How to Maximize Your Estate Plan Before the Great Tax Sunset

If you're like many Americans, you've worked hard to build your wealth and ensure a secure financial future for your family. However, significant tax changes are coming that may have a massive impact on your estate planning strategies. Understanding and leveraging the current federal estate tax exemptions and other key elements can help you protect your wealth. The Tax Cuts and Jobs Act of 2017 temporarily increased the federal estate tax exemptions to historically high levels—$13.61 million for individuals and $27.22 million for married couples in 2024. But this window of opportunity will close on January 1, 2026, when these exemptions are set to decrease significantly. This "Great Tax Sunset" presents a critical moment for strategic estate planning. Now is the time to take action to maximize your estate planning strategies and protect your wealth for future generations.

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Understanding the Changes in Federal Tax Exemptions

Federal Estate Tax Exemption

The federal estate tax exemption allows you to leave a certain amount of assets to your heirs without incurring federal estate tax. As of 2024, this exemption is $13,610,000. This means that if your estate is valued at $13,000,000, you won't owe any federal estate tax. However, any amount above this threshold is taxed at 40%. Remember, many states also have their own estate or inheritance taxes, which can further impact your estate.

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Federal Gift Tax Exemption and Annual Gift Tax Exclusion

The federal gift tax exemption covers the total amount of gifts you can give during your lifetime without incurring gift tax. This exemption is combined with the federal estate tax exemption. Additionally, the annual gift tax exclusion, which is $18,000 per individual in 2024, allows you to gift this amount each year without reporting it to the IRS or reducing your lifetime exemption.

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Federal GST Exemption

The federal GST (generation-skipping trust) exemption applies to assets transferred to beneficiaries at least two generations younger than the donor without incurring GST tax. This tax prevents individuals from bypassing estate taxes by transferring assets to younger generations.

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Advanced Estate Planning Before the 2026 Sunset

To take advantage of the historically high exemption levels and minimize future tax liabilities, consider these advanced estate planning strategies:

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Lifetime Gifting

One effective strategy is to utilize the annual gift tax exclusions. This may be the most underutilized strategy today, but by making use of these exclusions each year, you can slowly chip away at and reduce your taxable estate without incurring gift taxes. High net-worth individuals should consider gifting assets up to the current federal gift tax exemption while living. Keep in mind, this exclusion is a "use it or lose it" so you have to take advantage of it during each calendar year.

Utilizing this exclusion will not only ensure that more wealth is transferred tax-free but also allow you to see your loved ones enjoy the gift while you are still here with them.

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Irrevocable Life Insurance Trust (ILIT)

An ILIT is a powerful tool for estate planning. By placing a life insurance policy into an irrevocable trust, you can give a gift to the trust each year to pay the policy premiums, often below the annual gift exclusion amount. Upon your death, the life insurance proceeds are not part of the taxable estate, avoiding estate and GST taxes.

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Dynasty Trust

A Dynasty Trust allows you to fully utilize lifetime gifting for estate and GST tax savings. By gifting assets to the trust and applying your federal gift and GST tax exemptions, the trust assets, including any appreciation, are not subject to estate or GST taxes upon your death. Dynasty Trusts can last for generations, potentially preserving wealth for future family members who aren’t even alive yet.

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Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust created by one spouse for the benefit of the other. By funding the trust, you remove these assets from your taxable estate. Your spouse can receive distributions during their lifetime, providing financial security while ensuring the assets and their appreciation are excluded from both your estates for tax purposes.

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The Consequences of Waiting Until 2026

The clock is ticking on the historically high federal estate tax exemptions provided by the Tax Cuts and Jobs Act of 2017. As the January 1, 2026, deadline approaches, the urgency to act becomes more pressing. Waiting could result in losing the opportunity to shield a substantial portion of your estate from a hefty tax bill.

By taking action now, you can take full advantage of the current $13.61 million exemption for individuals and $27.22 million for married couples.?Imagine the peace of mind knowing that you have maximized your estate planning strategies, protected your wealth, and secured the future for your loved ones. The consequences of waiting until 2026 are stark. For example, a $20 million estate could face a $5.2 million tax bill if the exemptions revert to lower levels, leaving significantly less for your heirs.

Take Action Now

Don’t let this fleeting opportunity slip through your fingers. Consult with a financial advisor or estate planning professional today to tailor these advanced estate planning strategies to your unique situation and maximize the current tax exemptions before the 2026 sunset.

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