Maximizing Wealth Transfer Before the 2026 Tax Sunset

Steven Gates   |   January 2024   |   3-minute read
Maximizing Wealth Transfer Before Tax Sunset-banner

The old adage “make hay while the sun is shining” aptly applies to impending tax changes. We’re entering a time like that now, and it’s important to understand how upcoming changes could affect your high-net-worth clients and, in turn, your business.

In December 2017, the Tax Cut and Jobs Act (TCJA) increased the applicable exclusion amount (AE) for gifts and estates, but only between 2017 and the end of 2025. Unless Congress decides otherwise that AE is going to be cut in half on Jan. 1, 2026.

Currently, the AE sits at $13.61 million per person, or a total of $27.22 million for married couples. In less than two years, however, that amount will be reduced to an estimated amount of just $7.1 million per person.

Why it matters

For those with significant wealth, it means potentially losing the ability to shield over $7 million from the federal estate tax. That's money that could either go to your client’s loved ones or, if you don't act, could land in the government’s pocket instead.

Many clients may not have considered their estate tax exposure in the past. The reduced limits could change that. By planning now, individuals can leverage the current exemptions to build tax-efficient wealth for the future.

The choice seems pretty clear – make some strategic gifts now or let that money slip away under future legislative uncertainties.

Key components of a tax-advantaged plan

Wealth transfer planning typically focuses on maximizing the value passed on to heirs and usually involves:

  • Reducing the taxable estate
  • Creating liquidity to pay estate taxes
  • Shifting future growth in asset values out of the estate

The cut in the federal exemption amount will increase many taxable estates creating a need for more liquidity at death. It will also decrease the opportunity to gift appreciating assets out of the estate. Wealthy families can mitigate those impacts by implementing a planning strategy before the sunset.

Wealth transfer planning based on the current high exemption sunsetting in 2026 will typically incorporate two or three key elements – a large life insurance policy, a very large lifetime exemption gift (or potential gift), and an irrevocable trust established to hold the life insurance policy and/or the exemption gift. Each of these elements has an inherent lead time that should be considered.

  • Life insurance – Medical underwriting for life insurance for large face amounts with older insureds can require several weeks or even months.
  • Gifting – The process of making a substantial lifetime exemption gift may necessitate efforts to identify, value and reposition illiquid assets.
  • Irrevocable trust – The creation of a comprehensive trust instrument, capable of holding substantial amounts of wealth potentially across multiple generations, will require the expertise and time of a proficient estate planning attorney.

Why Life Insurance

Life insurance is a key component of a comprehensive strategy for asset protection and legacy planning.

Understanding the pivotal role of life insurance in estate planning is crucial, particularly as we approach the 2026 tax changes. Its tax structure is uniquely positioned to ensure financial security and create wealth preservation for beneficiaries.

For estates facing significant tax implications due to the reduction in the AE, life insurance provides a safeguard against eroding the estate’s value. By gifting current assets into a vehicle that can fund life insurance premiums, your clients can leverage those assets to effectively maximize the value passed on to their loved ones.

Making Hay

As a proactive financial planner, you’re most likely aware of the sunset, and have started considering how to help your clients make the most of the time they have left before the sunset. As we progress through 2024, planning advisors – including insurance professionals, accountants and attorneys – are going to be busy. Top estate planning attorneys, in particular, are expected to have very full calendars in 2025.

Help your clients get ahead of the anticipated rush and reach out to them now. We’ll do our part by keeping you up to date about any upcoming changes as they appear. It’s your chance to turn the sunsetting of exemptions into an opportunity for your clients.

About the Author

Through analytical expertise, Steven Gates supports advisors serving high-net-worth clients and business owners. Using customized modeling, he creates insurance-driven strategies for wealth transfer, business protection and charitable leverage. Steven is the go-to guy when you need a unique blend of technological expertise, industry knowledge and entrepreneurial drive.