RIAs better get ready in 2023 for a shocking 2026 wakeup call -- and a killer opportunity -- as '$26-million' estate tax exemption expires

If your client’s taxable estate is $26 million or less – for a married couple -- then they are sitting pretty right now from an estate tax perspective if they were to die suddenly.

They will owe a dreamlike federal estate tax – zero. 

The dream becomes a nightmare for millions of high-net-worth investors on Jan. 1, 2026 and becomes a big problem for reactive RIAs who fail to help clients take action now.

As a refresher for advisors, the federal estate tax is 40% on the estate value that exceeds the exemption amount – the amount individuals can give to others without a transfer tax. 

Getting estate planning done in 2024 and 2025 will be like calling an accountant on April 14th – only much worse. Lawyers will be swamped. 

Even now, it can take lawyers months to execute simple solutions and a year or more for bigger plans. 

Asset values will likely rise in the coming years, and time is on your client’s side when acting early. The bad news is that most RIAs won’t get paid extra for doing this extra work, and it is work on many levels. 

Not only is it a complex topic, but it's a morbid one. Worse, the solutions often call on the investor to use trusts, which tacitly
involves yielding control over assets to a trustee. 

Yet it’s also the ultimate value-added act of fiduciary stewardship. There is rarely a chance to achieve a 40%+ immediate return for clients with no increase in portfolio risk. It’s the big answer to stemming fee compression and defining a value
proposition.

Be aware

All advisors should be aware of some key considerations: 

First, the Generation-Skipping Tax exemption is currently coupled with the lifetime exemption amount. This means that if you would like to give money to grandchildren or anyone over 37.5 years your junior, there is an additional 40% tax on the transfer.

Second, the increased exemption is “use it, or lose it.”  In other words, any amount of the increased exemption (the difference between the amount available today and the amount available on January 1, 2026) not utilized before the higher limit sunsets will be lost for future use, which creates an incentive to utilize as much of the increased exemption as possible today. 

Fortunately, the IRS has already declared that the use of the increased exemption before it sunsets will not be reversed if you die in 2026 or later.

What set this estate tax moment in motion was the 2017 Tax Cuts and Jobs Act (TCJA), which was a temporary treat designed to ease the estate tax burden for people with large estates.

It covered amounts beginning at $10 million per person. This amount has increased with inflation to $12.92 million per person as of 2023. 

But, like all parties, this one is coming to an end.  The exemption amount – the amount that individuals can give to others without a transfer tax – is set to revert to pre-2017 levels, which will be somewhere between $6.8M to $7.5M depending on inflation when the law sunsets at the end of 2025.

The exemption should continue to increase by inflation after that – or at least until a regime change and a new law is passed.

What to do

Advisors should understand their clients’ total net worth – not just the money they can manage and get paid to service.  

If clients have estates approaching $14 million or greater, now is the time to educate them on the benefits of doing estate planning.

As an advisor, if you are familiar with the estate tax rules and have a reasonable understanding of the techniques to use one’s exemption, then it’s worth having that conversation with your clients. 

Even if you’re unfamiliar, advisors can begin collecting the information to identify the appropriate questions and opportunities and find a well-qualified estate planning attorney (ideally an ACTEC fellow) to refer your client.  

After the transactions are complete, there may be administration that’s necessary where an advisor can add value. 

Talk the talk

Today’s planning techniques offer tremendous flexibility, including specific escape hatches for people reluctant to put their wealth into irrevocable trusts.  

Consider Spousal Lifetime Access Trusts (SLATs) for married couples with healthy relationships and Domestic Asset Protection Trusts (DAPTs) or hybrid DAPTS for unmarried people or people who do not have healthy relationships, if appropriate.  

Ensure the trusts have flexibility, including change of situs [jurisdictional] provisions, decanting provisions and the ability to
remove and replace the trustee at any time. 

Use limited liability companies, LLCs, inside the trust to create more control for the investment manager, which can be the settlor and, if structured properly, generate fair market value (“FMV”) adjustments.

Take this opportunity to talk with your client about their goals within the context of this change. 

Estate planning should never be a set-it-and-forget-it exercise — with a significant regulatory change on the horizon; now is the time to drive home the value of engaging in strategic planning with a trusted advisor regularly.

Steve Lockshin, executive chairman and co-founder, Vanilla / co-founder, AdvicePeriod. Vanilla is is estate planning and wealth management software. He is a founder and principal of AdvicePeriod and former chairman of Convergent Wealth Advisors (formerly LydianWealth Management), a company he founded in 1994.