The clock is ticking if you haven’t already planned for the significant tax changes slated for 2026.
Signed into law in December 2017, the federal Tax Cuts and Job Act (TCJA) more than doubled the exemption threshold for lifetime estate and gift taxes. Taxpayers can use the exemption (the dollar amount that can be sheltered from estate or gift taxes) to gift assets during their lifetime, leave assets to heirs at death, or a combination of both. The current lifetime exemption stands at $13.61 million for individuals and $27.22 million for couples in 2024.
But the higher threshold is only temporary and will return to 2017 levels—adjusted for inflation—at the stroke of midnight on Dec. 31, 2025. As a result, it is expected that the current exemption amount will be approximately half of what it is today.
That means that Americans whose wealth exceeds the exemption amounts (now and after 2025) and who have not taken advantage of these higher thresholds could potentially face a sharp increase in estate tax liability in 2026 and beyond.
This coming change is another reminder that estate planning is not a one-and-done document. Rather, it is a fluid plan that can change based on your wishes, goals, and the law. As always, it is wise to consult with a financial professional or estate attorney who knows the ins and outs of the upcoming change and is also attuned to your financial goals.
If you are a married couple with a current net worth of greater than $15 million or an individual with a net worth greater than $7 million, you may want to consider reviewing your current estate plan to see if you should lock in the current higher exemption amount by establishing, or enhancing, your lifetime gifting plan.
It’s not too late to reduce the impact these changes can have on your estate plan. These decisions, however, should not be made in haste as they require thoughtful evaluation of your goals and desire for control. You should also consider your appetite for complexity and legal costs.
In addition, there are myriad other factors to consider when determining the right strategy, including, but not limited to, the liquidity of your asset base, the potential for assets to generate income that you may want or need before giving it away, potential for asset appreciation, family dynamics, and implications for income taxes. Any change can also affect your ability to fund future charitable endeavors, long-term healthcare needs, and other wealth management goals.
Once you have evaluated your situation, there are a variety of ways, ranging from a sophisticated trust and other structures to more basic ways (direct transfers to heirs, etc.) to use your exemption during your life. There is not one best way—there is only the best way for you. Here are some options.
Spousal Lifetime Access Trust
For example, couples with resilient, trusting marriages who do not want to immediately transfer a significant amount of assets to their children and would still like the use of some of those assets may want to consider a Spousal Lifetime Access Trust (SLAT) as a viable option to utilize the higher exemption amount. In its simplest terms, a SLAT is an irrevocable trust that is created by one spouse for the benefit of the other spouse. If the beneficiary spouse dies, the trust is then transferred to the grantor’s children. Assets of the SLAT are not included in the estate of the grantor or the beneficiary upon death, but gifts from the grantor to the SLAT count toward the lifetime estate tax exemption. Each spouse can create a SLAT in their own name, but it is important that the documents aren’t so similar that they run afoul of the “reciprocal trust doctrine” that could invalidate the benefit you are trying to achieve.
Family Limited Partnership & Family Limited Liability Company
If you have significant real estate holdings and/or a family business, you may want to consider gifting those assets to a Family Limited Partnership (FLP) and/or Family Limited Liability Company (FLLC). FLPs and FLLCs are sophisticated tools to facilitate the transfer of these assets to beneficiaries at a discounted value (due to lack of control and marketability issues), while also allowing the grantor to retain a level of control such as management decisions, and the timing and amount of the distributions. The ability to use discounting when making gifts to future generations makes these vehicles a highly attractive way to transfer significant wealth.
SLATs, FLPs, and FLLCs require careful legal drafting and counsel and should be handled by experienced and capable professionals. Furthermore, don’t forget about some of the more basic strategies that are easy to execute and also can be used to reduce the value of your estate, such as the annual exclusion amount for friends and extended family (set at $18,000 per recipient for 2024), the ability to front-load 529 plans by distributing five years’ worth of annual exclusion gifts at once, and paying tuition or medical costs directly to an academic or healthcare institution on behalf of someone else, and charitable gifts.
Irrevocable Life Insurance Trust
Moreover, it is worth noting that life insurance proceeds that are not held in trust are usually included in the estate for estate tax purposes. If the proceeds are significant, they can unexpectedly put your estate over the exemption amount. In these cases, you may want to establish an Irrevocable Life Insurance Trust (ILIT) and transfer ownership of the policy to the trust. This transfer is considered a taxable gift and any additional transfers to the trust to pay for premiums, for example, would likewise be regarded as gifts. Transferring an insurance policy to an ILIT requires careful consideration; if death occurs within three years of the transfer, the proceeds may be included in the taxable estate. Instead of gifting the policy, some people gift cash to the trust and then have the ILIT purchase the policy for its fair value.
Estate taxes in one form or another have been levied on individuals since this country was formed and there have been numerous changes along the way. Indeed, even the upcoming change to the exemption threshold could change if Congress decides to act. It is extremely difficult to predict the will of Congress, especially in an election year and amid geopolitical unrest. Until then, however, your gift planning can be made with a fair degree of comfort because the IRS has ruled that it will not retroactively “claw back” gifts that were made during the period of the higher threshold. It is therefore wise to consider taking this opportunity to use the exemption to its fullest before the window closes.
