How to Prepare for the 2026 Estate Tax Exemption Sunset

Minnesota families with substantial assets – pay attention. Major estate tax changes are coming in 2026 that will affect high-net-worth families and individuals unless Congress acts.

Recent years gave unusually high estate tax exemptions, allowing more tax-free inheritance transfers. But these Tax Cuts and Jobs Act provisions will sunset in 2026, plummeting exemptions. This means more Minnesota estates will face taxation again soon.

As a result, proactive estate planning strategies merit revisiting to optimize inheritance and tax efficiency outcomes before the deadline arrives.

In this post, we will analyze key changes individuals with sizable assets or robust life insurance policies should factor into strategic decisions over the next few years.

Federal Estate Tax Law Background

In 2017, the Tax Cuts and Jobs Act (TCJA) essentially doubled the federal estate tax exemption threshold from $5.6 million per person to $11.18 million per person. The increased exemption amount also applies to federal gift and generation-skipping transfer taxes at death.

Moreover, the exemption receives annual inflation adjustments to avoid erosion from rising asset values over time. The federal estate, gift, and generation-skipping transfer tax exemption now sits at a record $12.92 million per person ($25.84 million for a married couple).

However, the temporary TCJA tax provisions will expire after 2025. That sets the stage for a return to lower pre-2017 estate tax exclusion levels in just two short years.

The 2026 Federal Estate Tax Sunset

When the TCJA sunsets on January 1, 2026, the federal estate tax exemption is slated to revert close to 2017 thresholds.

Rather than losing the full inflation-adjusted amount (which could approach $14 million per person by 2026), the exemption will reportedly reset around $7 million per person – though the exact figure remains subject to change.

Such an abrupt drop effectively cuts the current estate tax exclusion in half overnight. That translates into millions of dollars in potential extra estate taxes for high-net-worth individuals and married couples in Minnesota and elsewhere.

Unfortunately, given Congressional gridlock on tax policy legislation, counting on federal action to maintain higher exemptions could prove overly optimistic today. The clock is ticking.

Act Soon to Shelter Assets Under Today’s Higher Exemptions

The sunset gives families a key chance to lock in today’s $12.92 million estate tax exclusion before it drops. Any future inflation adjustments before 2026 further raise what you can shield.

We encourage high-net-worth Minnesotans to meet with an estate attorney soon to explore strategies tailored to their situation. This minimizes future tax impacts. But you must act before the 2026 deadline nears.

Contact our office to examine options for legally transferring more wealth tax-free while current laws allow substantial exclusions. Don’t wait until late to shelter savings. The sunset timeline requires plans to be made well before 2025.

Making Substantial Taxable Gifts Before 2026

Because the IRS calculates estate taxes based on a person’s total remaining exclusion amount at death, making substantial taxable gifts up to federal limits before 2026 can cement more significant exclusions – even if national exemption thresholds later decrease.

• For Example: An $8 million taxable gift made in 2024 when the federal exemption amount remains highly favorable preserves that $8 million exclusion even if the estate tax exemption subsequently falls to $7 million in 2026 and beyond.

In fact, lifetime taxable gifts draw upon impending federal estate tax exemption reductions at the sunset of temporary TCJA tax cuts.

To illustrate, someone could make the maximum $12 million taxable gift today out of an available $14 million exemption, then watch their remaining $2 million exemption sink close to $0 million after the scheduled 2026 TCJA expiration and reset.

Additionally, 12 states, including Minnesota, levy separate estate or inheritance taxes – sometimes with exemption thresholds below current federal levels.

Making major taxable gifts to irrevocable trusts or individuals in 2023 and 2024 while federal exemptions stay elevated could thus mitigate state estate tax exposure. Every little bit helps when planning.

Leveraging Irrevocable Trust Strategies Before 2026

Beyond outright gifting up to annual and lifetime gift tax exemption limits, several specialized irrevocable trust strategies also warrant closer inspection between now and 2025.

These strategies depend on family goals and assets involved and may include the following estate planning tools.

Spousal Lifetime Access Trusts (SLATs)

An irrevocable trust structure is created for a grantor’s spouse. SLATs are funded using some or all of the grantor’s $12+ million gift tax exemption. The grantor names their spouse as a primary discretionary trust beneficiary to access gifted assets indirectly over their lifetime. However, divorce or premature death of the beneficiary spouse presents notable risks to monitor.

Generation-Skipping Trusts (GSTs)

An irrevocable trust vehicle focused on benefitting grantors’ grandchildren and beyond while leveraging gift and generation-skipping transfer (GST) tax exemptions before 2026. Properly structured GSTs avoid estate taxes at each successive generation.

Late Allocation of GST Exemption

Review your existing irrevocable trusts to identify opportunities to allocate any remaining federal GST tax exemption before 2026. Doing so, grandfathers trusts into higher exclusions.

Exploring Charitable Trust Opportunities

Beyond family-centric strategies, Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs) also deserve closer inspection between now and 2025.

Both vehicles aim to reduce beneficiaries’ estate and gift tax liability when funded before exemption sunsets take effect.

In exchange, qualified non-profits receive predetermined trust disbursements for a set period – with the balance passing to trusts’ named individual beneficiaries in the future. Charitable trusts seamlessly integrate tax-savvy wealth transfer and philanthropic objectives in the right circumstances.

The Time For Proactive Estate Planning is Now

If your family has a taxable estate over $12 million, pay attention to upcoming federal tax changes. Exemptions will plummet by 2026 unless Congress intervenes. Given the high stakes for inheritance impact, examining existing plans makes sense.

Contact our Minnesota estate attorneys at Safe Harbor Estate Law to map out how shifting exclusions affect your family’s wealth transfer goals.

Proper planning can still protect your legacy if exemptions fall. But you must act decisively while current elevated tax shields remain available. Don’t wait until the last minute.