Countdown to 2026: Maximizing the Estate and Gift Tax Exemption Before It Shrinks

As part of tax reform in 2017, the federal government doubled the federal estate and gift tax exemption. However, unless Congress intervenes, this elevated exemption will sunset at the end of 2025. Various estate planning strategies can be employed to take advantage of the increased exemption while it’s still available.

The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the federal estate and gift tax exemption from $5 million to $10 million per individual, adjusted annually for inflation. In 2024, the exemption is $13.61 million per individual or $27.22 million for married couples, allowing significant transfers of wealth without incurring federal gift or estate taxes. However, this increase is temporary, with the exemption set to revert to an estimated $7 million per individual on Jan. 1, 2026 – unless Congress acts to extend or modify the law. The potential reduction could lead to more estates becoming subject to the 40% estate tax on assets above the exemption. Several estate planning strategies can help individuals and families take advantage of the current high exemption before it sunsets. 

Leveraging Strategic Gifting and Trusts

One popular method for maximizing the estate and gift tax exemption is making outright lifetime gifts to heirs, using up the available exemption while it remains elevated. Other strategies include establishing Spousal Lifetime Access Trusts (SLATs) to transfer assets out of the estate while allowing access to the grantor’s spouse and creating irrevocable trusts for descendants to shield wealth from future estate taxes. These options also allow future appreciation of transferred assets to remain outside the taxable estate, maximizing estate tax savings. 

Life Insurance and ILITs: Ensuring Liquidity for Large Estates 

For larger estates, life insurance can play a crucial role in providing liquidity for estate tax payments, preventing heirs from needing to sell off family assets to cover tax bills. An Irrevocable Life Insurance Trust (ILIT) can help by holding insurance policies that are excluded from the grantor’s estate while providing liquidity to cover tax liabilities.

Transferring Future Appreciation Using Freeze Techniques

For individuals who have already utilized their lifetime exemption, “freeze” techniques can be employed to lock in the current value of assets, transferring future appreciation out of the estate allowing future growth to be passed onto beneficiaries gift and estate tax-free.

As the estate and gift tax exemption sunset approaches, taxpayers should maximize this opportunity while it lasts. Taking the proactive steps above not only shields wealth from future taxes but also preserves financial legacies for future generations. For more information on these planning strategies, reach out to your KSM advisor or complete this form.