As Mark Twain once said, “Plan for the future because that is where you are going to spend the rest of your life.” He might have been jesting, but there is an undeniable truth to his words, especially when it comes to estate planning. As we approach the 2026 sunset of the lifetime estate and gifting exemptions, it becomes ever more critical to align our compasses and set forth with intent.
Before we start navigating this maze, we need to understand what is at stake. The lifetime estate and gifting exemptions were significantly increased by the Tax Cuts and Jobs Act of 2017, but they are scheduled to revert to their pre-2018 levels in 2026. This rollback implies potentially exposing a larger portion of substantial estates to federal estate taxes, which would be a significant blow to many.
Why it matters more now than ever
Increasing asset values: If your estate contains appreciating assets (think stocks and real estate), waiting might mean it exceeds the exemption limits by 2026, thus incurring a larger tax bill.
Gifting strategy: The current elevated exemption levels present an excellent window of opportunity. Transferring wealth now, especially assets poised to appreciate, might reduce future estate tax liabilities.
Uncertain future: The political landscape resembles shifting sands. No one can guarantee that future legislation will not further lower the exemption threshold before 2026, making it wise to act sooner.
Strategies for safeguarding your legacy
Front-load gifts: Utilize the high exemption amounts now. This does not only cover gifts in the traditional sense but also assets that can be strategically funneled into trusts or bequests.
Set up a spousal lifetime access trust (SLAT): Gift assets into a trust from which your spouse can benefit. This strategy effectively uses the current exemption and ensures that the assets (and their future appreciation) are removed from the estate.
Establish a grantor retained annuity trust (GRAT): Transfer assets into a trust and then receive an annuity for a specific period. If the assets appreciate beyond a certain rate, the excess can be transferred to beneficiaries tax-free.
Consider a generation-skipping or dynasty trust: These long-term trusts can secure your family wealth for multiple generations, potentially offering a shield against estate taxes for decades.
Create a charitable lead or remainder annuity trust (CLAT/CRAT): Ideal for philanthropically inclined individuals, these trusts allow designated charities to receive a benefit while removing assets from your estate. It is a win-win: achieving charitable goals while also transferring wealth without serious tax implications.
Review and reevaluate: Make sure you regularly review your estate plan with your financial advisor. As assets grow or shrink, relationships evolve, and laws change, adjustments can prove vital.
Incorporate flexibility: In the world of estate planning, rigidity can be counter-productive. Given the mutable nature of legislation and life circumstances, introducing flexibility into your estate plan is paramount. Provisions such as trust protectors, powers of appointment, or decanting powers allow for modifications based on future needs and changes.
Mark Twain also said, “The secret of getting ahead is getting started.”
As the sun begins to set on the current exemption landscape, getting started is exactly what we ought to do. With foresight, flexibility, and strategic planning, we can ensure that our assiduously built legacy transitions into the hands of our loved ones with minimal interference from Uncle Sam.
-Andrew Dickens, AIF®, CEXP™, CBVS™
Director of Pension Services & Wealth Advisor
