The Tax Cuts & Jobs Act (TCJA) of 2017 reshaped the tax landscape, implementing the largest change in the tax code in three decades. Most notably from an estate planning perspective, the Act doubled the lifetime exemption, allowing affluent individuals to pass on a larger portion of their wealth to their heirs without incurring federal gift or estate taxes.
As of 2024, the lifetime exemption stands at $13.61 million per person, with married couples enjoying a combined exemption of $27.22 million. This figure, indexed for inflation since 2018, reflects an increase from the initial values of $11.18 million and $22.36 million, respectively. While these exemptions offer significant protection from federal estate taxes, it's essential to note that they are temporary.
As we approach 2026, the wealth planning industry faces uncertainty as this beneficial provision is set to sunset, which can have a big impact on advisors serving high and ultra-high-net-worth clients. Understanding the implications of this event and proactively preparing for it through proper estate planning becomes paramount for those seeking to safeguard their clients’ wealth and minimize their tax burdens.
The record-high estate tax exemption is scheduled to expire on January 1, 2026, and many tax experts anticipate a reversion to pre-TCJA levels, with exemptions shrinking back to $7 million for individuals and $14 million for couples (in inflation-adjusted terms). While similar provisions have been extended in the past by legislators, extension is uncertain this time.
For individuals or couples with a net worth ranging between $10-12 million, complacency regarding estate planning could prove especially costly. The potential growth of assets, over time, may push their estate value beyond the 2026 exemption threshold. Consequently, failure to plan adequately could result in significant estate tax liabilities for beneficiaries.
Estate planning is an important part of a comprehensive wealth management strategy. Before developing specific preparation steps in response to potential changes in lifetime estate tax exemption levels, investors should affirm they have the capacity to fund their future lifestyle and financial goals and then consider a gifting strategy that aligns with their views on family, values, and other legacy-oriented aspirations. A wealth advisor can provide valuable guidance in assessing gifting capacity and structuring a plan tailored to the investor's goals.
As the expiration of the TCJA expanded lifetime estate exemption levels approaches, advisors may consider several strategies and vehicles for their clients.
Knowing which assets to gift during your client’s lifetime versus retain in their estate and then pass along to beneficiaries at death as an inherited asset is an important consideration. An asset’s “cost basis” essentially refers to the purchase price of a particular asset, like a house, boat, or investment portfolio. When an asset qualifies for a “step-up”, inheritors can adjust the cost basis to the current market value, especially on inherited assets with a low-cost basis as the capital gains tax on the difference between the original cost basis and the step-up basis essentially goes away. However, if an asset is gifted prior to the client’s passing, there is no step-up benefit for the beneficiary, but the offset is that the asset remains in the estate at death and therefore counts against the lifetime exemption level.
Gifting is a powerful tool to reduce estate values relative to estate tax exemptions but choosing which assets to gift prior to passing or hold in the estate and pass along through inheritance may be influenced by step-up provisions and warrants a tax analysis.
The annual gift tax exclusion sets a dollar amount that clients can gift to someone else without needing to report it to the IRS. As of 2024, the annual gift tax exclusion is $18,000 per person or $36,000 per married couple. Capitalizing on this can allow individuals to gift assets annually, gradually reducing the size of the estate while maximizing tax benefits.
Incorporating charitable bequests into estate planning not only fulfills philanthropic objectives but also diminishes the size of the estate subject to estate taxes. Charitable contributions also provide immediate tax benefits including tax credits and avoidance of capital gain taxes on charitable contributions funded with appreciated stock. Wealth advisors can work with clients to explore the various vehicles that can be leveraged in charitable giving, such as a Donor-Advised Fund.
Irrevocable Trusts move the grantor’s assets from their estate to the beneficiary’s estate, effectively reducing the taxable estate value of the grantor. Transferring a portion of a grantor’s assets into an Irrevocable Trust before 2026 reduces the grantor’s estate value and can help safeguard against potential estate tax burdens resulting from the Lifetime Exemption Sunset. There are numerous types of irrevocable trusts that can be considered depending on the intended beneficiary need. Some commonly used include Bypass trust, Spousal Disclaimer trust, Charitable Giving trust, etc. Below, we discuss some of these options.
A bypass trust, also commonly known as a credit shelter trust, is an irrevocable trust designed for couples to minimize estate taxes, protecting assets for beneficiaries while providing for the surviving spouse. When a spouse passes, his/her share of the estate transfers to the trust at death. The surviving spouse may get income from the trust and use the trust assets till death, upon which the trust’s beneficiaries inherit the assets. Generally, in both transfer instances, the assets move free from estate taxes.
Disclaimer Trusts are a tool that can be built into an estate plan to allow a surviving spouse additional flexibility to handle inherited funds attributed to their spouse’s passing. Because transfers to surviving spouses are generally free from federal estate tax, the surviving spouse can disclaim a portion of the inherited estate and hold it in the marital disclaimer trust that is sheltered from inclusion in the surviving spouse’s estate. The assets may pass tax-free to the remaining beneficiaries when the surviving spouse dies.
As the 2026 lifetime exemption sunset looms, proactive estate planning should be a major imperative for affluent individuals and families. By deploying strategies that maximize exemptions, reduce taxable estates, and optimize tax efficiency, wealth advisors can well guide high-net-worth investors to safeguard their wealth, minimize tax liabilities, and help ensure a seamless transfer of assets to future generations.
- David McNatt is the EVP, Investment Solutions at AssetMark
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change.
AssetMark, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission.
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