Abigail Hollar, a financial planner and vice president of operations for Conger Wealth Management of Little Rock, outlined paths for clients to avoid a bigger estate tax bite with the Tax Cuts & Jobs Act of 2017 set to sunset at the end of 2025. (Steve Lewis)
Many provisions of the Tax Cuts & Jobs Act of 2017 are set to expire at the end of 2025, so wealth management advisers are telling high-asset clients to act now.
Individual tax rates will return to 2017 levels, with the top rate reverting to 39.6% for 2026.
But the even more pressing provision scheduled to “sunset” on Dec. 31, 2025, is the estate tax exemption, a limit that will fall by half. Wealth up to $12.92 million is shielded from estate taxation when a person dies, and for married couples, that adds up to $25.84 million.
When the tax law sunsets, those exempt amounts will essentially be cut in half. A person with an estate of nearly $13 million who dies in 2025 would pay no estate tax. But if the 2017 law sunsets, half the same fortune would face a tax of up to 40% before it could flow to heirs.
“I have one client who is at risk for $4.8 million in federal estate tax costs,” said Abigail Hollar of Conger Wealth Management in Little Rock. “That’s a very significant threat to passing wealth on to their heirs, and it’s very important for us to take some actions now to prevent that extremely large tax bill.”
Hollar offers several strategies for clients to use over the coming months to cut their tax liability.
“The classic is to gift away money,” she said. “Gifts that are philanthropic in nature have wonderful tax results. Why? Because it reduces the amount of estate to be taxed” and lets people support causes they believe in.
Another long-standing tactic is to set up irrevocable life insurance trusts. Clients buy a large and relatively costly life insurance policy and transfer it to the ILIT. Since the trust owns the policy, the payout is outside the taxable estate, and upon death, the insurance proceeds go tax-free to beneficiaries.
Lifetime Exemption
Another feature of the tax code, the lifetime gift tax exemption, gives Americans a one-time tax pass for gifts to loved ones. For 2024, the maximum is $13.6 million, but that amount, too, will fall by half at the end of 2025. Spouses together can give away $27.22 million tax-free, for now. So people hoping to take advantage of the higher number need to make arrangements quickly.
“You can go ahead and take your lifetime exemption now while the tax laws are more favorable,” said Marshall Butler of Pinnacle Advisors of Little Rock. “But for every pro, there’s always going to be a con. If you give away an asset, you don’t have control of that asset anymore. So people need to make sure they’re comfortable with not having that asset.”
Matt Jones, president of Legacy Capital Wealth Partners of Little Rock, explained a tool that lets clients use the lifetime exemption and keep a measure of control. It’s called a SLAT.
“That stands for spousal lifetime access trust,” Jones said in a telephone interview. “Let’s say you have $100 million. You can set up a SLAT for the benefit of your wife, and put $13.6 million into an irrevocable trust. So it’s outside of your estate, but your wife is a permissible beneficiary.”
The giver can’t access the money, but the spouse can. For that reason, Jones favors it only in some cases. “Technically, the individual loses access, but as long as you’re in a stable marriage and you’re comfortable with your spouse being the beneficiary of the trust, you can … access the funds through your spouse.”
Other provisions sunsetting at the end of next year will affect far more taxpayers, like the reversion of the standard deduction to about half its current amount. But Butler suspects the estate tax will affect more people than Arkansans would imagine.
“You might think, Lord, that’s a lot of money,” he said. “Does it even affect anybody I go to church with? But in Arkansas, the guy that deposits a lot of cash might be wearing dirty overalls, but still be worth 20 million bucks. When it comes to wealth in Arkansas, you can’t judge a book by its cover.”
