Many of us aspire to leave behind a financial legacy to safeguard those we love and give back to causes we care about. However, to preserve that goal, financial advisors must prepare for any tax law changes or possibilities that could impact their clients.
One of the most significant changes Americans will soon see is the sunsetting of tax laws under the Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA nearly doubled the lifetime estate and gift tax exemption from $5.6 million for individuals and $11.18 million for couples to $11.18 million for individuals and $22.36 million for couples, indexed for inflation after 2018. Currently, the exemption stands at $12.92 million per person and $25.84 million for a married couple.
However, lawmakers have chosen to sunset the TCJA’s Federal estate tax exemption in January 2026, resulting in a roughly 50% reduction over the next few years depending on inflation. Individuals could see their federal estate tax exemption lowering from $11.18 million to roughly $7 million while couples could see a reduction from $22.36 million to a combined exemption amount somewhere in the range of $14 million when factoring in inflation.
In anticipation of this drastic change, advisors should be reviewing estate plans with clients now with the goal of implementing an appropriate course of action in less than three years. This is particularly true for clients who may not have been impacted by estate tax law changes in the past under the current exemption amount but will be in 2026 due to this lowered exemption amount and the potential for future growth.
With the sunsetting of the estate tax exemption creeping ever closer, here are some strategies for how financial advisors can best prepare clients for this new paradigm.
Review The Complete Estate Plan With An Estate Attorney
Many Americans go years without consulting an attorney regarding updates to their estate plans. Without a proper estate plan, you lose sight of the value of your assets and may be completely in the dark regarding how they may have risen over the years. For example, a Baby Boomer who has not updated their estate plan in 20 or 30 years could see an enormous change in the value of their assets, possibly bringing them across the $7 million estate tax exemption threshold. Failure to address this change could risk their financial security in retirement as well as the assets they intend to leave behind for their loved ones.
Create A Strategy That Makes Sense With The Information You Have
An experienced financial advisor can review a client’s estate plan and create an effective strategy to efficiently move assets out of their estate. Ideally, the advisor should meet with the client, the estate attorney, and the client’s tax professional to review the client’s goals and time horizons to determine the best plan of action. There are several optimal strategies, including leveraging an annual federal gift tax exclusion, which as of 2023, is up to $17,000 per individual. This allows each client to give up to $17,000 each without the money being counted toward their estate plan.
The use of well-designed trusts are generally a main facet of estate planning in the US today. There are various types of trusts which can accomplish a variety of things for clients:
• Generate income and access to assets for living expenses
• Reduce taxation on the value of an estate based on the lifetime exemption amount
• Protect assets from creditors
• Keep a family’s financial assets and affairs private upon death
While this isn’t an exhaustive list, it does point to many of the options which should be considered as part of a family’s overall financial objectives. Related to the 2026 estate tax law changes, many families are concerned with reducing the taxation of any assets which would sit above the current exemption amount that is set to fall in a few short years.
Other options include allocating to a 529 plan, which allows clients to put aside money for the education of their loved ones. The plan, which was previously only allocated for college, can now be used for kindergarten through 12th grade private education, graduate coursework and more. Clients also have the option of accelerating gifting by giving up to five years of contributions in one year per individual.
For those seeking to pass on assets to grandchildren at death versus gifting during their lifetimes, clients could consider creating a generation-skipping trust, which would allow them to create a separate fund for grandchildren under the age of 37.
Another avenue for adjusting assets is charitable initiatives, which not only leave a positive legacy for those in need but may decrease the taxes on a client’s estate. Advisors can explore and define the various options for charitable giving including annual lifetime gifts and creating a Charitable Remainder Trust among others. Advisors should regularly discuss with clients how much they should be donating to noteworthy charities in order to decrease estate taxes.
Finally—apart from an estate planning strategy but related from an overall tax perspective—a more immediate strategy to potentially reduce lifetime paid income taxes and allow heirs to inherit tax-free assets can be made by taking advantage of Roth IRA conversions. This strategy can be effective for recently retired individuals who have not yet begun collecting social security or taking required minimum distributions from their retirement accounts.
With the above in mind, it is important to note that there is no one-size-fits-all approach. Advisors should work closely with clients and their estate attorneys and tax professionals to thoroughly understand their goals and objectives and create a plan that maximizes the value of their wealth while being mindful of impending tax changes. Each plan should be fully customizable and flexible to fit an individual or their family’s needs as they evolve.
The estate tax exemption change may have a massive impact on many American families in 2026, particularly those who did not make any amendments to their estate plans and stand to be negatively affected in turn. The stark truth is that if advisors do not prepare their clients for this adjustment now, investors could find their assets unnecessarily exposed to a 40% Federal estate tax, a development which could have lasting repercussions for anyone looking to pass their wealth on to subsequent generations.
With roughly three years to prepare, we as advisors are having conversations with our families now around:
1. Defining their objectives related to generational wealth planning
2. Coming up with customized strategies to implement these changes, in light of the coming significant changes to estate planning exemptions
3. Involving relevant other trusted advisors such as CPA’s and Estate planning attorneys to execute these plans
While we aren’t urging clients to rush into a plan we believe the time is now to begin discussing strategy and decision making that can have a huge financial impact for their family’s futures.
Kevin O’Regan is an East Coast based senior wealth advisor at Kayne Anderson Rudnick with more than 16 years of industry experience.