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The Estate Tax Exemption & The Rule of 72

Updated: Mar 3


Today's post is from Team Member Bob Keane, CFP™:


Since the Tax Cuts and Jobs Act (“TCJA”) was passed in 2017, I have had several discussions with prospects, friends, and other acquaintances that essentially go like this:


Me: "I see you haven’t done any estate planning, with the financial resources you have today, aren’t you concerned?"

Other person: "Nah, the TCJA doubled the estate exemption so we won’t be anywhere close to that when we pass away."


While the intricacies of the estate and gift tax exemption and credit may be a bit convoluted for a blog post, we did want to share a couple of things to encourage discussion with your financial advisor.


I believe it was Albert Einstein who said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” While Einstein may not have invented the Rule of 72, the Rule does provide a great shortcut to understanding “the 8th wonder of the world.” The Rule of 72 provides an estimate of how long it would take to double your money based on an estimated rate of return. As an example, if you assumed an average annual return of 3%, close to the long-term U.S. Inflation rate since 1900, your money would double in approximately 24 years (72 divided by 3). An average annual return of 5% brings the number of years to double your portfolio down by almost 10 years (72 divided by 5 equals 14.4 years)!


So why am I quoting Einstein in a post about estate planning? It goes back to the comment that “I won’t have enough money to have to worry about estate planning.” While that is true for many Americans, if one has significant assets today, they need to think about the Rule of 72 and what their estate may look like in the distant future.


Finally, keep in mind that the personal and estate tax provisions of TCJA expire on December 31, 2025. Unless Congress acts to make these provisions permanent, the estate tax exemption amount will roll back to the 2017 amount, adjusted for inflation (approximately $5.5 million per person in 2017).


So, what should you do? At a minimum, one should have basic estate documents executed including:

  • Living Trust – generally, a living trust is used to avoid probate

  • Will – provides for disposition of assets upon death

  • Guardianship Designations (if not incorporated into the trust or wills)

  • Springing Power of Attorney – document where you define who can make financial & legal decisions for you in the event of incapacity

  • Healthcare Directive (i.e., Living Will) – document where you state the actions to be taken in the event of incapacity due to a health issue

  • While not a document, proper primary and secondary beneficiaries should be designated on all tax-deferred accounts


For those with an expected future estate in excess of the estate tax exemption amounts, there are a number of strategies that can minimize the tax burden on your heirs and protect your legacy including various gifting and charitable trust strategies. Keep in mind, the earlier one starts with these strategies, the more potential future growth will be excluded for the estate calculation.


We understand that this may sound complicated but the bottom line is - talk to your advisor about the Rule of 72 and what steps you need to take to get started on your estate plan. It is never too early to start planning and a good financial advisor can make sure you’re protected.


Contact the Peninsula Wealth Team for a free consultation to begin building a financial and investment plan customized to your goals.



Office Address: 350 Townsend Street, Suite 411, San Francisco CA 94107 | P: 415-678-5360 | Email: team@peninsulawealth.com

 

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