The lifetime estate tax exemption is set to decrease in 2026.
Unless you are a tax accountant, taxes likely confuse and intimate you.
Both state and federal lawmakers pass legislation governing what citizens owe the government and for what reasons.
These taxes are consistently changing and can be difficult to follow.
According to a recent Financial Advisor article titled “How To Prepare Clients Now For Looming Estate Tax Changes,” planning for these changes can help you and your loved ones keep more of your hard-earned money.
One area where this is particularly true is with the federal estate tax.
The Tax Cuts and Jobs Act (TCJA) was enacted in 2018.
It almost doubled the lifetime estate and gift tax exemption upon its passing.
As a result, it jumped from $5.6 million for individuals and $11.18 million for married couples filing jointly to $11.18 million for individuals and $22.36 for married couples filing jointly.
This meant the number of those affected by the federal estate tax exemption shrunk significantly.
Five years later, the exemption has been adjusted for inflation to be $12.92 million per individual and $22.84 for couples filing jointly.
At the start of 2026, this exemption amount established by the TCJA will expire.
As a result, the exemption will be reduced by almost half.
Individuals will have closer to a $7 million exemption, while couples will have about a $14 million exemption.
Even if you were not threatened to be impacted by estate taxes in the past, you might find yourself in this window due to the decreased exemption and your asset growth.
While this change will not impact many families, those impacted should work with an experienced estate planning attorney to prepare.
If you have an estate plan, review your current plan with your attorney.
You may fail to address your tax liability without carefully reviewing your assets and plan.
As a result, financial security in retirement and your inheritance for heirs could be at risk.
Upon reviewing your estate plan, make an updated plan for your updated information.
It may be beneficial to remove assets from your estate.
Consider your goals and your timelines for how to approach this.
One strategy involves using your full gift tax exclusion.
The annual exemption for 2023 is $17,000 per person.
Trusts are also a beneficial estate planning tool for estate taxes.
These can serve several purposes, such as protecting assets for living expenses, generating income, shielding assets from creditors, reducing estate taxes, and keeping family affairs and finances private.
Not all trusts function the same, so you should choose one to best meet your needs.
If you have loved ones attending private schools or planning to attend college or graduate school, you can allocate funds to a 529 education plan.
You can even gift up to five years of contributions per individual in a single year.
Another way to reduce your estate tax liability is through a generation-skipping trust for grandchildren under age 37.
Working with an experienced estate planning attorney is critical to optimizing any estate tax exemption.
Reference: Financial Advisor (May 8, 2023) “How To Prepare Clients Now For Looming Estate Tax Changes”