Article
Getting Ahead of the TCJA 2026 Sunset
July 19, 2024
No one wants to owe more taxes on their estate than necessary. Proper estate planning can shield the legacy you leave your heirs from unnecessary taxation, but planning for a wealth transfer that is several years or decades away can be challenging, and requires not only current tax laws but also being informed about how those laws may change in the future. This is why you should be familiar with The Tax Cuts and Jobs Act of 2017 and how the potential sunsetting of this act in 2026 could affect you and your family.
The Tax Cuts and Jobs Act of 2017 (TCJA) brought significant changes to the tax system, including raising the lifetime estate and gift tax exemption amounts to $13.61 million for individuals and $27.22 million for married couples, as of 2024. However, these higher exemption amounts are set to expire on January 1, 2026, potentially falling to roughly $7 million for individuals and $14 million for married couples, depending on adjustments for inflation.
This change creates a “use it or lose it” situation for individuals and families with taxable estates. Without proactive planning, they may face significant financial impacts. With the federal estate tax rate at 40%, the decrease could result in a large tax liability. An individual with an estate of $13.61 million would face no estate tax under current law, but that same estate would be taxed up to $2.8 million once the current law sunsets. A married couple in the same scenario could see Uncle Sam take $5.6 million from the legacy they leave their heirs.
It is a common misconception that estate planning is only for those with massive estates exceeding $20 million. If Congress does allow the current exemption to expire, individuals with significantly less could see their assets be hit with estate taxes. Even if the potential $7 million figure seems beyond the scope of your estate, keep in mind that future growth may push the size of your estate past future exemption thresholds as investment returns compound. Historically, assets tracked by the S&P 500 have averaged a 7.3% annual return over the past 30 years, potentially doubling an estate’s value every decade. Also keep in mind that the IRS will be looking at your entire gross estate, which comprises all of your assets, including any life insurance benefits on owned policies and real estate, which has the potential to appreciate greatly in value over time.
The IRS has clarified that exemption amounts used under the current tax law won’t be subject to future reductions or “claw-backs,” making now an opportune time for strategic estate planning. Using smart strategies like the gifting of assets, establishing trusts, and titling changes can allow you to take advantage of the currently generous exemption amounts to reduce the size of your taxable estate and shield what you leave behind from taxation.
Proactive and strategic estate planning can help protect your wealth from the potential impact of these expiring tax provisions and changing tax policies. To ensure financial security and preserve your legacy for future generations, estate planning should be considered sooner rather than later. To discuss creating a personalized estate plan, please reach out to our financial planning team today.
