In 2017, the Tax Cuts and Jobs Act (TCJA) brought significant changes to the tax landscape in the United States. One of the most impactful changes was the adjustment of the federal estate tax exemption. However, as we approach the year 2026, it’s crucial to understand that these changes are set to expire, which could have major implications for estate planning. Below, a revocable living trust lawyer will explore what this means and why it is considered one of the most important tax changes in the coming months.
The TCJA Of 2017
The TCJA, signed into law in December 2017, aimed to stimulate the economy by reducing tax burdens on individuals and businesses. Among its numerous provisions, one of the most notable was the increase in the federal estate tax exemption. Before the TCJA, the estate tax exemption was approximately $5.49 million per individual. The TCJA nearly doubled this amount, raising the exemption to $11.18 million per individual, which has since increased to $13.61 million for 2024 due to inflation adjustments.
Impact Of The Increased Exemption
As our friends at Stuart Green Law, PLLC can explain, the increased exemption meant that fewer estates were subject to federal estate tax. Under the TCJA, a married couple could potentially shield up to $27.22 million from estate taxes. This change provided significant relief for high-net-worth individuals and families, allowing them to pass more of their wealth to their heirs without incurring federal estate taxes.
For many families, this meant a reduced need for complex estate planning strategies aimed at minimizing estate taxes. Trusts, gifting strategies, and other methods previously used to reduce estate tax liability became less critical for those whose estates fell below the new exemption threshold.
The Sunset Provision And What Happens In 2026
The TCJA’s changes to the estate tax exemption were not permanent. Unless Congress takes action to extend the provisions, the estate tax exemption will revert to pre-TCJA levels on January 1, 2026. This means the exemption will likely return to around $6 million per individual, adjusted for inflation. For married couples, the combined exemption would be approximately $12 million.
This potential reversion could bring many estates back into the taxable category. Individuals who previously did not need to worry about estate taxes may suddenly find their estates subject to federal taxes. The prospect of a lower exemption makes it crucial for individuals and families to reassess their estate plans in the coming months.
Why This Change Matters Now
The next 12 months are critical for estate planning. With the sunset of the TCJA provisions looming, now is the time to take action. Here are some key reasons why this change is so important:
1. Re-evaluation Of Estate Plans: Individuals and families should review their estate plans to ensure they are prepared for the potential lower exemption. This may involve revisiting trusts, wills, and other estate planning documents to optimize tax efficiency.
2. Strategic Gifting: The current higher exemption offers an opportunity for strategic gifting. By gifting assets now, individuals can reduce the size of their taxable estate and take advantage of the higher exemption before it potentially decreases.
3. Use Of Trusts: Trusts can be an effective tool in managing estate tax liability. Irrevocable trusts, such as Grantor Retained Annuity Trusts (GRATs) and Charitable Remainder Trusts (CRTs), may help reduce the taxable estate while providing financial benefits.
4. Lifetime Exemption Utilization: The current high exemption allows individuals to make significant lifetime transfers without incurring gift taxes. This can be a valuable strategy for reducing estate tax liability upon death.
5. Professional Guidance: Given the complexity of estate tax laws and the impending changes, consulting with an experienced estate planning attorney is essential. They can provide tailored advice and strategies to navigate the changing landscape effectively.
The expiration of the TCJA provisions in 2026 represents a significant shift in the estate tax landscape. The next 12 months offer a critical window for individuals and families to review and adjust their estate plans in anticipation of the potential changes. By taking proactive steps now, you can ensure that your estate plan remains effective and aligned with your long-term financial goals. Remember, careful planning today can help secure your legacy for the future, despite the uncertainties that lie ahead. Contact a lawyer near you for more information.
