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Start Planning Today for 2026

01/09/2024 - Effective Saving, Financial Planners, Financial Wellness & Life Planning, Investing for Life

Man at desk holding a pen in one hand and pointing toward 2026 with the other

For several years now, we have been talking about the pending expiration of the Tax Cuts and Jobs Act (TCJA) of 2017 and here is why you need to pay attention to this as well.  Since December 2017, we have enjoyed federal estate and gift tax exemption at doubled from $5 million to an inflation adjusted amount of $13.61 million today.  On December 31, 2025 this amount is going to be approximately cut in half.  For higher net worth families, failing to take advantage of the current rules may cost their ability to save estate tax and potentially sacrifice millions in tax-free gifting.

The expiration of the TCJA is not all about the federal estate and gift tax exemption amounts either.  It means we will revert back to pre-2018 income tax brackets, lower standard deduction amounts and increased exposure to Alternative Minimum Tax (AMT).  While it is difficult to say if the income brackets will remain the same adjusting for inflation, we can say the tax rates will revert back to what they were before 2018.  Additionally, we will see many more people itemizing their deductions as the standard deduction amount will be drastically reduced.

If you have not taken action as of yet, all is not lost. You still have time to take advantage of high exemption amounts while preparing for higher income tax rates in the future.  Here are a few noteworthy ideas:

  • Lifetime Gifting – Those with sizable estates (greater than $25 million) should consider making substantial gifts before the change.  Those with smaller estates ($7mm – $25mm) should explore annual gifting strategies or other gifting strategies to remove assets from the balance sheet.  Annual gifting ($18,000 for 2024) may not seem like a lot when it comes to estate planning, but it can become a significant amount over time.  In certain situations, one should consult their tax advisor to properly file a gift tax return form 709.
  • Intra-Family Loan Forgiveness – if you are holding promissory notes from prior estate planning transactions or loans to family members, and if your intent is to one day forgive some or all of the loan(s), then you should consider loan forgiveness before 2026 as this is considered a gifting event.
  • Strategic Gifting – Rather than using some lifetime exemption equally between spouses, (up to $13.61mm) consider using the entire gift exemption of one spouse today.  This will enable the other spouse to use their lifetime exemption amount sometime after 2025.
  • Roth Conversions – Accelerating income via Roth Conversions while at favorable rates can add tax diversification to your retirement income, lower future required minimum distributions, and create a tax efficient vehicle to transfer assets to the next generation.
  • Alternative Minimum Tax (AMT) – Millions of tax payers are going to be surprised to owe AMT as the exemption amounts will be massively reduced after 2025.  To prepare, one will want to reduce incentive stock options, private activity bond interest, foreign tax credits, passive income and losses, and net operating loss deductions over the next two years.
  • Spousal Lifetime Access Trust (SLAT) – Married couples can capture the benefits of the current gift tax exclusion while also receiving income distributions. The first spouse transfers assets to an irrevocable trust for the second spouse’s benefit, which essentially removes these assets from the grantor’s estate, avoiding estate tax.  Additionally, the second spouse in this example could establish a SLAT for the first spouse to essentially remove $27.22mm from the estate in today’s terms.  One should consult with an experienced estate planning attorney.
  • Charitable Giving – Consider donating appreciated assets to charities to avoid capital gains and receive a tax deduction.  Contributions to charitable giving vehicles such as donor-advised funds, charitable gift annuities, charitable remainder trusts, or private foundations may be appropriate.
  • Irrevocable Life Insurance Trusts (ILIT) – Utilization of life insurance is a great asset substitution strategy to settle one’s estate tax obligations.  Since the trust is the owner and beneficiary of the life insurance policy, it stays out of your estate and out of the estate of your loved ones.

 

These are just a few ideas how one can eliminate or significantly reduce their expose to an estate and income tax problem in the near future.  Note that some of these ideas take a fair amount of discussion and coordination with your team of advisors, so there is no better time to plan for 2026 than right now,  at the beginning of 2024.  Please talk to your WesBanco advisor today to engage our financial planning services to help you decide what is best for you and your family.

 

Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.

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