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Sunsetting of the Estate Tax Exemption Reduction in 2026

Sunsetting of the Estate Tax Exemption Reduction in 2026

February 15, 2024

The reduction of the estate tax exemption sunsetting in 2026 is indeed a significant concern for many individuals, especially those with substantial assets, such as service academy graduates and clients heavily invested in real estate. This looming change in tax policy has sparked discussions and strategic planning among high-net-worth individuals and their advisors.

The estate tax exemption, which determines the amount of assets that can be passed on to heirs without incurring estate tax, has been a contentious issue in tax policy debates. The Tax Cuts and Jobs Act (TCJA) passed in 2017 temporarily doubled the estate tax exemption from approximately $5.49 million in 2017 to over $11 million in 2018, with further adjustments for inflation.[1] This significant increase provided relief for many families, allowing them to transfer larger amounts of wealth to their heirs without worrying about the estate tax.

However, this increase is temporary and is set to expire at the end of 2025, reverting to pre-TCJA levels adjusted for inflation. As a result, the estate tax exemption is expected to decrease to around $6 million per individual by 2026, potentially subjecting more estates to estate taxes.[2]

For individuals heavily invested in real estate, the implications of the reduced estate tax exemption are particularly pronounced. Real estate assets often represent a significant portion of their overall wealth, but they can be highly illiquid. Unlike stocks or bonds, which can be easily sold to cover tax liabilities, real estate may need to be sold under pressure to settle estate tax obligations, potentially leading to suboptimal sales or disruptions in family business operations.

Moreover, valuing real estate for estate tax purposes can be complex and subjective, leading to disagreements with the IRS and potential legal battles. This uncertainty adds another layer of complication for estate planning.

In light of these challenges, it's crucial for individuals with substantial real estate holdings to engage in proactive estate planning strategies to mitigate the impact of the reduced estate tax exemption. This may include:

  1. Utilizing estate planning tools: Options such as trusts, family limited partnerships, and other vehicles can help reduce the taxable value of real estate assets and facilitate smoother transfers to heirs.
  2. Gifting strategies: Taking advantage of the current high exemption limits by gifting assets to heirs during one's lifetime can help reduce the size of the taxable estate and mitigate estate tax liabilities.
  3. Life insurance: Acquiring life insurance policies to cover anticipated estate tax liabilities can provide liquidity to pay estate taxes without the need to sell real estate assets.
  4. Regular review and updates: Given the changing nature of tax laws and personal financial circumstances, it's essential to regularly review and update estate plans to ensure they remain effective and aligned with one's goals.

Overall, the reduction of the estate tax exemption presents a significant planning challenge for individuals, particularly those heavily invested in real estate. By implementing proactive estate planning strategies and staying informed about changes in tax laws, individuals can better navigate the complexities of estate taxation and preserve their wealth for future generations.

[1] Source:,economic%20growth%20and%20create%20jobs.&text=The%20exemption%20continues%20to%20adjust,free%20from%20federal%20estate%20tax

[2] Source:´╗┐


Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WESTPAC WEALTH PARTNERS LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License #4128269 | 2024-168975 Exp. 02/26 | Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.