The Tax Cuts and Jobs Act (TCJA), enacted in 2017, brought significant changes to estate, gift, and generation-skipping transfer (GST) taxes, doubling the federal estate tax exemption. This change allowed individuals to shield up to $13.61 million in 2024 (or $27.22 million for married couples) from federal estate taxes. However, this elevated exemption is set to sunset on December 31, 2025, reducing the exemption by 50% unless Congress takes action. For those with substantial estates in Minneapolis, this looming deadline presents a crucial opportunity to minimize future tax liabilities by leveraging the current higher exemptions.
Understanding the Impact of the Current Estate Tax Exemption on Your Estate Plan
The current federal estate tax laws provide a unique chance for individuals to transfer significant wealth without incurring substantial tax liabilities notes Kiplinger in the article, The Clock Is Ticking on Tax Cuts: Act Now to Avoid Missing Out. With the exemption amounts set to decrease dramatically in 2026, proactive planning is essential. As the exemption reverts to pre-2017 levels (around $5 million per individual, adjusted for inflation), those who fail to act could face increased estate tax burdens. For many in Minnesota, where estate tax thresholds are lower than federal limits, this could mean a double hit from both federal and state taxes.
The Implications of the TCJA Sunset for Minnesota Taxpayers
Reduced exemption amounts in 2026 could have significant financial implications for taxpayers. Based on the 40% tax rate applied to the difference between the current and projected exemption amounts, individuals will lose approximately $2.644 million in tax-exempt transfers. This potential loss underscores the importance of proactive planning to utilize the higher exemptions before they decrease.
Key Strategies to Maximize Tax Exemptions Before 2026
One effective strategy that many Minneapolis clients use to leverage the current exemptions is establishing an irrevocable trust, such as a Spousal Lifetime Access Trust (SLAT). A SLAT allows you to transfer assets to a trust for the benefit of your spouse and other beneficiaries while removing those assets from your taxable estate. By utilizing the higher exemption amount now, you can significantly reduce your estate’s taxable value, potentially saving millions in future taxes. Read more in our article, Is an Irrevocable Life Insurance Trust the Right Estate Planning Strategy for You?
Another estate planning strategy Minneapolis clients consider is the integration of gift tax planning. The current higher exemption allows for more significant tax-free gifts, reducing the size of your taxable estate. However, with the expected reduction in exemptions, strategically gifting assets before 2026 is crucial to avoid future tax liabilities. In Minnesota, where the estate tax exemption is only $3 million, effectively reducing your estate’s value through gifts can provide substantial savings. Gifting assets to children or grandchildren through a 529 college savings plan is one strategy to consider.
Navigating Minnesota’s Estate Tax
In addition to federal estate taxes, Minnesota imposes its own estate tax on estates exceeding $3 million. This threshold is significantly lower than the federal exemption, making it even more important for Minnesota residents to engage in proactive estate planning. Although, as Phil Ruce explains in his video, My revocable trust doesn’t avoid estate taxes?, a revocable living trust alone does not act as a tax shelter, using additional strategies like strategically gifting assets in combination with a living trust, can ensure that more of your wealth passes to your heirs rather than being subject to estate taxes.
Planning for the Future: Adapting to Changes in Tax Law
As tax laws are subject to change, it’s crucial to stay informed and adaptable. The sunsetting of the TCJA’s provisions in 2026 will bring lower exemptions and potentially higher tax liabilities. Working with a knowledgeable Minneapolis estate planning attorney at Stone Arch Law Office can help you navigate these complexities, ensuring your estate plan remains effective in minimizing taxes and preserving your wealth for future generations.
Additionally, consider incorporating charitable contributions into your estate plan. These contributions can reduce your taxable estate while supporting causes that matter to you. By donating to qualifying organizations, you can achieve both philanthropic goals and tax savings.
Take Action Now: Consult with a Minneapolis Estate Planning Attorney
With the clock ticking down to 2026, now is the time to review and optimize your estate plan. Failing to take advantage of the current higher exemptions could result in significant tax liabilities for your heirs. Whether you’re looking to establish a trust, maximize gift tax exemptions, or explore other estate planning strategies, it’s essential to consult with an experienced Minneapolis estate planning attorney.
At Stone Arch Law Office, our team is here to guide you through the complexities of estate tax planning. We’ll help you navigate both federal and Minnesota estate tax laws, ensuring your estate plan is tailored to your unique needs and goals. Book a call with us today to secure your financial legacy and protect your family’s future.
By understanding and leveraging the current tax laws, you can take meaningful steps to minimize estate taxes and maximize the wealth passed on to future generations. Don’t wait—plan now to avoid the potential pitfalls of the 2026 sunset.
Key Takeaways
- The TCJA’s Sunset: Create or update an estate plan now before the exemption amounts for estate, gift and GST taxes decrease in 2026.
- Impact on Taxpayers: Failure to utilize the current exemption could result in a significant tax liability, with potential losses amounting to over $two million.
- Strategic Planning: Establishing an irrevocable trust, such as a SLAT, can be a savvy move to maximize the current exemptions and protect assets from future taxes.
- Professional Guidance: Work with a tax professional and an attorney to navigate the complexities of estate and gift tax planning effectively.
