Many of these changes are set to expire at the end of 2025, meaning the time to prepare for their impact on estate plans is now, according to the article “These Tax Cuts are Sunsetting in 2026. Are your clients ready?” from Think Advisor.
The most visible change will be the lifetime estate and gift tax exemption changes. Before 2018, the exemption was $5 million per person and $10 million for a married couple. In 2023, those limits were $12.92 and $25.85 million, respectively. In 2024, those limits are $13.61 million for an individual and $27.22 million for a married couple.
The annual gift tax exclusion was also increased because of the TCJA. In 2023, it was $17,000; in 2024, it is $18,000. It’s not yet clear what it will be after 2025.
Unless something changes, on January 1, 2026, the estate tax exemption will revert back to $5 million; adjusted for inflation, it’s expected to be approximately $7 million per person.
There won’t be much of an impact for estates that won’t exceed the expected 2026 levels. However, the increases in farmland and home values may bring some unexpected increases to the size of many estates.
For those whose estates exceed the 2026 exemption levels, there are many options to reduce the size of the estate to minimize the impact of the lower exemption levels on their heirs in the future. An experienced estate planning attorney can make a strategic plan to address these changes.
One option is to spend down part of the estate, especially if you are older. Now would be the time to travel or make purchases you might have been putting off.
Making lifetime gifts is another way to reduce the size of your estate, while enjoying watching heirs enjoy their inheritance. Gifts could be to children, grandchildren, or others.
The same generosity could be focused on charity. If you’ve been meaning to make a gift at some point, this could be the year to make a legacy gift.
Another tactic: a Roth conversion. If your retirement accounts consist of IRAs, converting to a Roth can help with tax diversification. Money in a Roth is not subject to Required Minimum Distributions, which reduce taxes during retirement. Under the SECURE 2.0 Act, inherited Roth IRAs are tax-efficient for leaving an IRA to non-spousal beneficiaries.
The TCJA increased the standard deduction level, making it difficult for many taxpayers to itemize deductions. The higher standard deduction will revert back to roughly the pre-TCJA levels, which were $6,350 for single filers and $12,700 for those filing married and joint, both indexed for inflation.
Speak with your estate planning attorney to determine how the sunsetting of this law will impact your estate plan and choose your best options in the short and long term.
Reference: Think Advisor (Nov. 22, 2023) “These Tax Cuts are Sunsetting in 2026. Are your clients ready?”