Estate planning is all about preparing for an inherently unknowable future. And when it comes to estate taxes, staying informed is a crucial element in maintaining a comprehensive financial plan. As we look ahead to 2026, potential changes in estate tax laws could have significant implications for many individuals and families. For example, the increased estate tax exemptions under the Tax Cuts and Jobs Act (TCJA) of 2017 are set to expire at the end of 2025, which means exemption amounts are expected to revert to pre-TCJA levels. This could result in a lower exemption and higher estate taxes for many families and individuals. 

According to the IRS” 

 “The basic exclusion amount (BEA) was doubled for tax-years 2018 through 2025. Because the BEA is adjusted annually for inflation, the 2018 BEA is $11.18 million, the 2019 BEA is $11.4 million and for 2020, the BEA is $11.58 million. Under the tax reform law, the increase is only temporary. Thus, in 2026, the BEA is due to revert to its pre-2018 level of $5 million, as adjusted for inflation.” 

Read more about the current and projected estate tax exemptions from the IRS.  

Review and update your estate plan 

Planning is not equivalent to prognosticating, but it remains crucial to regularly review and update your estate plan. If you don’t already have one in place, considering tools such as Grantor Retained Annuity Trusts (GRATs) or Irrevocable Life Insurance Trusts (ILITs) can help remove assets from your taxable estate and provide structured support to your beneficiaries. 

Download our free guide on Issues To Consider When Creating Your Estate Plan.  

Utilize the current higher exemption 

One effective strategy is to take advantage of the current high exemption by making significant gifts now. The current exemption allows for substantial transfers without incurring federal gift taxes. Additionally, utilizing spousal lifetime access trusts (SLATs) can help transfer wealth to your spouse while benefiting from the higher exemption. 

Dive into the details: Determine your gifting capacity 

Understanding your gifting capacity is an essential part of incorporating gifts into your financial plan. This involves assessing your net worth, future financial needs, and setting clear gifting goals that allow you to gift give without affecting your own financial stability and goals. 

Working with a financial advisor, you can develop a comprehensive plan that balances your desire to reduce your taxable estate with your need to maintain financial security. 

As you can see in the example below, assessing your overall financial strategy to develop an overarching gifting capacity can give you a starting point in determining how to incorporate gifting into your plan. 

Steps to determine your gifting capacity: 

1. Evaluate your net worth: Calculate your total assets and liabilities to determine your net worth. This provides a clear picture of what you can potentially gift without compromising your financial stability. 
2. Assess future financial needs: Consider your long-term financial needs, including retirement, healthcare, and any other significant expenses. Ensure that your gifting strategy does not jeopardize your ability to meet these needs.   
3. Consider tax-efficient methods: Explore tax-efficient ways to share your wealth, such as direct gifts, trusts, or other structures. Take advantage of the current high exemption by making significant gifts now and utilize spousal lifetime access trusts (SLATs) to transfer wealth. 
4. Reflect on impact: Before moving forward, think about how your gifts will be received. If your family isn’t expecting to inherit significant wealth, they might not be prepared to manage it effectively over generations.  Balancing financial support with encouraging independence and responsibility is key. 
5. Set gifting goals: Clear goals will help guide your gifting strategy. Are you looking to support family members, contribute to charitable causes, or achieve other specific objectives?  
6. Consult with professionals: Work with your financial advisor, estate planning attorney, and tax professional to understand tax implications and develop a gifting plan that aligns with your overall financial strategy. 
7. Family involvement: Decide how much you want to involve your family in these decisions. Open communication can help align expectations and prepare heirs for future responsibilities. 
8. Implement and monitor your plan: Once your gifting plan is in place, monitor its impact on your financial situation and adjust as necessary. Regular reviews with your advisor will ensure that your plan remains aligned with your goals and any changes in tax laws. 

Consider educational support 

Do you wish to fund education expenses for your children or grandchildren? This can be a meaningful way to invest in your family’s future. While you can’t predict the precise needs of the next generation, educational support can often prove to be a flexible and intentional way to gift something with lasting impacts, providing opportunities and reducing future financial burdens. 

Support a family business 

Do you aim to protect and nurture a family business? Investing in the continuity and success of a family business can be a key part of supporting and preserving your family’s legacy. Utilizing Family Limited Partnerships (FLPs) can facilitate the efficient transfer of business interests within the family. 

Incorporate charitable giving 

Charitable donations can play a significant role in estate planning. Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) not only provide income to heirs but also benefit charities, offering potential tax advantages. This strategy can align with your philanthropic goals while reducing the taxable value of your estate. 

Leverage life insurance 

Life insurance can be strategically used in estate planning. An irrevocable life insurance trust (ILIT) can hold a life insurance policy outside of your estate, providing liquidity to pay estate taxes without increasing the taxable estate. 

Stay a step ahead 

Navigating uncertainty is what makes the process of planning more important than the plan itself. While the future is unknowable, thoughtful planning remains essential. While a comprehensive plan can’t inject certainty where none exists, establishing a process and commitment to assessing your needs is essential in learning to navigate the variables that will come your way. Regularly reviewing and adjusting your estate plan ensures your wealth benefits your loved ones as intended.  

Taking time to consider both the financial and personal aspects of your plan can significantly increase its chances of success. By proactively addressing these strategies, you can better prepare for the anticipated changes in estate taxes and minimize the potential impact on your estate. 

Happy Planning! 

Marcos  

Download our free guide on issues to consider when establishing your charitable giving strategy.