Upcoming Change to Estate Tax Exemption

The world of estate planning is always in flux, with tax laws and exemptions changing frequently. One significant change on the horizon is the scheduled alteration to the estate tax exemption in 2026. As we approach this crucial date, it’s essential to understand what these changes entail and how they might impact your estate planning.

Understanding the Estate Tax Exemption

The estate tax, often referred to as the “death tax,” is a federal tax levied on the transfer of a person’s estate upon their death. The estate tax exemption is the amount of an estate’s value that can be passed on to heirs without being subject to federal estate tax.

Currently, under the Tax Cuts and Jobs Act (TCJA) of 2017, the amount of the estate tax exemption is relatively high. In 2023, the exemption stands at $25.84 million for a married couple. This means that estates valued below these thresholds are not subjected to federal estate tax.

The 2026 Change

However, this is set to change in 2026. The provisions of the TCJA are scheduled to sunset at the end of 2025, which means the estate tax exemption will revert back to its pre-2018 level of $5 million, indexed for inflation. If the law is not changed before then, a large number of estates that are currently not subject to the estate tax will become taxable.

Preparing for the Change

Given the significant reduction in the estate tax exemption, individuals and families with considerable assets should start thinking about how they can mitigate the effects of these changes. Here’s what you can do:

1. Review Your Estate Plan: It’s always wise to regularly review your estate plan with a qualified attorney, taking into account changes in both your personal circumstances and the law. With the upcoming changes to the estate tax exemption, this is more important than ever.


2. Make Gifts Now: One effective strategy to reduce the taxable value of an estate is to make gifts to beneficiaries while you are still alive. Currently, you can gift up to the amount of the estate tax exemption without incurring federal gift tax.


3. Establish Trusts: Another strategy is to establish trusts. For instance, you could set up a dynasty trust that can provide for multiple generations, or a spousal lifetime access trust that can provide for your spouse without the assets being included in their taxable estate.


4. Consider Life Insurance: Life insurance proceeds are typically not subject to income tax, and with proper planning, can be excluded from your estate for estate tax purposes. Life insurance can provide liquidity to pay estate taxes and other expenses.


5. Charitable Giving: If you’re charitably inclined, consider making gifts to charity. Not only does this reduce the size of your taxable estate, but it also gives you an income tax deduction.

Conclusion

While the upcoming changes to the estate tax exemption can seem daunting, proper planning can alleviate many of the potential tax burdens. It’s never too early to start planning, and with the changes set for 2026, now is the time to begin.

Remember, every individual and family’s situation is unique. It’s always best to consult with a financial professional and/or an attorney who specializes in estate planning to understand the best strategies for your specific circumstances.

By understanding the upcoming changes to the estate tax exemption and taking steps to prepare for them, you can ensure that your estate is passed on to your heirs in the most efficient way possible.