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As financial advisors weigh year-end tax planning strategies, there’s a looming issue on the horizon for high-net-worth clients.
Several key provisions from the Republicans’ signature 2017 tax overhaul are slated to expire after 2025, including a higher federal gift and estate tax exemption that allows more wealthy Americans to transfer tax-free assets to the next generation.
Also known as the “basic exclusion amount,” the exemption rises to $13.61 million per individual or $27.22 million for spouses in 2024. These are the tax-free caps on gifts during life or at death.
But those limits will drop by roughly half in 2026.
It’s “the biggest issue that we’re talking with clients about right now,” said Robert Dietz, national director of tax research at Bernstein Private Wealth Management in Minneapolis.
“You’re going to have a lot more people with estate tax issues,” said certified financial planner Ashton Lawrence, director at Mariner Wealth Advisors in Greenville, South Carolina. “You’re talking about potentially 40% of your estate being taxed.”
There are still about two years until the provision sunsets, but Dietz said certain estate planning strategies take more than a few months or even more than a year to implement.
“What we’re trying to get across to clients is they definitely should not be waiting” until 2025 to use the exclusion, he said.
How to leverage the higher exclusion before 2026
One way for married couples to leverage the higher exemption is to start removing assets from their estate now via lifetime gifts, experts say.
For married couples who will be affected by the lower exemption in 2026, the “number one” strategy is to use up one spouse’s higher exclusion before the provision sunsets, Dietz said.
In some cases, spouses are tempted to split gifts down the middle, only using half the current exemption each, which wouldn’t optimize the temporarily higher limit.
“The reality is you have to give away more than half to see any benefit from the gift in terms of the exclusion going away,” Dietz said.
If clients aren’t comfortable making irrevocable gifts now, it’s still possible to be proactive before 2026 by opening and funding a trust. But they can keep control of the assets with a “promissory note” that outlines a plan to receive the assets back, he explained.
Congress could still intervene and extend the estate and gift tax exclusion beyond 2025. However, it’s impossible to predict amid other legislative priorities.
