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  • Writer's pictureJames S. Falcone

Prepare For Future Estate Tax Law Changes



The clock is ticking down on a temporary increase to federal lifetime gift and estate tax exemptions. The Tax Cuts and Jobs Act (TCJA) of 2017 roughly doubled the amount of these exemptions, which 2023 allowed individuals to shield $12.92 million and couples up to $25.84 million from estate tax liability.


Unless Congress makes the change permanent, this provision will "sunset" on January 1, 2026, and the exemptions will revert to 2017 levels, adjusted for inflation—about half of what they are now. That might be around $7 million for individuals and $14 million for married couples. Estates valued above exemption levels may be taxed at a rate as high as 40%.


Prepare for future estate tax law changes. Today's exemption limits don't expire until 2026, but there may be reasons to revisit your plan sooner. For instance, you may want to take advantage of the current high exemption amount before it is reduced or eliminated by future legislation. You may also want to consider how state estate taxes may affect your heirs, as some states have lower thresholds and different rules than the federal level. Additionally, you may want to review your beneficiary designations, trust provisions, and gifting strategies to ensure they align with your goals and values. By planning ahead, you may avoid potential pitfalls and optimize your legacy for your loved ones.


Key takeaways:


  • As of January 1, 2026, the current lifetime estate and gift tax exemption will be cut in half and adjusted for inflation.

  • Families that may face estate tax liability in 2026 may benefit from transferring assets and their appreciation out of their estate sooner rather than later.

  • There are many ways to structure an estate plan. Your attorney can help you identify which solutions might best suit your family's unique needs.



One possible strategy that families may consider is utilizing the current lifetime gift tax exemption to transfer assets to their heirs during their lifetime. By doing so, they can decrease the size of their taxable estate and eliminate any future appreciation of those assets from their estate. For instance, if a parent gifts $1 million worth of stock to their child today, and the stock appreciates to $2 million by the time the parent passes away, the parent has effectively transferred $2 million out of their estate by using only $1 million of their exemption.


However, gifting assets during one's lifetime may also have some disadvantages, such as relinquishing control over the assets, diminishing one's income stream, or incurring capital gains tax for the recipient. Therefore, it is essential to evaluate the pros and cons of various gifting strategies and consult with a tax professional before making any decisions.


Another method to leverage the current estate and gift tax exemption is to establish a trust that can benefit multiple generations of beneficiaries. A trust is a legal entity that holds and distributes assets according to the terms set by the grantor, the person who establishes the trust. Trusts can offer various benefits, such as protecting assets from creditors, providing flexibility and control over how and when the assets are distributed, and minimizing estate, gift, and generation-skipping transfer (GST) taxes.


A common type of trust that can help families take advantage of the current exemption is a dynasty trust, which is designed to last for multiple generations, potentially indefinitely. A dynasty trust can enable the grantor to transfer a large amount of assets to the trust and allocate a portion of their exemption to the trust, effectively locking in the current exemption amount and removing the assets and their appreciation from their estate. The trust can then distribute income and principle to the beneficiaries over time, without being subject to estate or GST taxes at each generation. However, a dynasty trust may also have some drawbacks, such as being irrevocable, meaning that the grantor cannot modify or revoke the trust once it is established, and being subject to state laws that may limit the duration or validity of the trust. Therefore, it is advisable to consult with an attorney who is familiar with the laws of the state where the trust is established and administered.


These are just some of the ways that families can plan and utilize the current lifetime estate and gift tax exemption before it expires. However, each family's situation is unique and may require a customized approach. Therefore, it is recommended that families review their estate plan regularly and work with their attorney and financial professional to explore the best options for their goals and circumstances.



Key Point

Details

Exemption Limits

Current exemption limits expire in 2026, may be reduced or eliminated by future legislation.

State Estate Taxes

Some states have lower thresholds and different rules than the federal level.

Review Estate Plan

Review beneficiary designations, trust provisions, and gifting strategies to ensure alignment with goals and values.

