re highlighting something that’s really, really interesting and that is, it’s not just one big idea, it’s the totality of decisions that you make, small gifts, larger gifts and ways that you can reduce that over time and really understanding how these rules and law work. And one thing I also want to emphasize that you said is that there’s no tax due when you make these “taxable gift.” That’s often a point of confusion with those. It’s that you don’t pay any tax now, you simply reduce the amount that you get to exempt at a later date. So that’s an important consideration that I just wanted to add in as well.

Scott: Good point.

Dan: Oftentimes, a question that has arisen is concern from clients, especially high-net-worth clients, about giving assets away now, how will it impact their family? How will it impact their kids? And then for those who haven’t had a chance to listen, we talk about the benefits of having a family meeting in a previous episode, go back and listen to that as well. But how can clients navigate the uncertainty and preserve as much wealth as possible through these transfer techniques that you’re talking about?

Scott: Yeah, so one of the things that you’ll hear me say a lot is you don’t want the tax tail to wag the overall big picture dog. And here’s what I mean about that.

So clients come all the time and they say, “Scott, I’m really concerned about the estate tax. What advanced estate planning techniques can I employ to reduce, minimize or eliminate the estate tax?” And we go through all … there’s a bunch of complex things that you can do. But in the end, you have to decide whether it’s right for you and right for your family to make substantial lifetime gifts, because you don’t want to gift a lot of money, hundreds of thousands or millions of dollars to kids, grandkids, other family members if that’s not the right thing to do for them. You don’t want to give money that’s going to harm people. You want it to be a helpful situation. So giving the money during life to whoever has to be the right decision in and of itself. You can’t just do that for tax reasons only.

And then that raises the question, well, if I’m not comfortable doing lifetime gifting, what do I do then? Well, that’s when you have to basically do all of your estate planning at death. You have to then have an estate plan that reduces or minimizes estate tax and then your wealth passes to your heirs then, however you want it to. So I just wanted to make that distinction between lifetime gifting has to make sense for the family, first and foremost, before the tax benefits come into play.

Dan: No, it’s an excellent point and what I would encourage everyone who is listening to this to think about is your job is to think about what you want the world to look like. My job, Scott’s job, everyone here at Mariner is to figure out how we actually get you there. It’s very easy to get lost in the world of GRAT and CUPER and ILIT and all these acronyms that don’t make any sense to anyone but you and I. But that’s missing the forest from the trees. That’s simply the piping and the techniques that we utilize to get an end result. Anyone who’s listening to this, think about what you want your end result to be and then we can help you figure it out.

So last thing, Scott, that I’ll let you get off on now is 2025 or the end of 2025 is coming up pretty quick. I would encourage anyone who hasn’t taken these steps to at least begin the process now. Good luck finding an attorney in July of 2025 to do this by year-end. What other proactive steps would you recommend people take now to get out ahead of this curve that’s coming down the pike?

Scott: It’s just have an estate plan review done by your wealth advisor and also an estate tax calculation. Ask your advisor, “Show me what my estate plan says and does now so I understand it. And based on the size of my estate now and what it could be worth in 10, 15, 20 years, should I do anything? Should I take any proactive steps to try to get ahead of the estate tax exposure I might have?” That’s the first step is review your existing estate and determine what trajectory or path you are on for the size of your estate and what it will grow to.

Dan: Perfect advice, and we’ll end there. And again, being proactive, I promise you that you will be well out ahead of the crowds come next year. So thank you, Scott, for being so generous with your time.

Now, we’ve been speaking with Scott Luhnau, Mariner’s vice president of generational wealth transfer. And if you enjoyed this conversation, please make sure to hit the ‘Subscribe’ button and ‘Follow’ button so you don’t miss any other insights that we have here at Your Life Simplified. You can find us on Spotify, YouTube, Apple Podcasts, wherever you may listen to us. So thank you again for tuning in, and make it a great day!

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