Plan now for expected changes to estate tax

At the end of 2025, the regulations regarding lifetime gift and estate taxes will change, reducing the amount of wealth that is exempt from taxation.

Currently, an individual can make lifetime gifts or pass on an estate worth up to $12.92 million without incurring taxes. The exemption for a couple is double that figure.

However, at the beginning of 2026, the tax thresholds for both estates and lifetime gifts will be reduced by half and thereafter will be adjusted for inflation. The 2017 Tax Cuts and Jobs Act, which nearly doubled the estate tax exemption, is due to sunset. And barring any legislation to the contrary, the exemption level will revert to be in line with the 2017 figure, adjusted for inflation. It is expected that, in 2026, the new limit will be approximately $6.2 million. In addition to the change in estate tax limits, after 2025, the highest income tax rate will increase from 37% to 39.6%.

In 2023, single taxpayers are allowed to make annual gifts to an individual of $17,000 without reporting it to the IRS. (Couples making the gift have double that limit.) In 2024, it is expected to be $18,000, and $19,000 in 2025.

Many estate planning experts are advising clients that they can avoid the reductions in estate tax limits implemented in 2026 by placing some assets in trusts. It would be prudent not to wait too long to establish these trusts, so you can be sure that your attorney can establish the trusts before the new regulations are in effect.

There is now a 40% estate tax on the amount above established thresholds.

That rate will change to 45% in 2026, so it makes sense to establish trusts if you expect the size of your estate will exceed $6.2 million. For example, if you expect your estate to be $7.2 million, a 45% tax above the $6.2 million limit would result in an estate tax bill of $450,000.

Arizent, a business information and marketing company, and a publisher of Financial Planning Magazine, offered some advice from wealth management firms for individuals who wish to pass down assets in a cost effective way.

You should not leave so many assets in a trust that you will feel uncomfortable about maintaining your lifestyle. This recommendation includes qualified personal residence trusts, the purpose of which is to reduce the value of a personal residence from being included in the estate. Another example is a charitable remainder trust, which is designed to avoid capital gains taxes and provide a deduction when assets are transferred into it. Another example is an intentionally defective grantor trust, which include assets that compound outside the taxable estate.

Limit the size of assets in a trust. Use enough time for possible changes to a draft trust.

It can take several months to draft an initial trust because of the required paperwork and required discussions between the attorney and the client. After a draft of the trust is prepared, the trust has to be perfect and properly executed before it can be a valid document for a gift. Waiting until the end of 2025 to develop the trust can result in a poorly designed trust that may be difficult to modify later when situations change for the client’s family.

Don’t overfund an irrevocable trust.

There is the danger of putting too much of your wealth into an irrevocable trust just to ensure you maximize your exemptions. For example, if an individual with $10 million in assets puts $8 million in an irrevocable trust, and then lives much longer than anticipated or runs into unexpected health expenses, he or she might have to depend on beneficiaries for financial support later. The point is that you should never put so much of your wealth into an irrevocable trust that might impact your standard of living. There are other alternatives you can consider, such as annual exclusion gifts or educational gifts. For example, if you pay tuition directly to a school, it doesn’t count as a taxable gift. If your heir has high medical expenses associated with a surgery, you can pay the medical provider directly; it would be a tax-free gift.

Bottom line: Significant changes will be in place in 2026 regarding estate taxes. If you expect your taxable estate will exceed