Are You Prepared For An Estate Tax Sunset?
Are you thinking about your taxes and financial strategies for 2026? If not, you should be.
In 2026, a number of tax adjustments that were enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) are anticipated to expire. For affluent couples, the most consequential change is likely to be a substantial reduction in the estate tax exemption. Presently, the exemption stands at $12.92 million per person or $25.84 million per couple as of 2023.1 However, based on current legislation, these higher exemption amounts will revert to the 2010 level of $5 million, adjusted for inflation, which equates to roughly $6.4 million per person, or $12.8 million per married couple in 2026, representing nearly half of its present value. For estates exceeding these exemption amounts, the federal tax rate will be set at 40%, in addition to state death taxes where applicable.2
Preventing the expiration of high exemptions at the close of 2025 would necessitate an act of Congress. Given the current high levels of national debt and the government's assertive spending agenda, it is conceivable that tax increases could be prioritized in the years ahead to generate revenue.
Pending any changes from the government, what can you do to prepare for an estate tax sunset? There are a few things you may want to consider as part of your financial strategies.
Review your estate plan. To make the most of the current estate tax exemption amount, it's recommended that you review your estate plan. Consider taking advantage of strategies like gifting assets to family members or creating a trust to decrease the size of your estate. Gifting is a great way to maximize the use of the current exemption amount before it potentially decreases in the future due to changes in tax laws. A trust, on the other hand, can help minimize estate taxes and protect assets for your heirs.3
Life insurance. As part of your estate planning strategy, it's worth considering the use of life insurance. Life insurance proceeds are usually not subject to estate taxes, which means that they can be utilized to pay estate taxes or provide extra assets to beneficiaries. Survivorship life insurance policies are often utilized to ensure that your heirs' tax liabilities aren't as large. By using life insurance, you can help to ensure that your beneficiaries receive the full amount of your estate while also providing liquidity to pay for any estate taxes owed.4
Be aware of estate taxes imposed by your state. It's important to keep in mind that state estate taxes are separate from federal estate taxes. Some states have lower exemption amounts than the federal government, meaning that your estate may be subject to state estate taxes even if it's not subject to the federal estate tax. To determine if you are subject to state estate taxes, you should consult with a financial advisor or estate planning attorney who is familiar with the laws in your state.5
Consider utilizing the generation-skipping transfer (GST) tax, which is a tax on the transfer of assets to grandchildren or more remote descendants. This tax was created to prevent a double taxation of inherited wealth from grandparents to their children and then on to their children. The flat rate tax is currently set at 40%.6
Consider charitable giving as part of your estate planning strategy. Charitable gifts can reduce the size of an estate and may also provide a tax deduction.7
It's important to periodically review your estate plan to ensure that it aligns with your current wishes, family circumstances, and personal goals, especially considering changes in the law. To develop a comprehensive estate plan tailored to your unique financial situation and goals, it may be beneficial to seek the guidance of a financial advisor or estate planning attorney. Additionally, it's important to stay aware that estate tax is a political issue, which means that it may be subject to change in the future due to shifts in the political landscape or economic conditions.
As always, let us know if you have any questions.
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CRA Financial, LLC [“CRA]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CRA. Please remember to contact CRA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CRA is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of CRA’s current written Disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.crafinancial.com. Please Note: If you are a CRA client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your CRA account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your CRA accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Note: Limitations: Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if CRA is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (to the extent applicable). Unless expressly indicated to the contrary, CRA did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of CRA by any of its clients. ANY QUESTIONS: CRA’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including the criteria used for any reflected ranking.