The Tax Cuts and Jobs Act (TCJA) significantly increased the lifetime estate and gift tax exemption, nearly doubling it from where it stood previously in 2017. As of this year, the exemption is at around $13.61 million per individual and $27.22 million for married couples.

Families who were looking to pass on wealth should be mindful of the sunset provision embedded within the TCJA. These provisions are set to expire by the end of 2025. If nothing changes before 2025, these provisions will revert back to 2017 levels. This could decrease estate and gift exemptions to around $7.5 million per person and $14.5 million for married couples, factoring in inflation.

Although new tax legislation may emerge before 2026, families should reconsider their estate planning under the assumption that the TCJA provisions may likely expire. Adopting a wait-and-see approach could prove detrimental to saving on estate taxes. Rather than waiting to see if the law expires, reach out to an experienced valuation firm (like Appraisal Economics) that specializes in estate tax planning to help you be proactive in your financial future. 

But let’s talk more about the sunset provisions.

Reconsider Credit Shelter Trusts

Credit shelter trusts, or CSTs, have historically been a favored strategy for maximizing federal estate tax exemptions in a married couple’s estate plan. This trust is designed to shelter a portion of the couple’s assets from estate taxes upon the death of the first spouse, ensuring that the exemption amount is fully utilized. When they establish a CST, couples can effectively double their estate tax exemptions, thus minimizing the tax burden on their heirs and preserving more of their wealth for future generations.

However, with the changing landscape of estate tax laws and the impending sunset provision of the current exemption levels, there’s renewed interest in rebuilding and optimizing these credit shelters. As the exemption amounts are set to decrease, couples can discuss strategies with a financial expert to discover how they can leverage CSTs to their fullest potential.

Use the Opportunity to Plan for Growth

Planning for growth is a fundamental aspect of any successful estate planning strategy. As individuals and families accumulate wealth and assets over time, it’s essential to implement proactive measures to accommodate this growth within estate plans. This involves regularly reviewing and updating existing plans to reflect changes in financial circumstances, asset portfolios, and family dynamics. Anticipating future growth and considering its implications on estate taxation is how to create effective strategies that maximize tax efficiencies and ensure wealth is preserved and distributed correctly.

One key consideration in planning for growth is the utilization of tax-efficient vehicles, such as trusts, which offer flexibility and control over asset distribution while minimizing tax liabilities. Trusts allow individuals to designate specific beneficiaries, manage the timing and conditions of asset distributions, and potentially reduce estate taxes by removing assets from their taxable estate. By incorporating trusts into their estate plans, individuals can safeguard their wealth against market fluctuations and economic uncertainties while also providing for the financial security of their loved ones for generations to come.

As the sunset provision of the current lifetime estate and gift tax exemption approaches in 2026, it’s imperative for individuals and families to take proactive steps in their estate planning. By staying informed, proactive, and adaptable, individuals can navigate the complexities of estate taxation with confidence and ensure that their legacy endures for years to come.