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Navigating the Impending Estate Tax “Sunset” and What It Means for Wealthy Families

The approaching expiration, or “sunset,” of the Tax Cuts and Jobs Act (TCJA) has captured the attention of many high-net-worth individuals and their advisors. Set to expire after December 31, 2025, this tax law will revert the federal estate and gift tax exemptions to pre-2017 levels. If new legislation does not intervene, the lifetime basic exclusion amount (BEA) will drop from its 2025 value of $13.99 million to approximately $7.1 million per individual in 2026. This reduction could significantly impact estate planning for those with substantial wealth, and the urgency for careful planning has never been more pressing.


What’s Changing with the Estate Tax Exemption?


Under current TCJA provisions, individuals can transfer up to $13.99 million during their lifetime or death without incurring federal estate or gift taxes. However, starting in 2026, this exclusion will likely be reduced to around $7.1 million, depending on inflation adjustments. This nearly 50% decrease will mean that more estates could become subject to federal taxes, particularly affecting individuals and families with significant assets.


Moreover, specific tax-efficient estate planning tools, such as grantor trusts, dynasty provisions, and valuation discounts, face heightened scrutiny. These tools have long been integral to estate plans to maximize tax efficiency and preserve wealth across generations. However, recent proposals could further limit these strategies, as legislators increasingly view them as loopholes primarily benefiting wealthy families.


The Sunset’s Implications for Estate Planning


The reduced exclusion will make it more challenging for families to shield their estates from taxes, potentially reducing the amount of wealth that can be transferred tax-free to heirs. Several key steps may help families prepare:


  1. Consult with Professional Advisors Early: With the increased demand for estate planning services, waiting too long to act may limit access to skilled tax and legal professionals. Procrastination could mean missed opportunities as the capacity for new clients dwindles.

  2. Consider Gifting Strategies: For individuals who wish to take advantage of the current exclusion amount, now may be an opportune time to make lifetime gifts. This “use it or lose it” opportunity applies only if gifts are made before the exclusion reverts in 2026.

  3. Establish Key Legal Structures: Creating trusts, partnerships, or other legal entities may help manage assets more effectively and allow a smoother transition to the next generation. However, these legal documents require careful drafting and significant time to finalize.

  4. Explore Specialized Trusts: Trusts like spousal lifetime access trusts (SLATs) and grantor retained annuity trusts (GRATs) can allow for efficient wealth transfers while offering flexibility and control. However, these structures require precise timing to avoid triggering tax consequences, such as the Reciprocal Trust Doctrine, which can nullify the intended benefits if not executed correctly.


Potential Legislative Changes on the Horizon


While the 2026 sunset marks a significant milestone, it’s not the only factor to consider. Legislative proposals like the American Housing and Economic Mobility Act, introduced in 2024, suggest further reductions in the BEA and tighter restrictions on specific estate planning strategies. This proposal hints at reducing the exemption to as low as $3.5 million and ending the use of various trusts favored by high-net-worth individuals. The proposal has garnered support within specific political circles and could bring more restrictive changes depending on the political landscape.


Looking Ahead


The message is clear for individuals and families with substantial estates: proactive planning is essential to maximize the current tax benefits before the law changes. By engaging with advisors now, families can explore their options and prepare for potential future legislation that may further restrict popular estate planning tools. As these complex changes unfold, seeking guidance tailored to specific circumstances is crucial.


Conclusion


The impending sunset of the Tax Cuts and Jobs Act presents a unique—though temporary—opportunity for affluent families to take advantage of higher exemptions before they diminish. The changing political and economic landscape underscores the need to be proactive, flexible, and informed. Working with a trusted advisor to implement an estate plan suited to current conditions may help mitigate the impact of the sunset and safeguard wealth for future generations.


For more detailed insights, consult with DPH Financial Services or contact your tax and legal advisors.

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