Why You Should Act Now: Estate Tax Exemption Changes Coming in 2026
The estate tax exemption amount, which was significantly increased under the Tax Cuts and Jobs Act (TCJA) in 2018, is set to revert to lower pre-TCJA levels after December 31, 2025. For those with large estates, the potential reduction in this exemption could result in higher estate tax liabilities. This article highlights the importance of taking action now to plan for the future, especially if your estate may be affected by the upcoming changes.
What’s Happening with the Estate Tax Exemption?
The TCJA, enacted in 2017, temporarily doubled the estate and gift tax exemption from $5.49 million to $11.18 million per individual. For married couples, the exemption was effectively doubled to $22.36 million. In 2024, this exemption is $13.61 million for individuals and $27.22 million for couples. However, this increase is set to expire at the end of 2025, meaning that, without new legislation, the exemption amount will return to around $5 million per person, adjusted for inflation.
This upcoming reduction in the estate tax exemption could have significant consequences for individuals with substantial estates. With this in mind, now is the time to review and potentially revise your estate plan to take advantage of the current exemption levels before they sunset.
Why Proactive Estate Planning is Crucial
While it’s impossible to predict exactly what will happen in 2026, waiting until the last minute to address the potential decrease in the estate tax exemption is not advisable. The best course of action is to implement a wealth transfer strategy now that maximizes the current exemption amounts. Waiting to see what happens could cost you the opportunity to minimize estate taxes.
Strategies for Estate Tax Efficiency
Several strategies can help reduce the value of your taxable estate, lowering your estate tax liability. These strategies are especially important now, given the upcoming changes to the exemption amount.
Annual Exclusion Gifts
In 2024, individuals can gift up to $18,000 annually ($36,000 for married couples) to as many people as they wish without triggering gift taxes. These gifts do not count against your lifetime exemption and are not taxable. This annual exclusion is a simple, effective way to transfer wealth, particularly for families with many members. Importantly, this strategy will remain in effect even after the TCJA provisions sunset.
529 Plan Contributions
529 plans are education savings accounts that allow you to make significant contributions for educational expenses. Using the annual exclusion, you can accelerate gifts by contributing up to $90,000 per person ($180,000 for married couples) to a 529 plan in a single year. Not only can this reduce your taxable estate, but it also helps loved ones save for educational expenses. The growth in the plan is tax-free, and withdrawals used for qualified education costs are not taxed.
Spousal Lifetime Access Trust (SLAT)
A SLAT allows one spouse to transfer assets into an irrevocable trust for the benefit of the other spouse, reducing the taxable estate of the spouse making the gift. Although the gift counts against the donor’s lifetime exemption, this strategy can help reduce the estate tax burden when structured appropriately.
Irrevocable Life Insurance Trust (ILIT)
Transferring life insurance into an ILIT removes the policy’s value from the taxable estate. The death benefit proceeds are not included in the decedent’s estate and are not taxable to the beneficiaries. Annual exclusion gifts can be used to fund the premiums, further reducing the estate’s value.
Dynasty Trust
A dynasty trust allows you to transfer wealth across multiple generations without incurring estate or gift taxes. This strategy helps ensure that your wealth is preserved for future generations, free from additional tax liabilities.
Time is Running Out
It’s crucial to act sooner rather than later when planning for the reduction in the estate tax exemption. The strategies mentioned above are just a few examples of ways to reduce your taxable estate. Consulting with financial, legal, and tax professionals is key to developing a tailored strategy that fits your situation.
The closer we get to the 2026 deadline, the more people will be seeking advice from their wealth management teams, so allowing enough time to work with your advisors will give you more options and flexibility in your planning.
How Commerce Trust Can Help
Even if you think the sunset of the TCJA provisions won’t significantly impact your estate plan, it’s important to revisit your strategy. Life changes such as marriage, the birth of children or grandchildren, and retirement can all necessitate updates to your estate plan.
The tax laws surrounding estate planning are complex, and some investments are more tax-efficient than others. Seeking advice from professionals can help ensure that you are using the most appropriate strategies to meet your financial goals.
