Personal legacy planningEstate tax exemption sunset: What you need to know now

The Tax Cuts and Jobs Act of 2017 created a tremendous estate planning opportunity for wealthy individuals and families by more than doubling the lifetime estate tax exemption. It increased from $5.6 million for individuals and $11.8 million for married couples to an inflation-adjusted $13.61 million for individuals and $27.22 million for married couples in 2024.

When does the estate tax exemption sunset? The legislation is set to expire, or “sunset,” for these higher gift and estate tax exemption amounts on January 1, 2026. Unless Congress acts before this date, the exemptions will revert to where they were in 2017. With inflation adjustments, this will be approximately $7 million for individuals and $14 million for married couples.

“The sunset will reduce by about half how much wealthy individuals and families doing long-term, multi-generational estate planning can pass on to heirs tax-free during their lifetime or at death,” says Justin Flach, managing director of wealth strategy for Ascent Private Capital Management of U.S. Bank.

Though 2026 might seem a long way off, now is the time to start planning for the potential impact of higher gift and estate tax exemptions, according to Flach.

“There’s a chance Congress could act before 2026 and extend the higher exemption amounts,” he says. “But right now, there’s a firm deadline for the sunset of these provisions. We’re advising clients to work with their estate planning professional to devise a plan for what they will do if the law sunsets.”

Maximize the expanded gift tax exemption

You’ll need to make one or more gifts to lock in the expanded exemption before it sunsets in 2026. These gifts must use more of your exemption than will be available after the expanded exemption sunsets. For example, lifetime gifts of $2 million will not use any of the sunsetting exemption (assuming the exemption reverts to $7 million), but a gift of $9 million would. To fully use the expiring exemption amount in in the next two years, you would need to make gifts totaling $13.61 million per individual. A married couple filing jointly would need to make gifts totaling $27.22 million.

In addition to removing the value of the current value of the gifted assets from your estate, future appreciation on the gifted assets is free from federal estate tax as well as possible state or inheritance taxes upon death. The recipient(s) can also benefit from the gift now instead of later.

However, you will lose control over and access to the assets and their income once you have transferred them to someone else.

“Determine how much you can afford to give away during your lifetime from a cash flow perspective,” says Flach. “You don’t want to give away so much money that you can’t maintain your desired lifestyle or contribute to charitable causes that are important to you.”

Also think about what kinds of assets are best for gifting. Flach recommends gifting assets that you expect to appreciate in value in the near term to remove their future appreciation from your taxable estate at death.

Assets that are subject to valuation discounts for lack of marketability or control are also ideal for gifting. For example, an asset worth $10 million that’s discounted by 20% would be valued at just $8 million for gift tax purposes.

The role of trusts and life insurance in estate tax planning

Trusts and life insurance can plan an important role in estate planning. As you plan for the sunset of expanded exemption in 2026, there are a few different types to consider, each with their own benefits and drawbacks.

Spousal Lifetime Access Trust (SLAT)

A SLAT is one of several types of irrevocable trusts that can be used to transfer wealth outside of an estate. One spouse can fund a SLAT for the benefit of the other, or each spouse may fund a SLAT for the other spouse. Since the gift is made during the spouse’s lifetime, any post-gift appreciation is excluded from the estate for estate tax purposes.

One benefit of SLATs is that the beneficiary spouse continues to benefit from the assets during their lifetime, which gives them more flexibility. “The beneficiary spouse will have limited access to the gifted funds if they need them in the future,” says Flach.

SLATs are not without their downsides. A donor spouse loses the right to directly benefit from assets gifted to a SLAT. To mitigate this risk, a donor spouse should have sufficient assets outside of the SLAT to meet their financial needs.

Credit Shelter Trust (CST)

With a CST, when one spouse dies, a portion of their assets is placed in the trust and passes to beneficiaries when the surviving spouse dies. The assets and their appreciation are sheltered from estate taxes when the second spouse dies.

There are some potential drawbacks to using a CST, including additional income taxes for beneficiaries, since assets that go into the trust only receive a single step-up in basis when the first spouse dies. Some families decided to forgo these trusts when the gift and estate tax exemption was raised in 2017; reducing future income taxes was more beneficial if their entire estate was under the expanded exemption amount.

“Credit shelter trusts might be worth revisiting for some of these families now, given the scheduled sunset of the legislation,” says Flach.

Permanent life insurance

Including permanent life insurance in your estate can also be an effective estate planning strategy. If structured correctly, life insurance proceeds usually aren’t subject to estate taxes, so they can provide liquidity to pay any estate taxes that might be owed or replace wealth lost to tax payments.

Flach reminds clients to consider the potential appreciation of their estate between now and 2026 when planning. “For example, if a couple’s estate is worth $12 million now, it could easily exceed the potential new exemption amount of approximately $14 million in 2026 with appreciation,” he says. Life insurance may mitigate the impact of estate taxes for these newly taxable estates.

Start planning for the estate tax exemption sunset now

Given looming uncertainties such as a still uncertain economy and the 2024 presidential election, wealthy individuals and families should start planning now for how a lower gift tax exclusion and estate tax exemption could affect their estate planning.

“You don’t want to wait until 2025 to start thinking about this,” says Flach. “It will take time to devise the right plan for you and your family.”

Learn about Ascent’s holistic approach to the dynamics of family wealth.