By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies
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Perhaps you recall the term “Fiscal Cliff” from 2012? At that time there were several tax laws, spending cuts, debt ceiling limits and other issues that were scheduled to change dramatically, all at the same time, on January 1, 2013. In a last-minute effort, plummeting off the “cliff” was averted with Congress passing the American Taxpayers Relief Act of 2012[1].
Well, we have a similar cliff approaching on January 1, 2026, and for this blog we’re going to focus on the estate tax rules (note: there are several income tax rules that may change as well). The Tax Cuts and Jobs Act of 2017 (“TCJA”), which created the current tax rates and rules we have today, is scheduled to revert to previous tax laws on January 1, 2026, unless Congress acts otherwise. Should the laws revert, the estate tax rules will be modified significantly.
The current estate and gift tax exclusion is $13.61 million. This elevated estate and gift tax exclusion is scheduled to be cut to about half of what it will be in 2025. A good guess will be an exclusion of around $6.5 to $7 million in 2026, should Congress fail to act. As such, there are significant opportunities and risks for clients who may be subject to an estate tax possibility either now, or should the exclusion revert.
For those with very large estates (north of $50 million), the time to act is now to take advantage of the high current exclusions. The $13.61 million exclusion is by far the largest in history. Acting now to take advantage of the current law is crucial. It can be as simple as a large gift to beneficiaries, or more likely utilizing various complex estate planning ideas to maximize the large exclusion for the long-term benefit of multiple generations. Regardless of the technique, as the law is written now, this healthy-sized exclusion may be a “use it or lose it” situation.
A larger group of people, though, are those who are often referred to as the “Middle Rich.” In other words, people who do not face an estate tax issue now, but those who will, should the exclusion revert. In other words, people with more than $7 million of net worth or above, but not enough wealth to be able to give away $13.61 million.
For the Middle Rich, you need to review your current estate plan to see if it is designed to contemplate a lower exclusion. For example, are there provisions to address a potential estate tax liability, either proactively or reactively after your death, or is your document silent when it comes to tax planning? Whether your net worth has grown since creating your plan or whether your attorney didn’t plan for tax concerns due to the large exclusion, it’s time to review your plan now. You need to make sure you’re utilizing proper planning to address possible estate taxation. And for those of you who don’t have a plan in place at all, consider this situation as a catalyst to get your affairs in order.
While we do not know what Congress may do between now and 2026, we know that some change will occur. Either the laws will revert as written, or Congress will take some action to change this situation. Regardless, change is coming. Collaborate with your financial advisor along with your tax and legal professionals to see if you should start taking steps now to prepare for the cliff we see quickly approaching.
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IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.
[1] In spite of the Act being dated 2012, the Act actually passed by the House and the Senate on January 1, 2013, and President Obama signed the legislation into law on January 2, 2013, or as the running joke in tax corners became, December 33, 2012.