Understanding the Impending Changes to Estate Tax

Alecia Decker |

Estate planning is a critical component of any comprehensive financial strategy. It ensures that your assets are distributed according to your wishes and can provide peace of mind for both you and your loved ones. However, as we approach significant changes in estate tax laws, it's more important than ever to understand how these shifts could impact your financial future.

In fact, failure to plan ahead could result in estates valued above the new exemption levels being subject to a 40% federal tax. Let's explore the implications of the impending changes and how to prepare.

The 2026 Estate and Gift Tax Exemption Sunset

Usually, beneficiaries aren't liable for the federal estate tax unless your estate's value surpasses the exemption threshold. For instance, if an individual were to pass away in 2024, the exemption stands at $13.61 million.  This exemption applies individually to each spouse, effectively doubling for married couples. Consequently, the combined exemption for spouses reaches $27.22 million.

However, unless the government intercedes, these limits are slated to return to their pre-2017 levels by 2026, adjusted for inflation. This adjustment lowers the exemption levels by roughly half.

The impending shift underscores the importance of intelligent estate planning.

Starting Your Estate Planning Journey

If you haven't already engaged in estate planning or if it's been some time since you last reviewed your plan, now is the time to act. Begin by clarifying your goals, which may include distributing assets, providing for your loved ones, supporting charitable causes, and ensuring healthcare directives are in place.

Next, compile a comprehensive list of your assets, including both tangible and intangible items. This inventory will help you understand the value of your estate and identify areas where strategic planning may be necessary. Common assets include real estate, business interests, investment accounts, retirement savings, and life insurance policies.

With your goals and assets in mind, it's time to work with a financial advisor to establish directives, set up trusts, review insurance policies, develop a gifting strategy, and consider other estate planning tools. Throughout this process, it's crucial to consider the tax implications of your decisions.

Maximizing Lifetime Gifting

One strategy to reduce your taxable estate and maximize the benefits of current exemption limits is lifetime gifting. Currently, individuals can gift up to approximately $18,000 per person each year without affecting their lifetime tax exemption. Married couples can effectively double this amount by combining their gift tax exemptions.

However, with the impending changes to estate tax laws, these limits are on the verge of being lowered significantly. This creates a "use it or lose it" scenario, encouraging individuals to take advantage of higher gifting limits while they are still available.

Importance of Acting Now

While the sunset of estate tax limits may seem distant, the implications for your financial future are significant. Delaying estate planning could result in facing higher tax rates and increased uncertainty down the road.

Crafting a comprehensive estate plan that maximizes current tax benefits and aligns with your long-term goals is essential for securing your financial legacy. By working with a team of experienced professionals, you can navigate the complexities of estate tax laws with confidence. That's the value-added service we deliver at Creason-Edwards & Cimarolli.

If you're interested in a free, no-obligation consultation, please contact us today.