Is Your Estate Taxable? It May Be Sooner than You Think.

If your estate is at or near the taxable threshold, you should start viewing the government as one of your potential beneficiaries. Even if you are not, we are staring at another election cycle, and, with a growing debt burden on the US government, it is likely we will see changes with our current tax law. These changes could eliminate much of the generous estate exemptions we are currently enjoying. With the estate tax rate at 40% for amounts above the unified tax credit, this means the IRS could receive a significant portion of your estate, potentially more than each of your children if you have two or more. Fortunately, there are strategies you can implement today to maximize the wealth passed on to your descendants and charitable interests, minimizing the share that goes to the IRS and minimizing the risk of political or legislative change in the coming years.

At the end of 2025, the 2017 Tax Cuts and Jobs Act has several provisions that are set to expire. One of the major provisions is the reduction of the unified tax credit from a current $13.61 million per individual to around $7 million per individual ($5.5 million in 2018, subject to inflation). We do know the current limit is going to change. What we never know for certain is the potential of future legislation.

What is the unified tax credit?

The unified tax credit is the combined lifetime limit that an individual can gift during their lifetime or transfer at death without incurring federal estate or gift taxes, currently set at $13.61 million per individual. For a couple married filing jointly, this combines for a total of $27.22 million throughout their lifetime. If the estate is valued at more than the unified tax credit, any amount exceeding the limit is subject to federal estate tax at a rate of 40%.

Why is the unified tax credit important?

We expect the exempted limit to be cut in half on January 1, 2026, to around $14 million per couple ($7 million per individual). The IRS follows a “use it or lose it” policy, meaning if you utilize the current $13.61 million exemption today, you can secure this higher limit until your death. However, any unused exemption will be reduced to the new lower limit moving forward. This makes it crucial to take advantage of the current unified tax credit before it decreases. If you and your spouse have a $27.22M estate today, effective planning could save you roughly $5.3M in estate taxes ($27.22M current limit less $14M 2026 approximate limit multiplied by 40% estate tax).

Is the 2026 limit set?

Sort of. The 2017 TCJA mandates that the exemption doubling will end in 2026 so barring any new legislation, we expect the limits to revert to their 2017 basis adjusted for inflation (this is the ~$7M number). However, Congress could enact new legislation to adjust the limit as well.

Estate limits have certainly been tighter than they have been in recent years. This recent widening of the exempt limit is beyond any level since 1940. While we have no confidence in Congress’ direction, we do know that the current levels will be halved in 2026.

What Can I Do?

There are a number of options that you could consider taking advantage of today’s generous lifetime unified tax credit. You should start by reaching out to us if you have any questions or if you feel like you would like to capitalize on your current lifetime exempt amount. I am going to highlight one strategy that you could consider implementing with your estate. However, this is just one example, and there are many other structures that may be more suitable for you and your goals.

The Power of Spousal Lifetime Access Trusts

Utilizing Spousal Lifetime Access Trusts (SLATs) can provide many benefits, such as reducing your taxable estate, capturing the current unified tax credit, protecting assets from creditors, and allowing the donor spouse to retain indirect access to the trust's income and principal through the beneficiary spouse. However, SLATs also carry risks, including the potential loss of access to trust assets if the beneficiary spouse passes away or the couple divorces, and the complexities involved in setting up and maintaining the trust. It is essential to work with experienced legal and financial advisors to ensure SLATs are structured correctly and aligned with your overall estate planning goals.

Establishing SLATs

Spouse A establishes an irrevocable trust and transfers assets into that trust utilizing their current unified tax credit amount ($13.61M). Spouse B is named as the primary beneficiary of the trust which allows them to receive the income and principal of the trust for their lifetime. The assets funded into the trust are removed from Spouse A’s estate, reducing their taxable estate and migrating appreciation to the next generation.

It is important to take care that the trusts are not considered “reciprocal” which could negate the benefits of the SLATs. This can be achieved by varying the terms of the trust, the nature of assets included within the trusts, the timing of the trust funding and by the state in which the trust is situated. It is very important to work with a qualified attorney when establishing these terms as any mistakes could be costly.

Take Action Today

One of the things you must consider as you contemplate your estate planning is not only what your estate may be worth today but what it may be worth when you die. Generally, we see estate values growing over time. As an example, a $3 million estate that grows at 3% is worth over $7.2 million in 30 years! That future estate has a much greater likelihood of being taxable. The beauty of effective estate planning is that future scenarios are addressable today!

The SLAT is just one illustration of effective estate planning. As you engage with your attorneys and CPAs, it is helpful to include us in these conversations as well. Planning for the future can help ensure that your hard-earned wealth goes to your loved ones and charitable causes, rather than the IRS. It can be difficult navigating these difficult decisions, and it is hopefully a process you will only undergo once in your lifetime. Let us know if you are considering an update to your estate plan - we can help guide you as you navigate the complexities of estate planning.