Will They or Won’t They?

Answer: As we used to tell the grandkids when they were younger, “There are three possible answers to your question; yes, no, and let’s wait and see.” The answer to your question about the estate and gift tax exemption is “let’s wait and see.” The generous estate and gift-tax exemptions enacted in 2017 through the Tax Cuts and Jobs Act (TCJA) are scheduled to sunset on December 31, 2025.

What to expect

Unless Congress acts, the exemption for federal estate tax will be reduced to $5 million for individuals and $10 million for couples (from $13.99 million and $27.98 million, respectively, in 2025), indexed for inflation.

While no one can predict the future, it is prudent to at least consider a scenario where the exemptions were to revert to the pre-TCJA 2017 levels. If you’re a higher net worth individual or family with a taxable estate at levels equal to or greater than those identified in the previous paragraph, it may be advantageous to put some thought into this matter. If the levels remain the same or increase, all is in good order. If levels are reduced, it may be wise to consider speaking with your team of advisors to take advantage of the current exemptions. Waiting until the date is upon us may leave you with limited options.

Strategies

Based on your situation and goals, one or more of these strategies may allow you to take advantage of current exemptions before they’re potentially reduced substantially.

Outright gifts are usually the first approach to consider. This may mean giving gifts to loved ones ahead of schedule to avoid a greater tax burden later. You can also establish and fund an irrevocable trust with your gift, then designate the beneficiaries and distributions based on terms you choose. Any gifts to this trust can take advantage of the lifetime gift and estate tax exemption.

Note that the expiration of TCJA also means a reduction to the limit of cash contributions to public charities. It will be reduced from 60% to 50% of adjusted gross income (AGI), so it’s wise to speak to your advisor about your charitable giving goals during this time to determine how to make the most of your generous donations.

While gifting is certainly one option, there are other reduction strategies, payment techniques, and trust options that you should consider.

A spousal lifetime access trust (SLAT) is a popular option to leverage the high exemption for asset transfer and preserve wealth for heirs. It allows one spouse to create an irrevocable trust for the benefit of the other spouse. The funding spouse contributes assets to the trust, and the non-funding spouse is the beneficiary. SLATs may also provide liquidity for estate taxes.

If your gifts use up your gift and estate exemption, an irrevocable life insurance trust (ILIT) holds life insurance policies outside the insured’s estate. The trustee purchases life insurance on the grantor, with the trust as the beneficiary. ILITs avoid estate taxes on the policy proceeds, provide liquidity for estate settlement and protect the policy from creditors.

Consider your charitable giving strategy as part of your estate plan as well. A credit shelter trust (CST), also known as a bypass or family trust, allows married couples to maximize their federal estate tax law exemption. When one spouse passes away, a portion of their assets are placed into the trust. These assets, along with any appreciation, are sheltered from estate taxes upon the second spouse’s death. It allows you to maintain control over assets while providing a tax-efficient wealth transfer.

There are other trusts that can help in certain situations, including dynasty trusts, survivor standby trusts and qualified personal residence trusts. These may be a bit more complex, and you should discuss your options with your financial advisor, estate attorney and tax advisor.

Even though it’s possible that tax legislation will extend or build upon the TCJA provisions, now’s the time to review your estate plan and make decisions to limit the impact 2026 is expected to bring.

Now is a suitable time to review your estate and gifting plans. Individuals and families who benefit from historically high federal estate and gift tax exemption levels may soon see it reduced by about half. No matter what the outcome, it’s a promising idea to be prepared, have a discussion with your team of financial professionals to plan moves to minimize your tax burden and support your financial goals.

While we’re familiar with the tax provisions of the issues presented, Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Stay focused and plan accordingly.