Lately, we have been working with individuals and family-owned businesses to help them get a handle on the upcoming 2026 changes in estate and gift taxation. With the threshold for lifetime estate and gift tax exclusions being roughly halved, it's natural for many to have concerns about the possibility of their heirs being left with a tax bill of around 40% at a federal tax level. But here's the good news — there's still time to stay ahead of these changes by crafting a smart and strategic plan.
In this article, we will dive into some of the questions we have been hearing. Hopefully, it will shed light on estate planning, the significance of the 2026 Estate and Gift Tax Sunset, and strategies to protect your assets.
What goes into estate planning?
An estate plan typically includes various documents and directives to ensure that a person's assets and affairs are managed according to their wishes. These can include a will or living trust (which becomes null upon a person's passing), a living will, beneficiary designations, other trusts, insurance policies, and more.
These components collectively form an estate plan, which is essential for ensuring that a person's assets are distributed and managed according to their preferences and can provide peace of mind for both the individual and their loved ones.
It’s also critical that estate planning is done in a tax-intelligent way, ensuring more of the estate goes to the rightful heirs, rather than Uncle Sam, or fought over in probate court. Small steps now can prevent family disputes, lack of privacy, and costly legal fees.
What is the 2026 Estate and Gift Tax Sunset and why does it matter?
The 2026 Estate and Gift Tax Sunset is a significant event in the realm of taxation. It refers to the expiration of the increased federal estate and gift tax exemptions, which were temporarily raised by the Tax Cuts and Jobs Act (TCJA) of 2017. Starting on January 1, 2026, these exemptions are set to revert to their pre-TCJA levels, adjusted for inflation.
So, why is this important? The current lifetime estate and gift tax exemption, which was roughly $13 million per individual in 2023, is expected to be halved. This could result in a new limit of approximately $6.8 million for individuals and $13.6 million for married couples. People who don't take advantage of these current higher exemptions may find themselves facing higher estate and gift taxes after the sunset takes effect. Therefore, it's crucial to be aware of these changes and adjust your estate planning strategies accordingly to safeguard your wealth and assets for the future.
Are there any strategies to mitigate estate tax liabilities for high-net-worth individuals and family businesses?
Yes. To prepare for the upcoming estate and gift tax sunset, individuals and family businesses can implement various estate planning strategies, including making the most of annual gifts, deductible gifts, contributing to 529 plans, setting up irrevocable trusts, restructuring life insurance policies, establishing spousal lifetime access trusts, transferring assets before death, and more.
Every situation is different, and a financial advisor can provide personalized guidance based on your unique needs.
How can annual gift tax exclusions be used now to reduce tax liabilities?
Taking advantage of annual gift tax exclusions through lifetime gifting presents a valuable strategy for distributing assets to your heirs while simultaneously reducing your taxable estate. Currently, you have the ability to gift up to approximately $18,000 per person in 2024 annually without impacting your lifetime tax exemption. For married couples, this presents an even more advantageous opportunity, as they can essentially double the amount they can give together. This would prevent the need for a gift tax return (Form 709) to be filed (if assets are gifted from a joint account regarding married couples) and not be considered a taxable gift when calculating estate tax.
This approach can be beneficial in your toolkit. However, these generous limits are on the verge of a significant change. The impending reduction effectively cuts them in half. This impending shift creates a "use it or lose it" situation, encouraging many to capitalize on the higher gifting limits while they are still available.
Another key strategy is gifting to a 529 plan for a child or grandchild. This plan has become the new normal for educational funding due to its large contribution abilities (state dependent) and there is no income threshold or income phase-outs to participate. It's key because one can gift five years’ worth of gifts at once without triggering gift tax implications. This means that in 2023, you could have contributed $85,000 (or $170,000 for a married couple) at once, without gift tax or estate tax implications. Therefore, it's possible to lower a gross estate by gifting, while funding an education plan. A gift to a 529 plan is also considered a completed gift, unlike a revocable or disclaimer trust. Also, under certain circumstances, one can even roll unused funds into a ROTH IRA under SECURE 2.0.
We can help you navigate gift taxes, so please reach out to learn more.
How can deductible gifts be used now to reduce tax liabilities?
Although one may not get the income tax deduction, there are a few ways to gift that are fully deductible for gift tax purposes and therefore lower one’s gross estate without having to worry about adding anything back to an estate. Gifts to a spouse (must be a U.S. citizen), gifts to qualified charities, qualified payments made directly to an educational institution for tuition, gifts made directly to a medical provider, and gifts to American political parties are considered fully deductible. Again, these may not be deductible for income tax purposes, but they are for gift tax purposes and do not require the filing of a Form 709.
Therefore, rather than writing a check to your grandchild for their college tuition, consider making the payment directly to the university.
Should I start strategizing now or see if it gets repealed?
It would take legislative action to change course. Without that action, you could wake up in a not-too-distant future with the possibility of your heirs facing a much higher tax bill.
Beginning now is critical to secure your legacy. Waiting could result in higher tax rates and we’re already seeing increased demand for estate planners. Acting promptly ensures your business assets are well-prepared for the future. These strategies often take time to come together and execute, so now is the time to get started.
Focused on long-term goals, careful planning lays a strong foundation for helping you and your loved ones keep more of what you have earned. Contact us at Wealthspring to get started today. Our team includes tax and wealth management experts who are ready to help.