Preparing for the Expiration of the Tax Cuts and Jobs Act (TCJA)

Written by Sean Lacey, CFP®, CIMA®, CRPC ™ - Wealth Advisor on November 20, 2024

Key Insights and What to Expect

The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the U.S. tax code, particularly for estate, gift, and generation-skipping transfer (GST) taxes. One of the most significant provisions was the increase in the estate tax exemption. However, these changes are set to sunset on December 31, 2025, reverting to pre-TCJA levels. As a result, many high-net-worth individuals and families have a window of opportunity to adjust their estate plans before the lower exemption takes effect. Let’s explore the current estate tax landscape, expected changes after the TCJA sunset, and strategies to help minimize estate tax liability, such as gifting, trust planning, and wealth transfer techniques.

Current Estate and Gift Tax Exemptions

Under the TCJA, the federal estate, gift, and GST tax exemptions were doubled, enabling individuals to transfer substantial amounts of wealth tax-free. In 2024, the exemption is $13.61 million per individual and $27.22 million for married couples, adjusted for inflation. Any amount above these thresholds is subject to a 40% federal estate tax.

The increased exemption has allowed many estates to potentially avoid federal estate tax liability. However, this window will close when the TCJA provisions expire at the end of 2025.

The Post-TCJA Landscape: Lower Exemptions in 2026

When the TCJA sunsets, the estate, gift, and GST tax exemptions will revert to pre-2018 levels, adjusted for inflation. It is expected that in 2026, the exemption will drop to approximately $6.8 million per individual or $13.6 million for married couples. While still substantial, this reduction could expose more estates to federal estate taxes, possibly leaving a significant portion of wealth subject to the 40% tax.

This impending reduction presents a need for proactive financial planning. Without adjusting estate plans, high-net-worth individuals may face a significant tax burden on their estates.

Estate Planning Strategies Before the TCJA Sunsets

To mitigate the impact of reduced exemptions, individuals and families should consider various estate planning strategies before the TCJA sunsets. Some key strategies include lifetime gifting, trust planning, and wealth transfer techniques to preserve wealth.

1. Lifetime Gifting

One of the most effective ways to reduce the size of a taxable estate is through lifetime gifts. Gifting may allow individuals to transfer assets during their lifetime, potentially reducing the estate’s value and potential estate tax exposure.

Annual Exclusion Gifts: In 2024, individuals can gift up to $18,000 per recipient per year without using their lifetime exemption. For married couples, this amounts to $36,000 per recipient. This strategy allows gradual estate reduction without affecting the lifetime exemption.

Lifetime Exemption Gifts: Individuals can take advantage of the current $13.61 million exemption to make substantial gifts to heirs before the exemption drops in 2026. Gifting now can potentially save millions in future estate taxes.

Gifts of Appreciating Assets: Transferring appreciating assets, such as real estate or business interests, could remove future appreciation from the taxable estate. This strategy allows assets to grow outside the estate, shielding them from estate taxes.

2. Trust Planning

Trusts are powerful tools in estate planning, offering both tax and non-tax benefits. Specific trust structures can help reduce estate tax liability and preserve wealth for future generations.

Spousal Lifetime Access Trusts (SLATs): A SLAT allows one spouse to create an irrevocable trust for the benefit of the other spouse while using the higher lifetime gift tax exemption. SLATs offer flexibility, as the spouse-beneficiary can receive income or principal from the trust, maintaining indirect access to assets while locking in the higher exemption.

Grantor Retained Annuity Trusts (GRATs): A GRAT enables individuals to transfer appreciating assets while receiving an annuity for a set period. If the assets appreciate beyond the IRS-assumed interest rate, the excess passes to beneficiaries free of estate or gift taxes.

Charitable Remainder Trusts (CRTs): CRTs provide income to the grantor or beneficiaries for a term, with the remainder passing to charity. This strategy offers an immediate charitable deduction, defers capital gains taxes, and reduces the taxable estate.

Dynasty Trusts: Dynasty trusts are designed to preserve wealth for multiple generations. The assets in these trusts can grow free from estate taxes indefinitely, making them ideal for multigenerational wealth preservation.

3. Wealth Transfer Techniques

In addition to gifting and trust planning, other wealth transfer strategies can further reduce estate tax liability.

Family Limited Partnerships (FLPs): FLPs allow business owners or families to transfer assets at a discounted value, reducing the taxable value of the estate. The grantor retains control over the business or assets while transferring wealth to heirs.

Irrevocable Life Insurance Trusts (ILITs): Life insurance proceeds are generally included in a taxable estate. Transferring ownership of a policy to an ILIT removes the proceeds from the estate, providing liquidity for estate taxes or supporting heirs.

Qualified Personal Residence Trusts (QPRTs): A QPRT allows individuals to transfer their home to heirs at a reduced gift tax value while continuing to live in the residence for a specified period. This strategy removes future appreciation from the estate and ensures the home passes to heirs in a tax-efficient manner.

Planning Considerations in 2026 and Beyond

While the immediate focus is on leveraging higher exemptions before the TCJA sunsets, estate planning will remain essential after 2026. As the estate tax exemption is expected to decrease to around $6.8 million, individuals with larger estates will face renewed tax exposure. Continued use of gifting, trust planning, and charitable giving will be critical in managing estate tax liability.

Given the uncertainty surrounding future tax laws, estate plans should be designed with flexibility in mind. Congress may extend the TCJA provisions, enact new legislation, or adjust exemptions and tax rates. By building flexibility into estate plans, families can adapt to potential changes in the tax landscape.

Conclusion: Time-Sensitive Estate Planning in Light of the TCJA Sunset

The expiration of the Tax Cuts and Jobs Act’s estate and gift tax provisions presents both a challenge and an opportunity for high-net-worth individuals and families. With the estate tax exemption set to drop significantly in 2026, the next two years offer a window to act.

Proactively implementing gifting strategies, utilizing tax-efficient trusts, and employing wealth transfer techniques can help families preserve wealth and minimize estate tax exposure. By working closely with financial advisors, estate planning attorneys, and tax professionals, individuals can make the most of the current laws and prepare for the post-TCJA estate tax landscape.

If you would like more information about the terms and strategies discussed in this guide, or if you’re ready to explore how they apply to your specific situation, contact Waverly Advisors. With experience working with individuals, families, and executives managing significant wealth, we specialize in creating tailored strategies with the goal to help you grow, protect, and transfer your assets effectively.

MEET THE AUTHOR

Sean Lacey, CFP®, CIMA®, CRPC ™

Wealth Advisor

Sean began his career working in retail banking. In his role he helped his clients navigate a variety of financial scenarios to achieve their long and short-term financial goals. Sean transitioned to the investment landscape focusing on 401k plans assisting plan sponsors and participants. He then entered the wholesaler space focusing on RIA and Defined Contribution Investment Options, and finally established himself in wealth management serving high-net-worth clients in building their portfolios, manage tax liabilities, and develop deeper plans for long term success… Learn More

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