A Quick Synopsis
Families with current lifetime estate of up to $11.2 million are currently exempt from federal Estate Taxes thanks to the Tax Cuts and Jobs Act (TCJA) sunsets. However, the exemption decreases in 2026 when the TCJA sunsets and the exemption is set to decrease to $5 million. This could have a major impact on families who have wealth beyond $5 million.
Estate Tax Exemption
The current lifetime estate and gift tax exemption, which stands at $12.06 million for 2022 and $12.92 million for 2023, is set to undergo significant changes in the coming years. As of January 1, 2026, this exemption will be cut in half and adjusted for inflation. This change, known as the Estate Tax Exemption Sunset, is scheduled to take place at the end of 2025 unless Congress intervenes and extends the exemption.
Wealth Transfer
Families interested in passing on wealth should be aware of these upcoming changes and consider taking action sooner rather than later. The Tax Cuts and Jobs Act (TCJA) provisions, which increased the lifetime estate and gift tax exemption, are set to expire, potentially causing the exemption amount to revert to its pre-TCJA levels. This could result in a significant reduction in the amount of wealth that can be transferred without incurring taxes.
Strategies to Minimize Estate Taxes
For example, if the TCJA sunsets as planned, the estate and gift exemption might decline to around $7 million per individual and $14 million for a married couple, depending on inflation over the next few years. With the sunset just a few years away, it is crucial for families to consult with their wealth advisors and discuss strategies to minimize taxes on their estates.
Transferring Assets Out of the Estate
One option to consider is transferring assets and their appreciation out of the estate before the exemption decreases. This can help ensure that heirs receive as much wealth as possible. Additionally, it is essential to factor in the potential appreciation of assets between now and 2026 when creating an estate plan.
Reviewing Estate Plans with Professional Advisors
While there may be new tax legislation between now and 2026, it is wise for families to review their estate plans with the understanding that the TCJA provisions could expire. Waiting until the law actually sunsets could result in lost opportunities to save on estate taxes.
Conclusion
In conclusion, the Estate Tax Exemption Sunset in 2026 serves as a reminder for families to review their estate plans and consider taking action to minimize taxes on their estates. By transferring assets and their appreciation out of the estate before the exemption decreases, families can help ensure that their heirs receive as much wealth as possible. Consulting with a professional wealth advisor and staying informed about potential changes in tax legislation can help families navigate these upcoming changes and make the most of their wealth transfer opportunities.
Citations :
- https://www.thinkadvisor.com/2022/12/07/the-estate-and-gift-tax-exclusion-shrinks-in-2026-whats-an-advisor-to-do/
- https://opelon.com/federal-estate-tax-exemption-amount/
- https://lawreview.law.lsu.edu/2022/10/24/sailing-into-the-sunset-the-unified-gift-and-estate-tax-lifetime-exemption-set-to-sunset-and-revert-to-pre-tax-cuts-and-jobs-act-levels-in-2026-says-otherwise/
- https://www.fidelity.com/learning-center/wealth-management-insights/TCJA-sunset-strategies#:~:text=Today’s exemption limits don’t,to revisit your plan sooner.
- https://www.elderlawanswers.com/what-will-happen-when-the-gift-and-estate-tax-exemption-gets-cut-in-half-18704
- https://www.fidelity.com/learning-center/wealth-management-insights/TCJA-sunset-strategies#:~:text=Families who are interested in,an advanced planner at Fidelity.
- https://www.fidelity.com/learning-center/wealth-management-insights/TCJA-sunset-strategies
- https://www.adviceperiod.com/blog/federal-estate-and-gift-tax-exemption-to-sunset-in-2025-are-you-ready/
- https://www.pnc.com/insights/wealth-management/transferring-family-wealth/lifetime-gifts-is-the-window-of-opportunity-closing.html#:~:text=Beginning January 1%2C 2026%2C the,decrease in the exemption amount.
- https://ultimateestateplanner.com/2022/09/01/projecting-the-year-by-year-estate-and-gift-tax-exemption-amount/#:~:text=Applying the most recent 8.5%25 inflation rate%2C the year 2024,%2428%2C394%2C666 for a married couple.
- https://www.foley.com/en/insights/publications/2023/02/increased-gift-estate-tax-exemption-amounts-2023#:~:text=For 2023%2C the gift and,tax exemption available at death.
- https://turbotax.intuit.com/tax-tips/family/what-is-the-generation-skipping-tax/L5mfqiA5z#:~:text=The exemption will grow each,indexed for inflation%2C in 2026.
- https://ultimateestateplanner.com/2022/09/01/projecting-the-year-by-year-estate-and-gift-tax-exemption-amount/
