There may be an unprecedented amount of uncertainty heading our way and it has nothing to do with the presidential election. It has to do with taxes. The biggest tax policy uncertainty surrounds the scheduled sunsetting of the 2017 Tax Cut and Jobs Act at the end of 2025. With that sunset looming 15 months from now, the top concern for many high-net-worth clients is the potential reduction, by about half, of current estate and gift tax exemptions. Today’s levels are $27.2 million for couples and $13.6 million for individuals. It’s unclear whether those exemptions, as well as reductions in overall income tax rates, will be extended or returned to pre-2017 levels. Considering this, there may be a few opportunities to consider that have potential wealth transfer and income tax benefits.
Consider paying education and health care expenses for others. Direct payments of tuition and medical expenses, no matter the amount, are not subject to gift taxes and can be a good way to make an immediate impact on the lives of recipients.
Consider making annual exclusion gifts. With the annual gift tax exclusion currently set at $18,000 per person per year in 2024, these gifts can be an efficient way to make gifts on a consistent basis without eating into their lifetime exemption amount. Not only do these gifts remove a significant amount of money from a client’s estate, but they also remove any future appreciation or income generated from that gift. (Tax deductions may be disallowed in the event of non-qualified withdrawals.)
Develop a broader gifting strategy around 529 savings accounts. Beginning this year the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0) allows investors to convert 529 savings accounts into Roth individual retirement accounts (IRAs) without taxes or penalties. This could be good news to people with overfunded 529 savings accounts. Be aware that there are some restrictions to these rollovers. Penalty-free rollovers can be made if the account has been open for at least 15 years, and the amount to be rolled over has been in the account for at least five years. Rollovers are limited to a maximum of $35,000 per beneficiary over their lifetime. Rollover contributions must also be within Roth IRA annual contribution limits ($7,000 in 2024) and is reduced by any traditional or Roth IRA contributions made by the beneficiary in that year.
Another important thing to point out is that contributions can be accelerated by investing five times the annual gift limit in a 529 — up to $90,000 ($180,000 for married couples) at one time — essentially making five years’ worth in one year. Of course, every situation is different, and we look forward to going through your situation individually.
- Allen Minassian
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