Countdown to change: How to prepare for higher estate taxes

Planning your tax and wealth transfer strategy can be tricky, especially amid uncertainty about future tax laws. As we approach the sunset of several current tax laws, it's important to be aware of potential changes that could impact your financial strategy.

In 2026, key parts of the 2017 Tax Cut and Jobs Act (TCJA) are set to expire unless Congress acts. One major change would be a significant reduction in the federal estate tax exemption. The sunset of TCJA could also return the top personal income tax rate to 39.6% and remove limits on itemized deductions for state and local taxes, among other changes.

Congress may extend some or all the TCJA provisions, so the future is uncertain. However, staying informed and preparing for potential changes is a smart move. Now is a great time to think about planning strategies to keep in mind.

Prepare for potentially higher estate taxes

In 2026, the federal gift and estate and generation skipping tax exemption is scheduled to be reduced by roughly half, from $13.61 million to approximately $7 million ($14 million for couples). This means that any assets above that amount that pass to your heirs, but not your spouse, will be taxed at up to 40%.

Families that could face estate tax liability in 2026 may benefit from transferring assets out of their estate sooner rather than later. If you are a married couple with a current net worth of greater than $14 million or an individual with a net worth greater than $7 million, you may want to consider reviewing your current estate plan to see if you should lock in the current higher exemption amount by establishing, or enhancing, your lifetime gifting plans.

Once you have evaluated your situation, there are a variety of ways, ranging from trust structures to direct gifting, to use your exemption.

Consider what and when to give

As you evaluate gifting strategies, it’s important to think about specific assets and the timing of your gift. Some assets might be better to give during your lifetime and others might be better to leave as part of your estate. The goal is to maximize the after-tax value of the assets you pass along to your beneficiaries.

In general, the more an asset is expected to appreciate in?the future, the greater its gifting “value” from a tax perspective. Assets gifted during your lifetime are taxed at their original cost basis. That means if you give away an asset that has appreciated significantly, such as real estate or stocks you have held for a long time, your beneficiaries could be subject to capital gains taxes on the appreciation if they decide to sell.

However, the cost basis on property that is inherited after death is adjusted, or “stepped up,” to its current market value. For example, if you leave the family home to your children in your will or revocable trust, they will receive the property at its fair market value and can sell it immediately without any capital gains taxes. The only amount they would pay taxes on is any appreciation between the time they inherit the property and the time they sell it.

This applies to family business interests as well. Gifting an ownership stake in your company while it’s young and in the early development phase will ultimately pass on greater value to your beneficiaries than gifting ownership in a business that has already matured. Any appreciation after it is gifted will belong to your beneficiaries and not be subject to your future gift and estate taxes.

Remember, if you own assets with a low cost basis, it can be better to leave those to your heirs via your estate versus gifting them during your lifetime.

Choose the right gifting strategy

There are several different ways you can efficiently transfer assets. More than one strategy can be employed over time. The simplest step is to leverage the annual gift tax exclusion, which for 2024 is $18,000 per individual, or $36,000 per couple.

Larger gifts are typically transferred to beneficiaries via trusts. Trusts allow you to direct what ultimately happens with your gifts. You can craft the trust document to specify your intentions for the gift, set the timing and conditions for distributions, and create a framework to guide trustees and help them make the best decisions for you and your beneficiaries. Common trust options include:

• Spousal Limited Access Trust (SLAT). A SLAT can be a good solution for married couples looking for a way to use their current gift and estate tax exemption while maintaining some access to the assets placed into trust. You make a gift of assets to an irrevocable trust, naming your spouse as a beneficiary. Your children and other descendants can also be named as beneficiaries, along with a charity, if you choose. Often, the trust is structured so that the children only become primary beneficiaries after the surviving spouse’s death. With a SLAT, there is an additional income tax benefit in that the creator of the trust (the gifting spouse) pays any tax on realized gain or income, allowing the SLAT to grow without the drag of taxes.
• Sale to an Intentionally Defective Grantor Trust (IDGT):? A sale to an IDGT is a particularly useful technique if you have an asset that is likely to appreciate greatly over time, or if you own a minority interest in an asset that at some point will be sold or liquidated at a higher value. Technically not a gift, it is a sale to a trust and you (as the grantor) continue to pay income taxes on the trust assets with future appreciation transferring to the next generation. The sale is typically structured through the use of a promissory note, which will either provide you with an income stream to the extent actually paid or allows you to complete further gifting through the forgiveness of loan payments.
• Charitable Remainder Trust (CRT): If you have charitable intent and want to move assets out of your estate, a CRT is a good option. It provides you or your beneficiaries with a stream of income over the life of the trust and turns over the remaining assets to a charity at the end of the trust’s term. How much of your contribution is tax-deductible depends on the present value of the charitable remainder interest in the trust, which is determined by an IRS calculation. This strategy moves assets from your estate while fulfilling your charitable goals, provides a current income tax deduction and, if gifting appreciated securities, can provide investment diversification while spreading realized gains over the income stream of distributions.

Stay aware of other pending tax considerations

The TCJA reduced most?federal tax bracket?thresholds by several percentage points, so its expiration will mean a reversion to higher rates for most taxpayers. For high-income earners, the top federal tax rate will revert to 39.6% from 37%. Given this, your goal is to trigger income-generating events before the end of 2025. Income-generating events include taking distributions from an inherited IRA, taking trust distributions, or converting a traditional IRA to a Roth IRA.

Additionally, the deductions for state and local income taxes and real estate tax will be re-instated if the TCJA expires, meaning taxpayers may want to delay itemized deductions into 2026, especially if you live in a high-tax state. It may be advantageous to delay gifting appreciated property or securities to charity, which may allow an income tax deduction equal to the full fair market value of what you give away, even if your original cost for acquiring them was much lower. Plus, you avoid the capital gains that you would incur if you sold the assets.

Planning ahead

The status of the TCJA remains uncertain today, but it is always a good idea to plan ahead. The 2024 presidential election also remains a wildcard, as both parties have competing tax proposals.

Even if you're confident that the TCJA sunset won't affect your strategy, it's important to revisit your estate plan periodically.?It’s also a reminder that estate planning is not a one-and-done activity. Rather, it is a fluid plan that can change based on your wishes, goals, and the law.

If you have questions about your tax situation or the best strategies in light of pending changes, our advisors can help you create a plan that is flexible and works for you.

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