In January 2026, provisions of the Tax Cuts and Jobs Act (TCJA), which had temporarily increased the federal estate and gift tax exemptions, are set to revert to their pre-TCJA levels, adjusted for inflation. This means the current lifetime estate and gift tax exemption ($12.92 million in 2023) will be cut in half. Families who do not take advantage of the current rules may lose the ability to save on estate taxes and potentially sacrifice millions in tax-free gifting.
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As the chart above illustrates, the estate tax exemption is expected to plummet from all-time highs unless there is a legislative change. This is historically unprecedented, and while no one can predict that there won’t be legislative intervention in the meantime, it’s best to plan to reduce tax liabilities, protect assets, and ensure wealth distribution according to clients' wishes.
Here’s another representation that shows how much an individual or couple's estate bill can increase drastically:
Overnight, the increased estate tax bill will become $3,395,500 for an individual and $3,748,500 for a married couple!
While the exemptions remain relatively high, some individuals or couples might not anticipate an estate tax issue. However, it’s still important to factor in the potential appreciation of those estate assets. For example, a couple worth $12 million today may feel comfortable delaying or foregoing any planning as they would not have federal estate tax exposure in today’s dollars.
However, estates grow over time, and if we assume a 6% growth rate on those assets, their total estate would be worth about $14.29 million in 2026. It would put them just over the anticipated exemption level for couples at that time. If we fast forward 20 years, that same estate would be worth about $38.5 million. Therefore, individuals and couples need to think beyond the immediate horizon.
There are a few basic gifting strategies that one can utilize to transfer assets out of their estate efficiently:
Life insurance can be a valuable vehicle for creating a tax-efficient gifting and estate planning strategy, especially during periods of legislative and market uncertainty. The best policy type will depend on the specific details of each case. The choice of strategy depends on individual financial goals, risk tolerance, and estate planning objectives. In some cases, however, individuals may be reluctant to make significant gifts or have limited gifting capacity but still need estate planning. There are alternative strategies that can mitigate these concerns, including:
Bob and Susan, aged 55 and in good health, are a married couple with a high net worth of about $40M. They have used most of their gifting capacity and wish to keep any future gifting to a minimum. However, they also require approximately $15M in life insurance coverage for estate planning purposes.
Their advisor suggested a private financing arrangement to accomplish both goals. First, they set up an irrevocable life insurance trust (ILIT), which will apply for and own a survivorship life insurance policy on Bob and Susan. Their premium on a $15M policy will be about $284,222 per year, paid for ten years*. The policy also includes a “return-of-premium” death benefit option where the total death benefit in any given year equals the original face amount plus all premiums paid into the policy. This ensures the net death benefit to the ILIT will be kept at $15M once the outstanding loan is accounted for and the arrangement is extinguished.
Bob and Susan will loan the premium to the ILIT each year, and the ILIT will be responsible for paying loan interest back to them until the loan is repaid, which is based on the Applicable Federal Rate (AFR) at the time the loan is made. In the first year, for example, they loan $284,000 to the ILIT, and based on a 4% AFR rate, the interest is approximately $11,369.
Unless the ILIT has existing assets, this is the minimum amount that must be gifted to the trust to repay the loan interest to Bob and Susan in the first year. In the second year, they again loaned $284,000 to the ILIT, subject to the AFR rate at the time. The applicable loan interest will increase as each additional loan is made, so a sound exit strategy is essential.
The ILIT can repay the loan at any point if there are sufficient trust assets, or it can be paid back at death using the policy death benefit. This arrangement keeps the couple’s gifting to a minimum while providing $15M in liquidity for estate planning.
*Based on a male and female, age 55 and preferred nonsmoker, with John Hancock’s Protection SUL.
A tech-enabled brokerage like Modern Life can provide valuable tools and resources to insurance advisors that can help them prepare their clients for the upcoming estate tax sunset, including:
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