Secure your estate ahead of the lifetime exemption sunset
Waiting until you need something to invest in is usually an ineffective approach to financial planning — and the same is true for estate planning. With the 2024 federal estate tax exemption at an all-time high, now is the time to act, especially considering the significant estate tax changes on the horizon.
Planning for your wealth transfer and overall estate helps ensure the future of your financial legacy. And yet, estate planning often remains overlooked or fails to reflect the latest changes in life or estate tax laws. The 2023 estate tax exemption set a precedent for high exemption amounts, but new urgency for estate planning is coming from the looming sunset of the doubled lifetime exemption that was put into place under the Tax Cuts and Jobs Act (TCJA) of 2017. This change in estate tax laws is particularly significant for high-net-worth individuals and those concerned about the 2024 federal inheritance tax.
Effective January 1, 2026, the lifetime exemption is no longer doubled and reverts to the $5.49 million 2018 set for inflation. This estate tax sunset in 2026 could significantly impact your estate tax liability. Many are asking, “What happens to the federal estate tax exemption in 2026?” The answer lies in understanding the sunset provision and its implications for your estate planning strategy.
With the upcoming lifetime exemption sunset, it’s critical to take a current look at your estate planning situation and consider tax-efficient transfer strategies, including the use of irrevocable trusts and family trusts.
Doubled lifetime exemption sunset
The TCJA doubled the amount of value an individual could give away (lifetime gifting or upon death), from $5.49 million to $11 million. This increase applies to both the estate tax exemption and the gift tax exemption.
These lifetime exemptions have been set for inflation annually since 2018. In 2024, each individual has an eligible lifetime exemption of $13.61 million; in 2025 it is expected to be around $14 million. It’s important to note that this includes both the 2024 gift exemption and the 2024 estate tax exclusion. Many people ask, “What is the estate tax exemption for 2024?” The answer is $13.61 million per individual, a historically high amount that presents unique planning opportunities.
But with the exemption sunset effective January 1, 2026, the lifetime exemption is cut in half, resulting in an eligible lifetime exemption of around $7 million for each individual. This 2026 estate tax change could have significant implications for your estate planning. The sunset of estate tax exemption is a crucial factor to consider in your long-term financial strategy.
To help understand the potential impacts, consider a taxpayer with an estate worth $20 million. Their taxable estate would go from an estimated $6 million to $13 million, assuming they did nothing prior to the effective date. It would also result in additional potential estate taxes of $2.8 million (for $7 million at 40%).
The current exemption has made estate planning an immediate concern for those looking to preserve their financial legacy. If you’re uncertain of whether you need a plan or how to improve your existing plan, consider these key factors.
Understanding your estate planning situation
Estate planning doesn’t just concern the ultra-wealthy. Many people might be surprised to find they have a potential estate tax problem, especially considering the 2024 gift tax exclusion and 2024 estate tax exemption. The 2024 federal inheritance tax rules can significantly impact estates of various sizes.
The first step to understanding a need for an estate plan is understanding what makes up your taxable estate. A taxable estate is not only liquid assets, cash and investments — it can include physical assets such as homes, retirement accounts and any other asset you hold personally. This can include closely held businesses, which often require special consideration in estate planning.
As a result, poor or lacking estate planning can lead to unexpected estate taxes and unnecessary financial loss. When does the estate tax exemption sunset? Understanding this timeline is crucial for effective planning.
Without proper planning, assets may be subject to high estate taxes or lengthy probate processes. This can eat into the value of your estate and reduce the amount that beneficiaries ultimately receive. Moreover, proper planning can provide comfort and security in knowing your assets will be directed as you wish or available for important purposes, such as education or healthcare.
Combined with the potential halving of the exemption, it’s crucial to take a current look at your estate and consider strategies like irrevocable trusts, family trusts or even more advanced options like spousal lifetime access trusts (SLATs) and disclaimer trusts.
The benefits of estate planning
Many consider estate planning a tax savings mechanism, particularly as an effective way to shift assets with great appreciation out of a taxable estate at a much lower cost. However, a well-executed estate plan can also provide benefits such as:
- Family privacy
- Specific asset designation
- Multigenerational wealth preservation
- Charitable planning techniques
- Asset protection
These benefits can be achieved through various tools and strategies, including irrevocable trusts, family trusts and charitable lead trusts. Each of these options offers unique advantages for wealth transfer and tax efficiency. Additionally, tools like donor-advised funds and irrevocable life insurance trusts (ILITs) can provide further flexibility in your estate planning strategy.
With the potential estate and gift exemption sunset, now is the time to explore your personal needs and plan for your future legacy. This is especially important for high-net-worth individuals who may be significantly impacted by the changes in estate tax laws. Consider strategies such as credit shelter trusts (also known as bypass trusts) and generation-skipping trusts to maximize your tax savings and help ensure efficient wealth transfer across generations.
How Wipfli LLP can help
Wipfli’s robust team of estate advisors, along with our valuation and business specialists, work as a single unit to help you achieve your individual goals. We understand that no two estate plans are made the same and that time, thought and consideration are necessary with each client.
That’s why our approach results in a personalized plan that’s unique to you and your family’s needs, and why we’re ready to help make sure it always reflects your current life events. We can help you navigate the complexities of the estate tax exemption, gift tax exemption and other aspects of estate planning to help ensure a tax-efficient transfer of your wealth. Our knowledge extends to advanced strategies, like the annual gift tax exclusion and the use of various trust structures to optimize your estate plan.
Contact us to learn more about our estate planning solutions and how we can help you secure your financial legacy in light of the upcoming changes to estate tax laws. Whether you’re concerned about the new estate tax law or looking to optimize your current plan, we’re here to guide you through the process.
Or continue reading on:
