Overview Of The Federal Estate Tax Exemption Sunsetting In 2026
The Tax Cuts and Jobs Act (TCJA) has considerably affected gift, federal estate, and generation-skipping transfer (GST) taxes. One of its key aspects was the increase in tax exemption limits for these transfers. Specifically, the exemption amount surged from $5,490,000 in 2017 to $11,180,000 in 2018, allowing individuals to transfer more wealth without facing federal taxes. However, this substantial exemption is poised for a major change starting January 1, 2026. If Congress does not intervene, the exemption will “sunset” and revert to $5,000,000. This amount will likely be adjusted for inflation, bringing it to around $7,000,000. Such a decline could significantly impact estate planning for many, highlighting the necessity for those affected to stay informed and assess their options before the cutoff date. To learn more about federal estate tax exemptions and the potential changes after 2025, contact Harrison Law, PLLC, by calling (480) 320-2310 today.
The Impact of the Federal Estate Tax Exemption Sunsetting
On November 26, 2019, the Internal Revenue Service (IRS) released significant regulations that clarified a key element of estate and gift tax planning. These regulations state that gifts made between 2018 and 2025 will qualify for the higher exemption amount, even if the taxpayer dies in a later year when the exemption is lower. This provision offers strategic opportunities for taxpayers eager to optimize their gifting and estate management efforts, enabling them to benefit from the elevated exemption before its expiration in 2026.
However, given the looming sunset of this higher exemption, individuals need to initiate their gifting strategies promptly. Postponing these plans until late 2025 can result in lost opportunities and complications, primarily since many gifts may involve assets requiring a qualified appraisal to comply with IRS standards. The appraisal process is often lengthy, requiring detailed assessments and documentation. Additionally, as more taxpayers pursue the higher exemption, the demand for qualified appraisers will likely rise, potentially leading to backlog issues. To prevent delays and ensure that all gifts are correctly documented and appraised before the December 31, 2025, deadline, taxpayers should actively seek qualified appraisers and begin the gifting process as early as possible.
Common Misconceptions About the Upcoming Sunset Provision
There are several prevalent misconceptions regarding the upcoming sunset provision related to the TCJA. The first misconception is the idea that the sunset may not happen at all. While it is important to acknowledge that no one can predict future legislative changes with absolute certainty, the sunset provision is currently scheduled to take effect in 2025 as part of the TCJA. Unless Congress enacts new legislation to modify or eliminate this provision, it will be implemented as planned.
Another significant misconception involves the impact of the sunset on the benefits of the higher exemption limits currently in place. Many individuals believe that once these exemptions expire, they will lose the advantages they gained from making gifts under the increased limits. However, the IRS has provided clear guidance on this matter. According to the regulations, any gifts made while the higher exemption limits are still applicable will not be subject to a “clawback.” This means these gifted assets will not be included in the donor’s estate for tax purposes once the sunset provision takes effect. Therefore, individuals can confidently use the current exemptions without worrying about future tax implications on those gifts, even after the sunset occurs. However, to better understand these laws and how they may impact federal estate tax exceptions, contact an experienced Arizona estate attorney at Harrison Law, PLLC, to review your questions in more detail.
Estate Planning Techniques That Can Help Plan for the Future
To take full advantage of the current exemptions, consider the following estate planning strategies:
Take Advantage of the Annual Federal Gift Tax Exclusions
Individuals should consider taking advantage of the annual federal gift tax exclusions the IRS provides each year. These exclusions allow donors to give gifts without incurring any gift tax, making it an effective strategy for reducing a future taxable estate. More importantly, there is no limit on the number of gifts that qualify for this annual exclusion, which means donors can effectively provide financial support to multiple recipients without worrying about tax implications.
In addition, individuals with a high net worth may want to consider gifting assets up to the federal gift tax exemption while they are still alive. The federal gift tax exemption amount can vary, but it generally allows individuals to transfer a substantial sum without incurring gift taxes. This exemption operates under a “use it or lose it” principle. If individuals do not fully use the exemption during their lifetime and the federal estate tax exemption is reduced at the time of their death, they will not retain the higher exemption amount. This could potentially result in a greater tax liability for the estate. However, by proactively managing their finances, individuals can successfully pass on greater wealth to their loved ones.
Consider a Dynasty Trust
To maximize the advantages of lifetime gifting strategies, individuals may consider setting up an irrevocable trust known as a dynasty trust. This trust type provides notable benefits regarding federal estate tax and generation-skipping transfer tax reductions. When creating a dynasty trust, the grantor—the individual establishing the trust—transfers specific assets into it. These assets may include various types of property, such as cash, stocks, bonds, real estate, business interests, or other valuable items. By contributing these assets, the grantor can use their federal gift tax and GST tax exemptions, ultimately lowering the taxable value of their estate. A significant advantage of a dynasty trust is that its assets and any appreciation or growth over time are shielded from estate and GST taxes upon the grantor’s death. This enables potential growth of wealth without the typical tax liabilities that could diminish such assets, preserving a larger inheritance for future generations.
Contact Harrison Law, PLLC To Learn More
High net-worth individuals face an urgent deadline regarding their estate plans. If they do not act before January 1, 2026, they could face a significantly increased tax burden upon their passing. With a year remaining, it is critical to take advantage of the current record-high federal estate tax exemption. To learn more about protecting your wealth and minimizing potential tax liabilities, consider calling our skilled Arizona legal team at Harrison Law, PLLC, today at (480) 320-2310.
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This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
