Estate Tax Exemption Is Dropping—Here’s How to Lock In Savings Now

The clock is ticking for high-net-worth individuals and families. The current, historically high estate tax exemption is set to be slashed on January 1, 2026, meaning potentially a much larger portion of your estate could be subject to federal estate tax. Understanding this looming change and taking proactive steps now could save your loved ones significant tax dollars down the road.

What’s Happening?

The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily doubled the estate tax exemption. For 2023, that exemption sits at a generous $12.92 million per individual, effectively shielding up to $25.84 million for married couples from federal estate tax.

However, this provision is scheduled to sunset at the end of 2025. Unless Congress acts to extend or make the TCJA permanent, the exemption is poised to revert to its pre-TCJA level, adjusted for inflation. Current estimates predict the exemption will drop to around $6.5 million per individual (or $13 million for married couples) in 2026.

Why Should You Care?

The difference between the current and projected future exemption is substantial. If your estate is valued above the reduced exemption threshold, your heirs could face a hefty 40% federal estate tax on the excess. This could significantly diminish the inheritance they receive and complicate the estate settlement process.

How to Lock In Savings Now: Strategies to Consider

While the future of the estate tax laws remains uncertain, there are several strategies you can implement now to take advantage of the current higher exemption and potentially minimize future tax liabilities:

• Make Lifetime Gifts: Utilizing the current high exemption allows you to gift assets to your loved ones now, effectively removing them from your taxable estate. This can be done through outright gifts or by establishing trusts.
• Irrevocable Life Insurance Trusts (ILITs): An ILIT can hold a life insurance policy on your life. The proceeds from the policy can be used to pay estate taxes, allowing your heirs to receive the full value of your other assets. Since the ILIT is structured to keep the policy out of your estate, the proceeds are not subject to estate tax.
• Spousal Lifetime Access Trusts (SLATs): A SLAT is an irrevocable trust created by one spouse for the benefit of the other and other family members. It allows you to transfer assets out of your estate while still providing your spouse with access to them, subject to the terms of the trust.
• Qualified Personal Residence Trusts (QPRTs): A QPRT allows you to transfer your primary residence or vacation home out of your estate while still living in it for a specified term. At the end of the term, the home passes to your beneficiaries.
• Grantor Retained Annuity Trusts (GRATs): A GRAT allows you to transfer assets to a trust while retaining the right to receive a fixed annuity payment over a specified term. If the assets in the trust appreciate at a rate higher than the IRS’s designated interest rate (the “7520 rate”), the excess appreciation can pass to your beneficiaries tax-free.
• Review and Update Your Estate Plan: This is a crucial step regardless of the looming exemption change. Ensure your will, trusts, and other estate planning documents are up-to-date and reflect your current wishes and circumstances.

Don’t Wait: Seek Professional Guidance

Estate planning is complex, and the best strategies for you will depend on your individual circumstances, assets, and goals. It is highly recommended to consult with an experienced estate planning attorney and financial advisor to:

• Assess your estate’s potential tax liability.
• Develop a personalized estate plan that minimizes taxes and achieves your objectives.
• Implement the necessary legal and financial strategies before the exemption changes.

The shrinking estate tax exemption represents a significant shift in the estate planning landscape. By understanding the potential impact and taking proactive steps now, you can help protect your legacy and ensure a smoother financial future for your loved ones. Don’t delay – time is of the essence.

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