Estate planning isn't a "set it and forget it" task. Federal and state laws are constantly changing, and a plan that was perfect a few years ago could be outdated today. Staying informed about these changes is crucial to ensuring your assets are protected and your loved ones are not burdened by unnecessary taxes.
The Federal Estate Tax Exemption and Portability
The federal estate tax exemption is the amount of money a person can transfer at death without paying federal estate tax. This figure has been historically high for several years.
What You Need to Know: The federal estate tax exemption for an individual is $13.99 million for 2025. For a married couple, this effectively doubles to $27.98 million through a concept called portability. Portability allows a surviving spouse to use any unused portion of their deceased spouse's exemption, provided they file a federal estate tax return.
Why It Matters: The current high exemption amount is set to sunset at the end of 2025, which would cause it to revert to a much lower, inflation-adjusted amount (estimated to be around $7 million per person). For those with estates valued over the expected new threshold, it's an urgent time to consider gifting strategies to transfer assets tax-free while the exemption is still high.
The SECURE Act and Inherited Retirement Accounts
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and its subsequent updates have drastically changed the rules for inheriting retirement accounts like IRAs and 401(k)s.
The 10-Year Rule: The most significant change is the elimination of the "stretch IRA." Previously, most non-spouse beneficiaries could stretch distributions from an inherited IRA over their lifetime, providing long-term, tax-deferred growth. Now, under the SECURE Act's 10-year rule, most non-spouse beneficiaries must empty the inherited account within 10 years of the original owner's death.
The Impact: This new rule can create a significant tax burden for heirs, as large distributions over a short period can push them into higher income tax brackets.
Planning Strategies: To mitigate this, estate planning now focuses on different strategies, such as converting traditional IRAs to Roth IRAs during your lifetime (tax is paid upfront but distributions are tax-free for the heir) or using specialized trusts to control the flow of inherited assets.
The Step-Up in Basis Rule 🏡
The step-up in basis is a valuable tax provision that can save heirs hundreds of thousands of dollars in capital gains taxes.
How It Works: The "basis" of an asset (like a stock or a house) is the original cost used to calculate capital gains tax when it's sold. When a beneficiary inherits an asset, its basis is "stepped up" to the asset's fair market value on the date of the original owner's death.
A Simple Example: Let's say your mother bought a house for $100,000 many years ago, and it's now worth $500,000. If she were to sell it today, she would pay capital gains tax on the $400,000 profit. However, if you inherit the house, the basis "steps up" to $500,000. If you sell it immediately for that price, you pay zero capital gains tax. You only pay tax on any appreciation after you inherited it.
Why It's Important to Plan: Certain planning methods, like gifting assets during your lifetime or placing them in certain trusts, can sometimes negate this benefit. A knowledgeable attorney can help you structure your plan to maximize this tax advantage for your heirs.
Don't Let Your Plan Become Outdated
The laws that govern your estate are not static. To ensure your plan continues to protect your assets and your family, it must be reviewed and updated as laws change and your life evolves. Contact our experienced team today to schedule a consultation and make sure your estate plan is equipped to handle the legal and tax challenges of tomorrow. You can also learn more about our estate planning services.
