Tax Strategies - Estate Tax Sunset — Tobin Investment Planning

Are you thinking about your taxes and financial strategies for 2026? If not, you should be.

In 2026, a number of tax adjustments that were enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) are anticipated to expire. For affluent couples, the most consequential change is likely to be a substantial reduction in the estate tax exemption. Presently, the exemption stands at $12.92 million per person or $25.84 million per couple as of 2023.¹However, based on current legislation, these higher exemption amounts will revert to the 2010 level of $5 million, adjusted for inflation, which equates to roughly $6.4 million per person, or $12.8 million per married couple in 2026, representing nearly half of its present value. For estates exceeding these exemption amounts, the federal tax rate will be set at 40%, in addition to state death taxes where applicable.²

Preventing the expiration of high exemptions at the close of 2025 would necessitate an act of Congress. Given the current high levels of national debt and the government's assertive spending agenda, it is not likely to see any additional relief. What can you do to prepare for an estate tax sunset? There are a few things you may want to consider as part of your financial strategies.

Review your estate plan

To make the most of the current estate tax exemption amount it's recommended that you review your estate plan. Consider taking advantage of strategies like gifting assets to family members or creating a trust to decrease the size of your estate.

There are a few things you can do now to alleviate the potential future tax consequences and maximize the use of the current exemption amount before it potentially decreases in the future. If possible, you could make outright gifts to your children, pay for their medical and educational expenses and in some cases sell a portion of your estate to certain types of trusts to help preserve assets for your children and/or grandchildren.

Common trust types could include to name a few:

Grantor Retained Annuity Trusts (GRATs)
Intentionally Defective Grantor Trusts (IDGTs)
Spousal Lifetime Access Trust (SLAT)
Charitable Trusts (CRT/CLATs)
Qualified Personal Residence Trusts (QPRTs)

A trust, on the other hand, can help minimize estate taxes and more importantly protect assets for your heirs.³ The type of trust you choose to utilize and assets you would fund it with would depend heavily on your unique circumstances, and should be discussed with your estate planning attorney and financial advisor.

Consider utilizing the generation-skipping transfer (GST) tax exemption as well, which is a tax on the transfer of assets to grandchildren or more remote descendants. This tax was created to prevent a double taxation of inherited wealth from grandparents to their children and then on to their children. The flat rate tax is currently set at 40%.⁴

Consider charitable giving as part of your estate planning strategy. Charitable gifts can reduce the size of an estate and may also provide a tax deduction.⁵

Life insurance

As part of your estate planning strategy, it's worth considering the use of life insurance. Life insurance proceeds are usually not subject to estate taxes, which means that they can be utilized to pay estate taxes or provide extra assets to beneficiaries. Survivorship life insurance policies are often utilized to ensure that your heirs' tax liabilities aren't as large. By using life insurance, you can help to ensure that your beneficiaries receive the full amount of your estate while also providing liquidity to pay for any estate taxes owed.⁶

State Consequences

Be aware of estate taxes imposed by your state. It's important to keep in mind that state estate taxes are separate from federal estate taxes. Some states have lower exemption amounts than the federal government, meaning that your estate may be subject to state estate taxes even if it's not subject to the federal estate tax. To determine if you are subject to state estate taxes, you should consult with a financial advisor or estate planning attorney who is familiar with the laws in your state.⁷

It's important to periodically review your estate plan to ensure that it aligns with your current wishes, family circumstances, and personal goals, especially considering changes in the law. To develop a comprehensive estate plan tailored to your unique financial situation and goals, it may be beneficial to seek the guidance of a financial advisor or estate planning attorney. Additionally, it's important to stay aware that estate tax is a political issue, which means that it may be subject to change in the future due to shifts in the political landscape or economic conditions.