The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the tax landscape, including adjustments to estate taxes that provided relief for high net worth individuals. However, as the sunset provision of the TCJA approaches, slated for January 1, 2026, it’s crucial for affluent individuals to understand the implications and take proactive steps to navigate the shifting tax environment. In particular, the expiration of the Temporary Increase in the Basic Exclusion Amount for estate taxes (TCJA) will reverberate through estate planning strategies, potentially impacting individuals with estates exceeding $6 million. The net worth threshold will be dramatically reduced, so let’s delve into the key points outlining the impact of the TCJA expiration on your estate plan for high-net-worth individuals and explore the strategies to mitigate its consequences.
TCJA Estate Taxes Set to Increase Dramatically
Under the provisions of the TCJA, the Basic Exclusion Amount for estate taxes was temporarily doubled from approximately $5.49 million to $11.18 million for individuals and $22.36 million for married couples, indexed for inflation. This increase provided substantial relief for wealthy individuals, shielding a larger portion of their estates from federal taxation. However, come January 1, 2026, the TJAC is set to expire, reverting the Basic Exclusion Amount to pre-TCJA levels adjusted for inflation. As a result, the estate tax threshold will effectively halve, plummeting from approximately $13 million to an estimated $6.5 million.
That means that individuals who have more than $6M will have major tax exposure if they do not restructure their estate plans and financial plans before the deadline. If you have a home, insurance, and retirement accounts or plan to leave a legacy for your family, this could have a major impact on you and your heirs, if you do not restructure your assets.
TCJA Implications for High Net Worth Individuals
The implications of this impending change are profound. Currently, individuals with estates valued below $13 million are exempt from federal estate taxes. However, post-2025, those with estates exceeding the reduced threshold of $6.5 million will face estate taxes ranging from 40% to 50%. This substantial increase in the tax burden underscores the urgency for affluent individuals to revisit and potentially restructure their estate plans to capitalize on the existing exemptions.
What Happens After TCJA Expires 1/1/26?
Once the TCJA deadline passes, and especially if no new legislation is passed, you will be unable to execute certain tax strategies, based on the new guidelines. This is critical for those who have a net worth over $6 million. That is why it’s important to review your estate plan immediately to enact the strategies that will allow you to utilize the current tax brackets.
Proactive Estate Planning Strategies for TCJA Changes
Given the finite window before the TCJA expiration, high net worth individuals must act swiftly to work with their estate planners and financial advisors to mitigate the impact of the impending changes. Here are some proactive strategies to discuss with your estate planning attorney:
- Maximize Use of Current Exemptions: Leveraging the current higher Basic Exclusion Amount, individuals can implement estate planning techniques to transfer assets and wealth to future generations, effectively utilizing the current tax advantages.
- Review and Update Estate Plans: It’s imperative for affluent individuals to have their existing estate plans reviewed in light of the impending tax changes. By working with financial advisors and estate planning professionals, individuals can identify potential vulnerabilities and make necessary adjustments to optimize tax efficiency.
- Explore Gifting Strategies: Gifting assets during one’s lifetime can be an effective strategy to reduce the size of the taxable estate. By taking advantage of the annual gift tax exclusion and lifetime gift tax exemption, individuals can transfer wealth to heirs while minimizing estate tax liabilities.
- Consider Trusts and Other Vehicles: Trusts, such as irrevocable life insurance trusts (ILITs) and grantor retained annuity trusts (GRATs), can be valuable tools for estate planning. These vehicles allow individuals to transfer assets to beneficiaries while retaining certain control and flexibility over the assets and minimizing tax exposure.
- Stay Informed and Act Decisively: With the ever-evolving tax landscape, staying informed about legislative changes and seeking professional guidance is paramount. High net worth individuals must remain proactive and decisive in implementing estate planning strategies to optimize tax efficiency and preserve wealth for future generations.
The expiration of the TCJA tax expiration could have a dramatic impact on your existing estate plan. The proposed subsequent reduction in the Basic Exclusion Amount for estate taxes will have far-reaching implications for high net worth individuals. With the window of opportunity narrowing before the scheduled changes take effect on January 1, 2026, affluent individuals must act decisively to review and potentially restructure their estate plans to maximize tax efficiency and preserve wealth for future generations. By leveraging the current exemptions and implementing proactive estate planning strategies, our attorneys can help you navigate the shifting tax landscape with confidence and ensure the preservation of their legacies for years to come.
The Maryland Estate Planning Attorneys at Frame & Frame Attorneys at Law have been helping individuals for over 70 years. We have seen a lot of things change over the years and we’ve helped clients anticipate and prepare for these changes, in a thoughtful, proactive way. Is your estate planning attorney talking with you about these changes? Contact us today to have your current estate plan reviewed or to schedule a consultation to see how these changes will impact you and your legacy.