Tick Tock Goes the Estate Tax Clock: Act Now Before Time Runs Out
In January 2026, the current lifetime estate and gift tax exemption — nearly $13 million in 2023 — will be cut in half. Families who do not take advantage of the current rules may lose the ability to save on estate taxes, sacrificing $6 to $12 million or more in tax-free gifting.
BACKGROUND — ELEVATED GIFT TAX EXEMPTIONS WILL SUNSET AFTER 2025
The Tax Cuts and Jobs Act (“TCJA”), enacted in 2017, included a significant provision that increased the lifetime estate and gift tax exemption to close to double its previous level. Prior to the TCJA, the exemption stood at $5.49 million for individuals. However, the legislation raised it to $11.18 million, indexed for inflation annually starting in 2018. For 2023, the indexed exemption has risen to $12.92 million for individuals and $25.84 million for married couples. This inflated exemption is currently set to expire at the end of 2025, returning to levels of around $7 million for individuals and $14 million for married couples, effectively cutting the limit in half.
DON’T DELAY — GET YOUR ESTATE PLAN IN ORDER TODAY
With the increased lifetime estate and gift tax exemption scheduled to lapse at the end of 2025, the window is shutting for individuals and families to capitalize on this planning opportunity. Remember, at the beginning of 2026, the exemption will decrease by roughly 50%. Thoughtful estate planning requires time to develop and implement properly. Attorneys, CPAs, appraisers, insurance advisors and other planning professionals currently have their hands full with a high volume of requests. Their workloads will likely surge as the deadline draws closer and clients impacted by the reduced exemption rush to establish plans to secure and preserve tax savings.
Beyond working with advisors, aspects outside one’s direct control like obtaining tax identification numbers for new trusts will likely face delays given the sudden high volume of activity. If you have a taxable estate projected to exceed the post-2025 exemption level, it is critical to act now rather than later. Merely beginning the planning process before the 2025 deadline does not guarantee you will have enough time to fully implement you plan before the exemption drops.
SPOUSAL LIFETIME ACCESS TRUSTS (SLATS): A POWERFUL AND EFFECTIVE ESTATE PLANNING TOOL
For individuals with estates exceeding or expected to exceed the estate tax exemption post-2025, engaging in substantial wealth transfer planning now is integral to locking in the benefits of the temporarily exemption. A common technique is making transfers to Spousal Lifetime Access Trusts (SLATs). SLATs are irrevocable trusts created by one spouse for the benefit of the other spouse. This allows continued indirect access to the gifted assets through one’s spouse, while removing them from the grantor’s taxable estate. A key consideration when implementing SLATs is the reciprocal trust doctrine. This doctrine allows the IRS to combine two separate trusts that are substantially similar in nature. If deemed too similar, the doctrine causes the trusts to be “uncrossed,” bringing the assets back into the grantors’ estates for estate tax purposes. When drafting SLATs for spouses, it is important to properly engineer differences in provisions between the trusts and allow adequate time between the drafting dates. Structuring the trusts with adequate time intervals between their creation dates can help prevent potential problems that could come up if the trusts contain very similar terms. The longer you wait to implement SLATs, the harder it may be to defend they are not reciprocal, especially as the deadline nears.
Estate planning can no longer be viewed as a tomorrow problem for two key reasons:
- Developing an estate plan takes time. Don’t wait until the last minute! Consult your financial advisor, estate planning attorney and other trusted professionals as soon as possible to discuss strategies to reduce your taxable estate before the 2026 deadline. Taking action today provides the necessary time to properly evaluate all options.
- Appreciating assets can compound estate tax issues. Assess your current balance sheet and consider transferring certain appreciating assets out of your estate now to avoid magnifying gifting and estate taxes later.