2026 is still a bit distant, but high-net-worth individuals have crucial decisions to make regarding estate planning. A colossal shift in tax reforms may be undertaken in 2026. The current estate tax exemption of $13.61 million per person is set to expire at the end of 2025, potentially dropping to approximately $7 million in 2026. This impending change is a cause for concern for all high-net-worth people who wish to secure their financial future. The IRS's "use it or lose it" policy means that time is of the essence when utilizing your assets. Here are some important strategies that may need to be adopted in 2025.
One of the simplest ways to take advantage of the current exemption is through outright gifting. This strategy allows you to pass assets to your heirs free from tax and minimizes the size of your estate tax responsibility. Annual exclusion gifts allow you to give up to $17,000 per recipient without affecting your lifetime exemption. For married couples, this amount doubles to $34,000 per recipient. The annual exclusion amount is adjusted for inflation, so it may increase in future years. You can also make larger gifts using a portion of your lifetime exemption.
There are certain considerations which should be made when deciding whether or not to give large gifts. Any gifts above the annual exclusion amount will shave dollars off your lifetime exemption, and the gifted asset becomes the property of the recipient. You can’t dictate what the recipient chooses to do with the gift once it belongs to them, nor can you revoke the gift if you don’t like what they do.
For those desiring a higher level of planning and a little more control, several choices are available in the sphere of irrevocable trusts. These trusts enable you to enjoy some tax advantages but you are not fully stripped of your control on the assets. Simple generic irrevocable trusts are typically useful, but more sophisticated structures can provide even more options and advantages.
These trusts are critical in estate tax planning and wealth transfer strategies. There are many variants of these powerful tools, but each one is intended for particular purposes. For example, Grantor Retained Annuity Trusts (GRATs) enable you to transfer the appreciation of the assets to the beneficiaries with a minimal amount of gift tax repercussions. Intentionally Defective Grantor Trusts (IDGTs) offer a unique advantage: you are taxed on the income received by the trust, thus making tax-free gifts to your beneficiaries. For married couples, Spousal Lifetime Access Trusts (SLATs) allow you to provide for your spouse and also minimize your estate’s tax burden.
When considering an irrevocable trust, it is essential to understand the reasons for establishing the trust, your family circumstances, and the type of assets you have. As with all trusts, these are usually fixed once created, so it’s critical to receive professional advice and plan carefully. Financial advisors, estate attorneys, and accountants should be consulted before finalizing an irrevocable trust.
When it comes to the selection of which assets should be transferred, potential appreciation should be considered a high priority. If you can transfer these assets out of your estate now, then the future appreciation can be protected or avoided from estate taxes. However, it is imperative to understand how to navigate these processes to achieve the most benefits with the least drawbacks.
Focus on transferring assets that may appreciate significantly, such as investment real estate, business interests, or growth stocks. When transferring partial interests in assets like real estate or business entities, you may have the opportunity to claim valuation discounts for lack of control and marketability. These discounts can help you transfer more assets using your lifetime exemption.
Timing the transfer of assets is also very important. It’s crucial to act now to take advantage of the current levels of exemption and ensure that transferred assets have enough time to grow. In most cases, assets with appreciation potential should be transferred early enough so that the future appreciation is out of the taxable estate. Transferring early can also be used to ensure that the benefits of your wealth transfer are maximized while at the same time minimizing the taxes. However, always consider your personal financial requirements and the market trends before making your move.
Failing to act before the 2026 exemption sunset could have significant consequences. More of your estate could be included in the estate taxes at a rate of up to 40%, which means less would go to the next generation. That could put a ceiling on their future financial possibilities and opportunities. Failure to act now results in forfeiting a chance to engage in the tax-favored wealth transfers which may not be available after 2025.
Legislation is still under discussion, so it’s necessary to know what changes may be implemented in the future. For example, there is talk of a new tax-exempt annual gift of $50,000 per donor which may offer further opportunities. Also, be sure to monitor possible shifts in tax rules governing capital gains on gifts or inheritance since these changes may affect your plans.
At PFW Advisors, we're committed to helping you navigate these complex decisions and secure your financial legacy. Don't let the 2026 estate tax exemption sunset catch you unprepared. Contact us today to start planning for tomorrow.