A significant change is on the horizon that will impact many people’s estate and gift plans. The current tax laws, which have been favorable to individuals looking to transfer wealth to their heirs, expire on January 1, 2026. At that time, the laws will revert to pre-2018 provisions, potentially affecting your financial strategies and future planning. Here’s why acting now is important and a few steps you should consider taking before the end of 2025.
Understanding the current law and its benefits
The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased tax exemptions for federal estate, gift, and generation-skipping transfers (GST). In 2024, individuals can transfer up to $13.61 million without incurring federal estate or gift taxes. For married couples, the exemption doubles, allowing up to $27.22 million.
The elevated exemptions of the past several years opened a window of opportunity for individuals to transfer substantial amounts of wealth to their heirs without the burden of hefty taxes. However, without Congressional action, the opportunity will end with the closing of 2025. The exemptions are set to revert to an inflation-adjusted amount, projected to be about $7.5 million per individual and $14.5 million for married couples after December 31, 2025.
What does the estate planning sunset 2026 mean for you?
When the current gift and estate planning law sunsets in 2026, the reduced exemption amounts will likely result in higher estate taxes for estates valued above the new thresholds. For many people, a larger portion of their estate could be subject to federal estate taxes, significantly impacting the wealth passed to future generations.
Even if you don’t consider yourself likely to be passing a multi-million dollar estate to your heirs, consider your business. If you’re the sole owner, you may easily exceed the threshold. For those with substantial estates, the 2026 estate planning sunset could mean millions more in taxes, diminishing the inheritance for your heirs and potentially forcing the sale of assets to cover tax liabilities.
Why You Should Act Now
- Maximize your exemptions: By gifting assets now, you can take full advantage of the current higher exemptions. Gifting is particularly beneficial for those with estates exceeding the anticipated lower exemption amounts.
- Leverage tax-free transfers: Utilize strategies like the annual gift tax exclusion (currently $17,000 per recipient) to gradually transfer wealth without impacting your lifetime exemption.
- Secure financial stability for heirs: Proper estate planning ensures your loved ones are financially secure and reduces the likelihood of disputes or financial hardships arising from unexpected tax burdens.
- Take advantage of valuation discounts: Certain assets, such as interests in family-owned businesses, can be transferred at a lower tax value due to valuation discounts, further maximizing the tax benefits.
Steps to Take Before the Estate Planning Sunset 2026
- Review your estate plan: Work with your estate planning attorney and financial advisor to review and potentially revise your estate plan in anticipation of the upcoming changes. Ensure your current strategies align with the law’s provisions before they expire.
- Consider gifting assets: Explore gifting options to utilize your current exemption amounts. You may consider outright gifts, setting up trusts, or using other advanced estate planning tools.
- Plan for liquidity needs: Assess the liquidity of your estate to ensure you can cover taxes without forcing the sale of valuable assets. Life insurance policies and other financial products can be part of this strategy.
- Communicate with your heirs: Keep your heirs informed about your plans and the reasons behind them. Transparency can prevent future conflicts and ensure everyone understands your intentions.
Enlist the Help of Trusted Advisors
The estate planning sunset 2026 is a call to action for anyone with significant assets. Planning ahead and taking advantage of the current exemptions can safeguard your wealth and provide for your family’s future. While some speculate that Congress may act to extend the exemption, we urge you to plan ahead and not hope to be saved by bureaucracy at the last moment. Upcoming elections have the potential to make political changes, but no one can predict who will win and whether Congress will act on this particular issue.
Don’t wait until it’s too late—start your estate planning process now to make the most of the opportunities available under the current law. For personalized advice, Financial Solutions Advisors offers estate planning services. Our trusted experts can guide you through this complex but essential process. Remember, your actions today can profoundly impact your family’s financial future for generations to come. Schedule a consultation today.