As we approach the end of 2024, estate planning professionals and their clients may wish to consider the scheduled changes to estate legislation.
Beginning in 2026, the estate tax exemption is set to decrease to pre-2017 levels, which could potentially alter estate planning considerations for certain individuals and families.
This change could be crucial for many individuals and families with substantial assets, as it may have profound implications on how they structure their estates.
Understanding the Estate Tax Landscape
The estate tax, often called the “death tax,” applies to the transfer of a deceased person’s taxable estate. The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the estate tax exemption, allowing individuals to pass on up to $12.06 million (as of 2022) without facing federal estate taxes. This exemption is adjusted annually for inflation, so by 2026, it is projected to reach approximately $13.6 million.
However, beginning on January 1, 2026, the estate tax exemption is scheduled to be cut in half, reverting to pre-TCJA levels. For single individuals, the exemption is expected to decrease from around $13.6 million to approximately $6.03 million, while for married couples, the exemption will fall from roughly $27.2 million to about $12.06 million. These figures will also be subject to inflation adjustments in future years.
Consequently, some estate planners are urging their clients to reassess their estate plans in light of this impending change.
The reduction in the estate tax exemption could mean that more individuals will be subject to estate tax upon their death. For many families, this could lead to significant tax liabilities, particularly those who have accumulated wealth through real estate, investments, or business ownership. The increased tax burden could necessitate the sale of family assets or businesses to cover estate taxes, potentially disrupting family legacies and financial stability.
Estate Planning Strategies
In anticipation of the 2026 estate tax expiration, some proactive strategies individuals can adopt to help mitigate potential tax liabilities include the following:
1. Gift Strategies: One approach to reducing the size of an estate is through gifting. Individuals can give up to $17,000 per recipient (as of 2023) annually without incurring gift tax. By starting to gift assets now, individuals could reduce their taxable estate and potentially avoid taxes altogether.
2. Establishing Trusts: Various types of trusts can help individuals control how their assets are distributed while potentially minimizing estate taxes. Irrevocable life insurance trusts (ILITs), for example, allow individuals to remove life insurance from their taxable estate, thus potentially reducing the overall value subject to estate tax.
3. Charitable Giving: Donating to charities can not only provide philanthropic benefits but also the opportunity to reduce the taxable estate. By establishing a charitable remainder trust (CRT), individuals can typically receive income from the trust during their lifetime, and the remainder will go to charity upon their death, effectively lowering the estate’s tax liability if IRS requirements are met.
4. Utilizing Family Limited Partnerships (FLPs): These partnerships allow family members to pool assets while retaining control over how those assets are managed. When structured according to IRS regulations, FLPs can help in valuing assets and potentially provide discounts on estate valuations, which can further minimize tax exposure.
5. Reviewing Beneficiary Designations: In many cases, it is important to review beneficiary designations on retirement accounts and life insurance policies as they typically function independently of will provisions. Updating these can help prevent unintended tax consequences and better reflect intended asset distribution.
Conclusion
The expiration of the increased estate tax exemption in 2026 may impact many families and their estate planning strategies. Proactive measures, such as those outlined above, could help mitigate the risks associated with higher estate tax liabilities.
As the deadline approaches, individuals may want to consider reviewing and, if deemed necessary, revising their estate plans to ensure their wishes are honored and their heirs are protected from unexpected tax burdens. By taking action today, families can potentially secure their legacies for future generations.
Sources:
- “Understanding the 2026 Changes to the Estate, Gift, and Generation-Skipping Tax Exemptions,” June 13, 2024
- “H.R.1 – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” December 22, 2017
- “Tax Cuts and Jobs Act: A comparison for businesses,” December 19, 2023
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