3 ways to maximize your estate tax exemptions before the sunset

The potential sunset of the lifetime estate and gift tax exemption has added new urgency to estate planning.

In 2017, the Tax Cuts and Jobs Act doubled gifting exemptions from $5 million to $10 million, with indexing for inflation. Under the act, the eligible lifetime exemption has grown to $13.99 million. But that number could be halved on January 1, 2026, resulting in an exemption of about $7 million per individual.

The potential 2026 exemption sunset is just months away. If you want to take full advantage of the increased exemptions as they exist today, the time to start planning is now. With the right strategies, you can move growth out of your estate, reduce your estate’s overall tax liability and better prepare for your beneficiaries’ futures.

Here are three strategies you can use to prepare for the estate tax exemption sunset:

Spousal lifetime access trust

A spousal lifetime access trust (SLAT) is an irrevocable trust that allows indirect access to assets while excluding them from your taxable estate. Proper planning for a SLAT can help you make the most of the current exemption before the sunset, allowing you to transfer a large amount of future growth out of your estate tax-free, while still providing your spouse access to those funds. 

For example, consider a couple with a $20 million estate who are concerned about future estate taxes. Spouse A could transfer $13.99 million into the SLAT for the benefit of spouse B, effectively removing those assets and any future appreciation from their taxable estate. However, spouse B could still access the trust assets if needed, maintaining financial flexibility.

This strategy reduces spouse A’s taxable estate to $6.01 million, significantly lowering potential estate tax liability. By locking in the higher exemption amount before 2026, the couple preserves more wealth and minimizes the impact of future estate tax changes.

There are three important considerations you may face when establishing a SLAT:

• If both spouses want to create a SLAT, the trusts must be nonreciprocal. Each trust would need to be distinguished, either by different assets or by different rights.
• Indirect access to the trust will be lost when the beneficiary spouse passes away. To effectively plan for a SLAT, you’ll need to be sure there will be sufficient assets left for the surviving spouse without it.
• Divorce can create significant complications for a SLAT, so be sure to address a possible separation when creating the trust document.

Intentionally defective grantor trust

An intentionally defective grantor trust (IDGT) allows a transfer of assets to be effective for estate tax purposes without affecting income tax treatment. With an IDGT, you can transfer wealth out of your estate through gift or sale. A sale effectively freezes the value of the transferred assets without impacting your exemption.

For example, assume a taxpayer has a $20 million estate and wants to reduce their future estate tax liability while maintaining some control and income from their assets. They could establish an IDGT and sell $13.99 million worth of appreciating assets to the trust in exchange for a promissory note. The IDGT is structured so that it is excluded from their estate for estate tax purposes, but they continue to pay income taxes on the trust’s earnings, allowing the trust to grow tax-free for the beneficiaries.

This strategy freezes the value of the transferred assets in the taxpayer’s estate while shifting future appreciation to heirs outside the estate.

Using an IDGT also gives you double benefits for your planning: 

• Growth of value in the IDGT is higher since the assets don’t have to be decreased by income tax every year from the trust side. And to the extent that those assets grow in value, that growth remains outside of your estate.
• An IDGT also allows you to reduce your remaining estate via an income tax “burn.” As the grantor, you would be responsible for paying income tax on the trust itself out of assets includable in your taxable estate.

To maximize this strategy, it’s crucial to watch your cash flow.

Don’t underestimate the potential tax liability you’ll face when paying tax on income earned by the trust. During planning, make sure you’ll have the liquidity you need available.

Irrevocable life insurance trust

An irrevocable life insurance trust (ILIT) can help you manage your life insurance policies and allocate benefits.

While it’s not an effective vehicle for moving growth out of your estate, it can help you avoid the potential estate tax consequences of owning life insurance policies directly. The ILIT is separate from your estate and, therefore, not subject to estate tax when it pays out.

An ILIT also gives you more control over your policy’s proceeds, as the terms of the trust allow you to dictate how the benefits will be distributed.

The primary consideration for these trusts is that they require a long-term funding plan for how you’ll pay the premiums. Typically, these trusts are paired with an annual gifting strategy, allowing you to take advantage of the annual gift exemptions while draining your taxable estate. However, you’ll need to make sure that the annual gift tax exemption per beneficiary is sufficient to cover the premium or else you could potentially be making annual taxable gifts that reduce your remaining exemption.

How Wipfli can help

Wipfli’s estate planning team can help you navigate the strategies you need to maximize your exemption before the sunset. Our experienced professionals take the time to understand the unique needs of your estate, applying proven tools and the latest knowledge of regulations to help you achieve your vision of the future.

Contact us to learn more about how we can help you preserve your financial legacy.