Interest rates are part of the calculation when establishing charitable remainder trusts (CRTs). Today’s higher interest rate environment creates a potential tax advantage for those who establish CRTs, which are irrevocable trusts. You place assets into the trust, which can generate income for life or a term up to 20 years to the grantor or a beneficiary. At the end of that term, the remaining value goes to a qualified charitable organization. To determine the amount that qualifies for a charitable tax deduction, an assumed interest rate, the IRS’ so-called “7520 rate,” must be applied. In December 2023, that rate reached 5.8% (compared with a rate that dropped to 4.2% in June 2023).1 With a higher applicable rate, the charitable remainder value of the trust increases, which may allow the grantor to claim a larger tax deduction in the year making the gift.
The 7520 rate is also part of the calculation for GRATs, another form of irrevocable trust which is typically used by a grantor to transfer rapidly appreciating property (e.g. shares of stock). The 7520 rate is used to determine annuity payments back to the grantor and, conversely, a favorable 7520 rate may allow a grantor to transfer large amounts of money to a remainder beneficiary while paying little or no gift tax. Consider discussing these strategies with your financial and tax professionals.
Existing tax laws set to expire
In some cases, tax law changes are already built into the calendar. This is true with many of the provisions included in the Tax Cut and Jobs Act (TCJA) that passed in 2017. A number of the changes designed to be beneficial to taxpayers are scheduled to “sunset” (or no longer apply), by Dec. 31, 2025. As that date closes in, planning ahead is critical to leverage current, historically taxpayer friendly tax laws and to mitigate the potential impact of the changes that are scheduled to occur without further Congressional action. Here are some specific changes that will occur after 2025 unless Congress acts to amend their sunset status, and strategies to consider to offset these changes:
2023 tax bracket adjustments
Under current law, the top tax bracket for individual taxpayers, estates and trust income is 37%. It reverts to 39.6% after 2025. In addition, income thresholds that apply to the top tax bracket are likely to decline, putting certain high-income individuals at risk of greater tax liabilities if current tax laws expire as scheduled.
Other tax brackets will move higher after Dec. 31, 2025 as well, including:
- The current 12% rate rising to 15%
- The current 22% rate rising to 25%
- The current 24% rate rising to 28%
Tax bracket strategies to consider
To the extent you are able, you may want to consider accelerating income into years prior to 2026 to take advantage of lower tax rates. You also will want to consider the potential benefits of maximizing pre-tax contributions to your retirement plan. In addition, if Roth IRA conversions are part of your long-term strategy, it may be advantageous to begin strategically executing those conversions as soon as possible in a strategic manner to capitalize on the current reduced tax brackets.
Alternative minimum tax (AMT) adjustments
Other provisions of the 2017 Act that could phase out after 2025 are exemption amounts that determine a taxpayer’s exposure to AMT. Under current law, AMT only affects several hundred thousand Americans. If current rules expire as scheduled, AMT could affect 6.7 million taxpayers in 2026.2
AMT strategies to consider
It may be particularly important for individuals with vested Incentive Stock Options that can be exercised to consider doing so before 2026. Be sure to connect with a tax professional to fully assess the tax complications.
Phaseout of qualified business income deduction
The TCJA allowed a 20% tax deduction on business income for S Corporations. If the provision expires as scheduled on Dec. 31, 2025, this deduction will no longer be available.
Business income deduction strategies to consider
Shareholders of S corporations may want to consider an election to a C corporation during the 2025 calendar year, as C corporations benefit from an existing top tax rate of 21%. That may be more favorable than what would be the applicable tax rate for an S corporation should the current tax deduction expire.
Unified gift and estate tax deduction cut dramatically
The unified estate and gift tax deduction is valued at $12.92 million per individual in 2023 and $13.61 million in 2024 (nearly $26 million for a married couple in 2023 and more than $27 million in 2024). Note that the exemption amount is rose significantly in 2023 and 2024 due to inflation adjustments. However, this exemption amount will be cut approximately in half, with a projected inflation-adjusted exemption of $6.8 million per person applicable in 2026 after the current tax law sunsets.
The ability to utilize certain lifetime gifting strategies will be limited, because of a reduced lifetime gift tax exemption beginning on Jan. 1, 2026, if not earlier. The same limitations apply to certain estate planning and wealth transfer strategies at death, because of a reduced estate tax exemption.
Gift and estate tax deduction strategies to consider
Individuals with large estates may want to capture the benefits of the current enhanced exemption levels by stepping up the pace of lifetime gifting. For example, the individual lifetime gift and estate tax exemption is scheduled to drop to approximately $6.8 million in 2026, barring Congressional action. An individual could gift up to $13.6 million prior to 2026. That may exhaust their exemption by 2026, but it will reduce the size of their estate and potential future estate tax liability significantly before more limited exemption levels apply. The IRS has made clear that utilizing the current enhanced gift and estate tax is permissible and will not have adverse consequences on taxpayers going forward, even if current laws sunset at the end of 2025. Also note that the opportunity to use this enhanced exemption may go away, so if it’s appropriate to, you’ll want to capitalize on it in the available, pre-2026 window.
In addition, business owners have an opportunity of gifting an ownership position as part of a lifetime gift. Depending on the structure of the business and the share of the business assets being passed on, “illiquidity” and “lack of control” discounts can apply to the valuation of business interests. For instance, assuming a 15% discount, if passing on $1.4 million of business assets as a gift, the lifetime gift tax exemption that needs to be claimed is much lower (approximately $1.2 million), reflecting the illiquidity discount. Note that the business valuation discount can vary. Leveraging business valuation discounts in conjunction with current higher exemption amounts can result in significant wealth preservation and transfer, if the actions occur prior to January 1, 2026.
Be sure to consider any current gifting strategy in the context of your broader financial plan. You want to be certain that large gifts you make now don’t preclude you from pursuing other prioritized goals.
New business entity reporting requirements effective in 2024
Under new federal legislation, the Corporate Transparency Act, most domestic and foreign businesses operating in the U.S. will be required to file specific owner & business information with the U.S. government. The intent of the new requirement is to detect, prevent, and punish money laundering, terrorism, and other business misconduct. The new rules apply to:
Any domestic reporting company that is a corporation, Limited Liability Company (LLC) or entity created by filing a document with a secretary of state or any similar office under the law of a state or American Indian Tribe.
Any foreign reporting company that is a corporation, formed under the law of a foreign country and registered to do business with a secretary of state or any similar office under the law of a state or American Indian Tribe.
Additional rules apply and certain corporations are exempt from the reporting requirement. Failure to report as required can lead to civil and criminal penalties. All existing entities must complete their initial filing with the Financial Crimes Enforcement Network (FinCEN) by Jan. 1, 2025. Newly created/registered entities established in 2024 must file their reports within 90 days of registration. These filings can be completed online through the FinCEN website, but it may be beneficial for entities with complex ownership structures seek the assistance of a tax professional or attorney.
Be prepared for new and potential tax law changes
While no new notable tax laws are on the horizon in 2024, changes could occur in the future based on the outcome of the 2024 November elections. There is also a high degree of certainty about the consequences if Congress does not act and provisions of the Tax Cut and Jobs Act (outlined above) expire at the end of 2025. Therefore, during the existing but narrowing window of opportunity for significant wealth preservation and transfer, it is important to consider current tax laws and related sunset provisions and plan accordingly. We, as always, closely monitor events in Washington and will keep you apprised of any potential changes to the tax code that could affect your tax liability.
Be sure to consult with your wealth professional, tax advisor and attorney to determine the most effective and appropriate tax planning strategies for you to meet your unique goals.