Planning for Future Estate Law Changes

There are some significant changes that could be coming in 2026 regarding the estate tax exemption law. Unless Congress takes action, the record-high estate, gift, and generation skipping transfer tax exemption amounts will be cut in half on January 1, 2026. Although it is unknown what legislation might emerge within the next year, those who are relying on the current exemption amount should consider their options. Importantly, there is still time to plan — and utilize the existing exemption amounts before the law expires.

Tax Law Changes and Estate Planning

In 2017, the estate and gift tax exemption amounts were changed under the Tax Cuts and Jobs Act, doubling the exemption amounts from $5.6 million per person to $11.18 million per person, adjusted to $13.61 million in 2024 for inflation. These amounts were also doubled for married couples from $11.18 million to $22.36 million, adjusted to $27.22 this year for inflation. If Congress does not extend the current estate tax exemption, the amount would decrease to around $7 million per person and $14 million per married couple, effectively increasing the estate transfer taxes for high net-worth families by a substantial amount.

Notably, if you can use some or all your estate tax exemption amount prior to January 1, 2026, that amount cannot be taken away from you at a later time. If you use more of the exemption during your lifetime than is available at the time of your death, the IRS is not permitted to impose estate tax on the excess gifts that were part of your taxable estate when you die.

Planning for the Changes to the Estate Tax Exemption Law

Not taking full advantage of the gift tax exemption before its expiration could potentially result in a much smaller estate for your heirs and beneficiaries. However, if you are planning to make a large financial gift to a family member, it’s essential to consider your own objectives, how the gift would impact the family member, and tax-efficient strategies to transfer your wealth. To maximize the assets that you can give in accordance with your wishes, you might consider the following planning opportunities:

• Set up a trust — Depending on the type of trust you set up, you may be able to avoid the estate tax entirely. For example, a Spousal Lifetime Access Trust (SLAT) is an irrevocable trust that allows a spouse to gift assets to the other, giving the beneficiary spouse access to the income and principal distributions during their lifetime. Other types of trusts to consider can include irrevocable life insurance trusts that provide life insurance proceeds to beneficiaries outside of the insured’s estate and irrevocable trusts for your descendants.
• Consider maximizing annual gifting to family now — Annual gift tax exclusions are permitted each year. Gifting to your children and descendants now, before the current estate tax exemption law expires, can be a good strategy to decrease your taxable estate. In 2024, you can gift funds up to $18,000 to a loved one without owing any tax.
• Make any payments for education and medical costs directly — By paying medical or education costs directly to the institution, these payments would not count against the annual gifting exclusion. You could still cover a child or grandchild’s college tuition by paying the bill directly and provide your loved one with a gift up to $18,000 (or $36,000 if you are gifting as a married couple) without incurring tax consequences.
• Using a spouse’s lifetime estate tax exemption — A married couple may use a spouse’s lifetime estate tax exemption while preserving the exemption of the other spouse. This strategy can help to ensure that even after the exemption reduction, one of the spouse’s exemptions will still be available.

There may be additional strategies available, depending on your financial and family circumstances. Critically, failure to implement the proper estate planning techniques before January 1, 2026 can mean a significantly higher tax bill upon your passing. By using strategies that will reduce your estate tax burden, you are also increasing the amount that your loved ones — and future generations — can receive. It’s essential to have a skillful estate planning attorney by your side who can discuss your options and the potential strategies you may be able to use.

Contact an Experienced California Estate Planning Attorney

If you are thinking about taking advantage of the high estate tax exemptions, it’s vital to implement a plan as soon as possible. An experienced estate planning attorney can help ensure you meet your goals and satisfy your wishes. The attorneys at White & Bright, LLP assist individuals and families in California for a wide variety of estate planning matters. Call us at (760) 747-3200 or fill out our online contact us form to schedule a consultation to learn how we can help.