Year-end estate planning: Strategies for maximizing tax benefits and legacy planning

While the future of estate and gift-tax policy is uncertain given the expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025, there are important actions to consider now before the end of the year. Sound estate planning involves much more than planning for potential taxes. For instance, this might include efficient transfer of wealth to heirs, addressing certain risks and satisfying philanthropic goals.

With family gatherings on the calendar in the final weeks of the year, it may be an opportune time to talk about legacy planning with family members and chart a plan for the future.

As year-end approaches, here are several strategies for investors to consider.

Create a “road map” document

Create a road map document to help family members navigate documents and legacy plans in case of an unforeseen event or death. Family members will need to locate investment accounts, key documents, important contacts, online passwords and specific instructions on how to proceed. Creating a document that outlines this information for family members may be a good place to start. Consider consulting a financial advisor for guidance on preparing heirs.  (See our “Heir preparation packet”).

Review beneficiary designations and other considerations

Review and update plans and documents, including beneficiary designations on retirement accounts, life insurance policies and annuities. Consider a revocable trust to help heirs avoid probate. In case of incapacitation or a health-related issue, documents such as powers of attorney, health care proxies and living wills are critically important for health- and financial-related decisions.

Use it or lose it: The annual gift-tax exclusion

Year-end provides an opportunity to review existing estate plans and consider gifting strategies. The annual gift-tax exclusion for individuals in 2024 is $18,000. To avoid utilizing a portion of the lifetime gift- and estate-tax exclusion (over $13 million for 2024), annual gifts can be made to as many recipients as desired as long as each gift doesn’t exceed $18,000 (or $36,000 for married couples electing split gifts). For gits exceeding the annual limit, or when making a split gift with a spouse, a gift tax return is required.

Consider whether large lifetime gifts make sense

The large lifetime exclusion for gifts and estates allows higher-net-worth families many options on sheltering their net worth from federal gift and estate taxes. However, due to the expiration of the TCJA at the end of 2025, the lifetime exclusion figure is scheduled to be reduced in half. While the risk of an expiration of the current estate and gift tax laws is lower given the results of the election, those with potentially large estates should consult with a qualified estate planning attorney. For example, does it make sense to gift assets now to remove them from an estate or pass them to heirs at death and potentially benefit from stepped-up cost basis. Here’s a chart that highlights some considerations:

Use 529 plans to fund education for family members

Before the end of the year, consider gifts into 529 plans utilizing the annual gift-tax exclusion of $18,000. There is also a special 529-plan exclusion that allows five years’ worth of gifts—up to $90,000, or $180,000 for married couples—to be contributed at once, provided that no other gifts are made within the next five-year period. Another option would be to contribute the annual exclusion ($18,000 or $36,000 for couples) into a 529 before the end of the year and then early in 2025 make a large contribution representing five years' worth of gifts. By taking this action you have essentially front-loaded six years' worth of gifts into a 529 in a relatively short period of time. 

For federal financial aid purposes, funding a 529 plan may make sense. The federal financial aid calculation treats 529 plans owned by parents more favorably than assets owned by the student (for example, in a custodial minor account). There is an added benefit for non-parents such as grandparents who own 529s. These accounts are not currently factored as assets for determining federal financial aid under the FAFSA process. In addition, recent changes to the FAFSA form do not include distributions from grandparent-owned (and other non-parent-owned accounts) in the income test portion of the FAFSA form.  See our article, “Reasons why a grandparent-owned 529 may make sense.”

Lastly, recent tax law changes allow 529 account owners to withdraw $10,000 for K–12 tuition expenses and $10,000 to repay student loans and allow distributions for qualified apprenticeship programs. (Distributions for K–12 expenses are free from federal income taxes, if taken after December 31, 2017. Earnings may be subject to state income taxes in certain states.)

Plan for the 10-year rule

In late 2019, Congress passed the SECURE Act, which eliminated the “stretch” option on distributions from most inherited retirement accounts inherited by non-spouses. Under the new rules, most non-spouse beneficiaries are required to fully distribute inherited account balances by the end of the 10th year following the year the account owner dies. As a result, from a tax perspective, retirement accounts may not be as beneficial to all heirs. Those with large 401(k)s or IRAs may want to review their overall estate plan and consider leaving a greater share of non-retirement assets to higher-income heirs. For example, consider proceeds from a life insurance trust or real estate that may benefit from a step-up in cost basis at death when transferred. See our education piece, “Distribution planning under the SECURE Act.”

 

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