On Sunsets and Cupcakes
By Nicholas S . Stromsodt
Sunsets are beautiful , cupcakes are delicious … unless you are an estate planning attorney . To an estate planning attorney , sunsets are a pain and cupcakes are not quite as tasty as they appear . If someone texted me this , I would respond with a confused emoji . The goal of this article is to provide a very succinct outlook on what should be going through our minds as we assist our clients with their estate planning before the end of 2025 . Citations to authority are intentionally left out as this is meant to read more like a conversation than a journal article .
Concerning Sunsets
Let ’ s start with what we know . At the end of 2025 , there are a bunch of tax laws that are scheduled to sunset , including many provisions related to estate planning . Right now , we have a lifetime exclusion amount for estate taxes that is roughly double of what we expect it to be after the sunset ( more on this when we talk about cupcakes ). Many estate planning attorneys may look at this timeline and think they have a year and a few months to get their clients ’ plans figured out . Unfortunately , that mentality could lead to a rather cloudcovered sunset for their clients . Instead , it would be better to view the timeline as follows : What do I need to get done in the next couple months , and what do I need to get done in the subsequent 12 months ?
Traditional estate planning concepts used to date could have us in a less-than-ideal position to maximize tax savings before the sunset . A vast percentage of estate plans have been historically set up to prevent the need for probate upon the first spouse ’ s death . Joining up ownership of a couple ’ s property is common , useful , and good planning for many clients . However , as those joint assets appreciate , and our clients don ’ t stay in touch , we land in a precarious position when they knock on our door after Jan . 1 , 2025 . Cue the music for the pesky Step Transaction Doctrine .
I do not intend to discuss the Step Transaction Doctrine other than to say , if you try to cram too much into a short period , this tax doctrine will unwind the work you did . Where this matters is when proper tax planning for your clients involves multiple steps . If part of your tax planning will involve the need to separate jointly held assets , it is better to get that done far in advance of the next step in the tax planning . Even better : get it done before Dec . 31 , 2024 , so
Nick Stromsodt practices in the areas of estate planning , wealth transfer tax planning , high net worth tax and estate planning , and special needs estate planning . He earned his J . D . from the University of North Dakota School of Law and is currently pursuing an LL . M . from the prestigious Heckerling Graduate Program in Estate Planning at the University of Miami School of Law . He has been awarded the designation of Accredited Estate Planner ® ( AEP ®) by the NAEPC .
6 THE GAVEL the rest of your planning can be done in the next tax year . I wish we could discuss this further , but we need to save room for dessert .
Concerning Cupcakes
The next concept that is time sensitive for estate planners is related to how a client ’ s lifetime exclusion amount is used . The best analogy I have come across for explaining how the exemption is used is one I heard another practitioner explain in a webinar . The first step is that we need to view the exemption as analogous to a cupcake . The cake portion of the cupcake represents what the exemption is going to be after the sunset ; the frosting portion of the cupcake represents the “ bonus exemption ” we currently have , a . k . a the portion of the exemption that is scheduled to go away after 2025 .
Next , we need to think about how our clients get to eat their cupcake . When my young children eat a cupcake , they lick the frosting off first . When I eat a cupcake , I am careful to make sure each bite has both cake and frosting . Both of these consumption strategies are not how our clients get to eat their exemption cupcake . Instead , when it comes to use of the exemption , the client is forced to eat the cake portion of the cupcake first , before even getting to touch the frosting .
Let ’ s assume ( using easy round numbers ) the cake portion of the cupcake is $ 7 million , and the frosting portion of the cupcake is $ 7 million . This would mean that in the year 2025 , the client would have $ 14 million of available exemption . If the client wants to make a $ 7 million dollar gift before the sunset , they will not have accomplished much in terms of pre-sunset tax planning . All they have done is eaten the cake portion of their cupcake . When the sunset occurs , and their frosting is taken away , they are left with no more dessert . And they probably will have a stomachache when they come to realize they lost their step up in basis on the gifted assets in the process . Moral of the story , consideration needs to be given as to whether it is worth gifting before the sunset if you can ’ t take a bite of your frosting . As a side note , the regulations to the tax code have made clear that if you do eat some of the frosting before the sunset , you get to keep it . The IRS will not retroactively attempt to collect tax that would have been owed on gifts using exemption above and beyond the cake portion of your client ’ s lifetime exclusion amount .
Back to Sunsets
I think most would argue a sunset is better enjoyed with someone . This brings us to the final matter I want to address in this article ,