Current Lifetime Estate and Gift Tax Exemption

Will be cut in half as of January 1, 2026, and adjusted for inflation.

Transferring Assets

Families may benefit from transferring assets and their appreciation out of their estate sooner rather than later.

Structuring an Estate Plan

Many ways to structure an estate plan, an attorney can help identify solutions to suit unique needs.

Gifting Strategies

Utilizing the current lifetime gift tax exemption to transfer assets to heirs during lifetime can decrease the size of taxable estate and eliminate future appreciation of assets from estate.

Disadvantages of Gifting

Relinquishing control over assets, diminishing income stream, or incurring capital gains tax for recipient.

Trusts

Can offer various benefits such as protecting assets from creditors, providing flexibility and control over asset distribution, and minimizing estate, gift, and GST taxes.

Dynasty Trust

Designed to last for multiple generations, can enable grantor to transfer large amount of assets to trust and allocate portion of exemption to trust, effectively locking in current exemption amount and removing assets and their appreciation from estate.

Drawbacks of Dynasty Trust

Irrevocable, subject to state laws that may limit duration or validity of trust.

Customized Approach

Each family's situation is unique and may require a customized approach, recommended to review estate plan regularly and work with attorney and financial professional to explore best options.



Trust Advantages and Disadvantages

Feature

Advantage

Disadvantage

Revocable

Can be changed or terminated at any time by the grantor

Does not provide asset protection or tax benefits

Irrevocable

Provides asset protection and tax benefits

Cannot be changed or terminated by the grantor, subject to state laws that may limit the duration or validity of the trust


Growing out of proportion


An estate valued at $4 million in 2015 may approximately double over a decade and be subject to federal estate taxes starting in 2026.



Source: Schwab Center for Financial Research. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product. Dividends and interest are assumed to have been reinvested, and the example does not reflect the effects of taxes or fees. Assumes an individual estate value of $4 million, 7% estimated annual return, 5% inflation rate, and reduction of the estate tax exemption to $7.48 million in 2026.

For married couples: dual spousal trusts


  • Dual spousal trusts for married couples: Married couples can create spousal lifetime access trusts (SLATs) in their own names to exclude assets from their estates while allowing limited access to their beneficiary spouses. This can help them lock in the current exemption limit for estate and gift taxes.

  • Reciprocal trust doctrine for SLATs: SLATs between two spouses should not be too similar, otherwise they may be invalidated by the court-established reciprocal trust doctrine. This strategy requires working with an estate planning specialist and attorney.

  • SLATs for generation-skipping transfer tax: SLATs may also preserve the higher generation-skipping transfer (GST) tax exemption, which applies to gifts for individuals who are more than one generation or at least 37½ years younger than the donor.


For family businesses: a change of entity


  • Family limited partnerships or family limited liability companies for family businesses: Family businesses can form as family limited partnerships (FLPs) or family limited liability companies (FLLCs) to transfer wealth between generations and protect partnership assets from creditors and divorcing spouses. Both entities can employ discounts that reduce the amount of a reportable gift.


For everyone: strategic gifting


  • Strategic gifting for everyone: Gifting assets to loved ones while alive can lower the taxable estate and allow the beneficiaries to enjoy the gifts right away. However, the value of the estate may grow differently than expected, so it is good to review the estate plan regularly and work with a wealth advisor.


In our experience, most people don’t consider themselves wealthy. However, the bar is being lowered from an estate tax perspective, and everyone should discuss this with their wealth advisors and attorneys. 



 

Investment advisor representative of securities and investment advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer, and Registered Investment Advisor. Cetera is under separate ownership from any other named entity. In addition, some Investment advisory services are offered through Fulcrum Wealth Advisors, LLC. Fulcrum Wealth Advisors, LLC is a registered investment advisor in the State of Washington. 

Branch Address: 10940 NE 33rd PL., Suite210 Bellevue, WA 98004
Branch Phone: 877-400-0260

Neither Cetera Advisor Networks nor Fulcrum Wealth Advisors, LLC provide legal services or tax advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
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