By Charles R. Johnson, Wealth Director, and co-author Ed Mooney, Director of Financial Planning, of Fiduciary Trust International.
Planning your wealth transfer strategy can be challenging, especially with uncertainty about future tax laws. November’s election results mean new political leadership will weigh changes to our current tax laws, including whether to extend the provisions of the 2017 Tax Cuts and Jobs Act (TCJA). Whatever ultimately makes it into law in the future, it’s crucial to remain aware and ready to adapt your planning strategy.
As things currently stand, key provisions of the TCJA are set to expire in 2026 unless Congress acts. Significant changes could include a reduction in the federal estate tax exemption and a potential increase in the top personal income tax rate from the current 37% to 39.6%. In addition, state and local taxes would again be deductible in 2026, among other changes.
While the new administration settles in and begins to prioritize their agenda, here are things to consider as changes to existing tax laws take shape.
Prepare for potentially higher estate taxes
In 2026, the federal gift, estate, and generation-skipping tax exemption is scheduled to decrease significantly, from $13.61 million ($27.22 million for couples) in 2024 to approximately $7 million ($14 million for couples). This reduction means that any assets above these thresholds that pass to your heirs (other than your spouse) could be taxed at rates up to 40%.
Families potentially facing estate tax liability in 2026 may benefit from transferring assets out of their estates sooner rather than later. If you are a married couple with a net worth exceeding $14 million or an individual with a net worth above $7 million, consider reviewing your estate plan. It might be advantageous to lock in the current higher exemption amount by establishing or enhancing your lifetime gifting plans.
Once you assess your situation, there are various strategies available — from trust structures to direct gifting — to utilize your exemption effectively.
Consider what and when to give
As you evaluate gifting strategies, think carefully about the specific assets and timing of your gifts. Some assets may be better gifted during your lifetime, while others might be more advantageous to leave as part of your estate. The goal is to maximize the after-tax value of the assets passed on to your beneficiaries.
Generally, assets expected to appreciate significantly in the future hold greater gifting value from a tax perspective. Assets gifted during your lifetime are taxed based on their original cost basis. Thus, if you gift appreciated assets, such as real estate or long-held stocks, your beneficiaries could face capital gains taxes on the appreciation if they sell the assets.
In contrast, inherited property receives a “step-up” in cost basis to its current market value at the time of death. For instance, if you bequeath your family home to your children, they inherit it at its fair market value and can sell it without incurring capital gains taxes on the appreciation up to that point. They would only owe taxes on any appreciation occurring between inheritance and sale.
This principle also applies to family business interests. Gifting an ownership stake in a developing business can pass on more value to your beneficiaries than gifting a mature business. Any appreciation after the gift belongs to your beneficiaries and is not subject to your future gift and estate taxes.
Remember, if you own assets with a low-cost basis, it might be more beneficial to leave them to your heirs through your estate rather than gifting them during your lifetime.
Choose the right gifting strategy
Several strategies can efficiently transfer assets, and you may employ more than one over time. The simplest approach is leveraging the annual gift tax exclusion, which for 2024 is $18,000 per individual, or $36,000 per couple.
Larger gifts are often transferred via trusts, which allow you to direct the ultimate disposition of your gifts. You can craft a trust document to specify your intentions for the gift, set the timing and conditions for distributions, and provide a framework to guide trustees in making decisions that align with your wishes and benefit your heirs. Some trust options include:
• Spousal Limited Access Trust (SLAT): A SLAT can be an effective solution for married couples seeking to utilize their current gift and estate tax exemptions while maintaining some access to the assets placed into the trust. You make a gift of assets to an irrevocable trust, naming your spouse as a beneficiary. Your children, other descendants, and even a charity can also be named as beneficiaries if you choose. Often, the trust is structured so that the children become primary beneficiaries only after the surviving spouse’s death. With a SLAT, there is an additional income tax benefit: the creator of the trust (the gifting spouse) pays any tax on realized gains or income, allowing the SLAT’s assets to grow without the drag of taxes.
• Sale to an Intentionally Defective Grantor Trust (IDGT): A sale to an IDGT is particularly useful if you have an asset likely to appreciate greatly over time or if you own a minority interest in an asset that will eventually be sold or liquidated at a higher value. Technically not a gift, this is a sale to a trust, and you (as the grantor) continue to pay income taxes on the trust’s assets, with future appreciation transferring to the next generation. The sale is typically structured through a promissory note, which either provides you with an income stream (to the extent actually paid) or allows for further gifting through the forgiveness of loan payments.
• Charitable Remainder Trust (CRT): If you have charitable intent and want to move assets out of your estate, a CRT may be a good option. It provides you or your beneficiaries with a stream of income over the life of the trust and transfers the remaining assets to a charity at the end of the trust’s term. The amount of your contribution that is tax-deductible depends on the present value of the charitable remainder interest in the trust, as determined by an IRS calculation. This strategy moves assets out of your estate while fulfilling your charitable goals, provides a current income tax deduction, and, if gifting appreciated securities, may offer investment diversification while spreading realized gains over the income stream of distributions.
Stay aware of other pending tax considerations
TCJA reduced most federal tax bracket thresholds, and its expiration could result in a reversion to higher rates for most taxpayers. For high-income earners, the top federal tax rate may increase from 37% to 39.6%. Given this potential change, consider triggering income-generating events before the end of 2025. Such events include taking distributions from an inherited IRA, taking trust distributions, or converting a traditional IRA to a Roth IRA.
Additionally, if the TCJA expires, the deductions for state and local income taxes and real estate taxes could be reinstated. Taxpayers may want to delay itemized deductions until 2026, particularly if they reside in a high-tax state. It may also be advantageous to delay gifting appreciated property or securities to charity. By doing so, you might receive an income tax deduction equal to the full fair market value of the assets, even if your original cost was much lower. Plus, you might avoid capital gains taxes that would be incurred if you sold the assets.
Planning is an ongoing process
While future tax policy remains uncertain, proactive planning is essential. Even if you believe the TCJA sunset won’t impact your strategy, it’s important to periodically review and adjust your estate plan. Estate planning is not a one-time task but a dynamic process that should adapt based on your goals, wishes and changes in the law.
If you have questions about your particular situation or need guidance on the available strategies considering potential changes, we’d be happy to have a conversation to help you create a thoughtful and informed estate plan.
This material should not be construed in any way as investment, tax, estate, accounting, legal or regulatory advice. Any description of tax consequences set forth herein is not intended as a substitute for careful tax planning. Please consult tax counsel for advice specifically related to any and all tax consequences.
Charles R. Johnson, Wealth Director, Fiduciary Trust International is responsible for developing investment and trust relationships with families and organizations. He works closely with the tax, investment and planning teams to help clients determine optimal asset allocation and transfer strategies.
Ed Mooney, Director of Financial Planning, Fiduciary Trust International, provides goal-based financial strategies for the tax efficient and successful transfer of family wealth, planning for retirement, the sale and succession of business interests and achievement of philanthropic goals.