The 2017 Tax Cuts and Jobs Act (TCJA) increased almost twice the lifetime estate and gift tax exemption. It elevated the individual exemption from $5.6 million to $11.18 million. It raised the exemption for couples from $11.18 million to $22.36 million. These figures were subsequently adjusted for inflation after 2018. Since 2018, the exemptions have seen yearly increases. As of 2023, the exemption has risen to $12.92 million per individual and $25.84 million for couples. However, barring any congressional changes, it will be very different in 2026.
2026 Changes
Unless Congress takes action, the inflation-adjusted exemption will return to approximately $7 million, or $14 million for married couples, in 2026. This would effectively cut the limit in half compared to before. Adding to this, the current highest tax rate for significant gifts and inheritances, which is currently 40%, is set to go up to 45% in 2026. This would be the highest rate seen since 2009.
Given these upcoming changes, individuals and families must reevaluate how they plan to transfer their wealth. They have to decide if it’s wise to give more gifts during their lifetime before they lose the opportunity to give away extra money between $7 million and $12.92 million after 2025. They will forfeit if they don’t utilize this additional amount allowed before the rules change.
Strategies
Pending any changes from the government, people should start getting ready for the changes to estate and gift tax limits. There are a few strategies that individuals can consider.
1. Review your estate plan
To maximize the current estate tax exemption, it’s suggested that you look at your estate plan. Meeting with a financial advisor to review your estate plan would be a good idea. Consider using tactics such as giving assets to your family or establishing a trust to reduce your estate’s value. Giving gifts is an effective method to use as much of the current exemption as possible before it might go down later because of new tax rules. On the other hand, setting up a trust can lower estate taxes and safeguard assets for your beneficiaries.
2. Life insurance
In your estate planning approach, thinking about incorporating life insurance is valuable. Typically, the money from life insurance is only sometimes counted when calculating estate taxes. This makes it useful for covering those taxes or giving your beneficiaries extra resources. People often go for survivorship life insurance to help reduce the taxes their heirs have to pay. Using life insurance can ensure your beneficiaries get the entire estate amount and offer funds to cover any estate taxes due.
3. Various trusts
There are different types of trusts that can help maximize the current estate and gift tax exemption. One example is the Spousal Lifetime Access Trust (SLAT), which is a special kind of trust where one spouse sets up a trust for the benefit of the other spouse and sometimes their children. It allows the assets put into the trust to be outside the estate for tax purposes while allowing the grantor (the person who set up the trust) to benefit indirectly from the trust’s income.
Another example is a Grantor Retained Annuity Trust (GRAT). A GRAT is a method where you place assets into a trust while still getting annual payments from the trust for a set time. When the term ends, any leftover assets in the trust are given to beneficiaries. This strategy can help reduce the transferred assets’ potential gift or estate taxes.
Conclusion
Understanding the evolving landscape of estate and gift tax exemptions is crucial for effective wealth transfer planning. The significant changes brought about by the 2017 Tax Cuts and Jobs Act have presented opportunities to leverage higher exemptions, but these benefits might be short-lived without proper preparation. As we approach 2026, when the exemptions are expected to decrease, thoughtful strategies become paramount. If you have questions or concerns about your estate plan, CF Financial may be able to help.
Disclosure
CF Financial is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.