Estate Tax Exemption Sunset in CA: How to Prepare

  • Post last modified:September 2, 2023

Estate planning is an important but often overlooked aspect of financial planning. With the federal estate tax exemption sitting at a historically high $12.06 million per individual, it may seem that only the ultra-wealthy need to worry about the estate tax. However, this generous exemption is set to expire in 2026, when it will revert to around $6 million, adjusted for inflation. At that point, you will need to implement strategies to minimize the estate tax’s impact on their legacy. 

Let’s take a deep dive into how the federal estate tax works and what steps you can take now to protect your estates down the road.

Understanding the Federal Estate Tax

The federal government imposes a tax on transferring a deceased person’s assets, calculated based on the fair market value of their worldwide assets at the time of death. Any assets above the estate tax exemption amount will be taxed at 40% upon transfer.

This estate tax applies to U.S. citizens and residents alike. Importantly, it is based on the decedent’s assets, not the beneficiaries’ assets. The estate tax exemption is also unified between spouses. With proper estate planning, a married couple can shield $24.12 million from estate tax using their combined exemption (in 2023).

Planning for the Sunset of the Estate Tax Exemption

In 2026, the estate tax exemption is scheduled to revert to around $6 million per person, adjusted for inflation. This more than 50% drop in the exemption means that many more Americans’ estates will suddenly become subject to the estate tax. Proper planning before 2026 is essential to mitigate the tax bite.

You have a few options to help minimize estate taxes on their assets:

  • Annual gifting- Individuals can gift up to $17,000 per recipient each year – as of 2023 – without using up their lifetime exemptions. Larger gifts may require gift tax returns.
  • 529 college savings contributions- Money in a 529 plan escapes estate taxation and can reap tax benefits if used for education.
  • Irrevocable trusts- Assets transferred into properly structured irrevocable trusts are removed from the taxable estate.
  • Life insurance- Life insurance held in an irrevocable life insurance trust (ILIT) can provide liquidity to pay estate taxes without increasing the taxable estate.
  • QTIP trusts- This will allow assets to benefit a surviving spouse while preserving the deceased spouse’s estate tax exemption.
  • Appreciating assets – Purchasing appreciating assets now, like real estate, maximizes the use of the increased exemption before 2026.

Navigating the complex estate tax rules while balancing competing financial priorities is challenging. Working with an experienced estate planning attorney can help craft a customized plan to accomplish your goals and protect your legacy. Given the scheduled sunset of the generous estate tax exemption, now is the time for you to evaluate their situation and implement protective planning.

Contact a Pasadena Estate Planning Attorney to Protect Your Estate

You deserve to know the maximum strategies you can use to protect your assets and family. Work with an estate planning lawyer in California to get started. Book your consultation to prepare today.