Today at Cardinal Advisors, we’re diving deep into the federal estate tax and its impending changes, especially considering what’s on the horizon after the 2026 election and the Tax Cuts and Jobs Act of 2017. This legislation, effective since 2018, includes a sunset provision that will revert taxes to 2026 levels unless Congress intervenes. Let’s break down the current law and why it matters.
Estate Tax Exclusion Explained
The federal estate tax exclusion amount is crucial—it’s the threshold below which estates aren’t taxed. In 2025, this exclusion stands at nearly $14 million per person. This means estates valued at $14 million or less pay no federal estate taxes. For couples, this exclusion effectively doubles to around $28 million. However, by 2026, under current law, this exclusion is expected to drop significantly to approximately $7 million. This reduction could impact many affluent families, prompting concerns about future tax liabilities.
Who Needs to Worry About Estate Taxes?
While these numbers may seem distant for some, they’re critical for anyone with substantial assets or those planning for intergenerational wealth transfer. If you anticipate your estate growing significantly over the years or inheriting substantial wealth, understanding and planning for estate taxes is essential.
Historical Context and Future Implications
Reflecting on historical changes, such as the exclusion amount’s increase from $600,000 in 1991 to today’s levels, underscores the evolving landscape of estate taxation. The potential return to lower exclusion amounts raises concerns similar to those faced by families in earlier decades, necessitating proactive planning.
State-Level Considerations
It’s also vital to note that 17 states and Washington D.C. impose their own inheritance taxes, often with lower thresholds than federal requirements. These state taxes can impact smaller estates differently, highlighting the need for tailored estate planning strategies regardless of federal changes.
A Solution: Leveraging Life Insurance
One effective strategy to mitigate estate tax burdens involves using life insurance policies. Specifically, second-to-die or survivorship policies can provide liquidity to cover estate taxes without liquidating assets or compromising family legacies. Here’s how it works:
- Example Scenario: Joe and Alice, aged 67 and 58, face potential estate tax challenges due to their combined assets nearing the exclusion threshold. By establishing an Irrevocable Life Insurance Trust (ILIT) and funding it with premium payments over a limited period, they ensure that a million-dollar policy will cover future tax liabilities upon the second spouse’s passing.
- Benefits of ILIT: An ILIT keeps life insurance proceeds outside of the estate, thus preventing them from being subject to estate taxes. This strategic use of life insurance can safeguard family businesses, farms, or other assets intended for future generations.
Conclusion
As we prepare for potential changes in estate tax laws, staying informed and proactive is crucial. Whether you’re currently above the exclusion threshold or planning for future growth, understanding these dynamics and exploring solutions like life insurance can ensure your legacy remains intact for generations to come.
For more detailed insights and examples, please refer to our show notes or visit our website. Stay tuned as we continue to explore comprehensive estate planning strategies at Cardinal Advisors.
