Are Big Estate Tax Changes Coming?
As we approach January 1, 2026, a pivotal moment looms for families navigating the complexities of estate and gift tax planning. While uncertainty persists around the expiration of key provisions of the 2017 Tax Cuts and Jobs Act, prudent preparation now could significantly influence your ability to preserve and pass on your wealth.
Key Considerations for Wealth Planning in Uncertain Times
The 2017 Tax Law’s Potential Sunset
When the Tax Cuts and Jobs Act was enacted, it significantly increased the lifetime gift and estate tax exemption, indexed for inflation, to $11.2 million for individuals and $22.4 million for married couples. In 2024, this exemption stands at $13.61 million for individuals. However, unless Congress intervenes, the exemption will revert to approximately $7 million for individuals ($14 million for couples) in 2026, exposing many families to substantial estate tax liabilities.
While legislative outcomes remain unpredictable, the potential reduction underscores the urgency to act. Families with net worths exceeding these thresholds should evaluate their current estate plans and consider strategies to mitigate future tax burdens.
Proactive Strategies to Consider
1. Accelerated Gifting
Take advantage of today’s higher exemptions by gifting assets outright or through trusts. Accelerated gifting can help remove assets from your taxable estate while transferring wealth to heirs. However, consider the tax implications, such as capital gains taxes, on appreciated assets received during your lifetime that heirs may face.
2. Establishing a Spousal Lifetime Access Trust (SLAT)
A SLAT allows one spouse to create an irrevocable trust for the benefit of the other, utilizing current exemption amounts. This strategy enables wealth transfer while retaining some access to funds under specific conditions. Given the complexity and potential risks—including divorce or premature death of the beneficiary spouse—this approach should be implemented with expert guidance.
3. Maximizing One Spouse’s Lifetime Exemption
Couples may choose to fully use one spouse’s lifetime exemption before the potential sunset while preserving the other spouse’s exemption for future planning. This tactic can safeguard against losing access to today’s elevated exemptions.
4. Stress Testing Your Plan
Scenario planning allows you to evaluate how changes to tax laws may impact your estate. By modeling different outcomes, you can identify vulnerabilities and refine your strategies to align with your long-term goals. Stress testing is particularly valuable in uncovering overlooked opportunities or risks in your existing plan.
5. Revisiting Your Estate Plan
Estate plans should evolve alongside your life circumstances and financial objectives. If your plan is outdated or misaligned with your current goals, now is an opportune time to revisit and revise it.
A Holistic Approach
While estate tax changes grab headlines, they are just one part of the broader wealth planning landscape. Other Tax Cuts and Jobs Act provisions, such as marginal tax brackets and the standard deduction, are also set to expire. These shifts may necessitate adjustments to your overall wealth strategy to ensure continued alignment with your family’s financial priorities.
Keep Your Eye on the Bigger Picture
Uncertainty can tempt families to react impulsively to potential tax law changes. However, the most effective wealth plans are rooted in your long-term objectives. Collaborate with a team of trusted advisors to:
- Clarify your generational wealth goals.
- Build a dynamic and adaptable plan.
- Stay informed about legislative developments that could impact your strategy.
Conclusion
As a preeminent wealth advisor, I’m here to help you navigate this period of change with clarity and confidence. By acting now, you can position your family to weather potential tax law shifts and preserve your legacy for future generations. Let’s discuss how we can tailor a strategy to your unique circumstances and aspirations.
Insights from John J. Bowen Jr. inspired this blog.
