In early 2017, the provisions of the Tax Cuts and Jobs Act went into effect. Congress and President Donald Trump passed the largest tax reform in a generation, and its impact has been tremendous.
However, the act contained multiple automatic sunset provisions that are set to kick in at the end of 2025. One of the sunset provisions is tied to the estate and gift tax exemption. As land values have increased and wealth has accumulated these past few years, estate tax planning will become a concern for many farm families in the years ahead of the sunset.
The Tax Cuts and Jobs Act doubled the estate tax exemption up to roughly $11 million per person. With that exemption level indexed annually to inflation, the current exemption threshold is $12.06 million per person, and that figure will certainly increase over the next few years. This means the first $12.06 million in a person’s estate at the time of death is exempt from estate taxes.
Fast-forward to 2026, and the estate and gift tax exemption amounts will sunset unless otherwise extended by Congress and the president. Projections for the post-sunset exemption level place the new amount about $7 million per person. Keep in mind, every dollar over the exemption level is subject to a 40% tax.
Farm families should be proactive when planning around this sunset event. Balance sheets that are strong on land and equipment and low on cash could face some difficult decisions to manage potential tax liability. The last thing families want to do is sell land to pay a tax bill.
With a midterm election and general election scheduled before the sunset date, it is impossible to predict whether the sunset will occur or if the higher exemption levels will be extended. Regardless, taking proactive steps today can save a lot of time and money if urgent changes to your succession plan are required.
Financial, tax and legal professionals are likely to face an extremely busy 2025. If your family could be in estate tax territory after the sunset, the best strategy is beginning the effort now. Waiting until 2025 to engage a succession planning team and develop a strategy for managing potential taxes could be costly.
Ryan Conklin is an attorney and new owner of Wright & Moore Law Co. LPA in Ohio. Reach him at [email protected] or 740-990-0755.