The Big Estate Tax Exemption Cut Is Just One Planning Trend to Follow

What You Need to Know

The estate tax exemption has effectively never been lowered — let alone slashed — but that outcome seems increasingly likely.
FTI's Scott Small says there are other key developments to be aware of.
These include innovative uses of trusts to help families address problems with addiction and a growing ability to modify irrevocable trusts.

Advisors serving high-net-worth clients likely know that the historically generous estate tax exemption established by the 2017 tax overhaul is on track to sunset at the end of 2025.

Under the law, the exclusion amount for estate, gift and generation-skipping transfer tax purposes was increased from $5 million to $10 million, and it was indexed for cost-of-living adjustments starting from 2010. For people who die in 2023, the exemption amount will be nearly $13 million. For a married couple, that comes to a combined exemption of a little less than $26 million.

This state of affairs is now more or less common knowledge among the advisor population serving high- and ultra-high-net-worth clients, explains Fiduciary Trust International’s Scott Small.

What many advisors may not appreciate, Small says, is the hugely disruptive effect this sunset provision could have on wealthy Americans’ legacy giving plans — and how the time to take action to prepare clients for this change is already upon us.

Small recently joined FTI as trust counsel in its Radnor, Pennsylvania, office, following a long-term stint at Wells Fargo, where he worked in both the wealth and investment management divisions as well as in the firm’s private bank. According to Small, it is a particularly interesting (and busy) time to have taken on the new role.

Estate Exemption Cuts Incoming

As Small points out, the estate tax exemption has only been lowered once in recent history — back in 2010, when both the estate tax and exemption were effectively eliminated for one year due to a quirk in prior legislation from 2001. Despite that fact, Small says, a big reduction in the exemption seems increasingly likely, given the significant divisions in Congress and the “simple power of inertia.”

“The estate tax exemption has effectively never been lowered,” Small says, “but in my opinion that outcome seems increasingly likely, and it’s going to have a big impact on clients when it happens.”

Critically, the increase in the exclusion only applies to estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026, and to gifts made during that period. As noted, this provision sunsets in 2026, meaning the exclusion will go back to $5 million per person, indexed for cost of living.

According to Small and others, it is hard to overstate the importance of the 2026 sunset provisions when it comes to achieving optimal estate planning outcomes for clients. Put simply, clients have only a little more than two years to take advantage of the doubled exemption.

What to Do Now

Crucially, a client doesn’t need to die to take advantage of the historically generous exemptions. Rather, they simply need to enact some of the strategies that can move their wealth out of their own estate — and ensure such strategies are appropriately documented and supported from a legal and regulatory standpoint.

As Small explains, married clients with joint wealth of $10 million or below face a lot less uncertainty than those with wealth of $15 million and above. For couples (or individuals) with this degree of wealth, the next two years present a big opportunity to achieve tax-efficient giving, the likes of which may not present itself again in their lifetime.

“For those folks in that $15 million-plus area, they really should be starting to think about what kind of giving they may want to do now,” Small says. “There are a lot of different tools they can lean on.”

If the intention is to maintain the wealth within the family, there are many different types of trusts to lean on, some revocable and some irrevocable. Just a few to mention are spousal lifetime access trusts, irrevocable life insurance trusts and generation-skipping trusts, among many other options.

As Small explains, those with charitable intentions also have a lot of options, from charitable remainder unitrusts to charitable lead annuity trusts and charitable gift annuities. All of these are growing in popularity.

Other Legacy Planning Trends

While the 2026 “estate tax cliff” is the top trend he is tracking, Small says there are other key developments for advisors and their clients to be aware of.

“For example, we are having a lot of discussions with clients about their non-tax focused rationales for utilizing trusts,” Small says. “One challenging but rewarding area of the practice is working with special needs trusts and families who have, for lack of a better phrase, been dealt a bad hand by life.”

As Small explains, such trusts are often established in the wake of a debilitating injury or accident that is found to be the fault of a third party. While supporting clients facing such a burden can be emotionally challenging, it is also incredibly meaningful to be able to help families navigate such a difficult time.

“Often, these are clients who come to us because they may have gotten a [settlement or insurance] check for more money than they have ever had to deal with before,” Small says. “They can be angry and suspicious because of what they have been through, so helping these clients means dealing with emotions.”

Another difficult trend Small sees emerging is the growing use of incentive-based trust vehicles as a means of helping families combat addiction in the younger generation — often involving opioids. In such cases, Small explains, the giving generation can create some specialized trusts that require negative drug tests or attendance at rehab facilities in order for payments to the next generation to proceed.

In other cases, Small explains, payments coming out of trusts can be made contingent to the next generation maintaining gainful employment or achieving some other goal that the giving generation wants to see.

“Throughout all of this, the advisor can really play an important role in facilitating difficult conversations and trying to find solutions,” Small says. “Again, this work can be emotionally challenging, but it’s so rewarding when you are able to help these families.”

How Trusts Are Changing

Small further notes that the general understanding of “just how irrevocable irrevocable trusts are” is quickly changing across the country, thanks to legislative action at both the federal and state levels.

“The exciting thing is that we are finding there is more flexibility than ever before to make adjustments to irrevocable trusts that we might have previously viewed as out of bounds,” Small explains. “You still can’t violate the material purpose of the person who created the trust, of course, but things like changes of trustees, early terminations of trusts and playing around with some of the incentive provisions are all possible.”

Importantly, Small says, clients can do a lot of this stuff non-judicially — i.e., without going to court — as long as all the interested parties are on board.

“Generally, folks are good at getting on the same page, but not always,” Small notes. “We had a big case recently here in Pennsylvania where some beneficiaries wanted to insert a provision allowing them to remove the trustee at will. As you can imagine, consensus was not achieved there, and it went all the way to the Pennsylvania Supreme Court, and they ruled for the trustees.”

One important outcome from this trend, Small adds, is the increasing ability to “decant” one trust into another.

“This is a key part of that added flexibility,” Small says. “You effectively now have the ability to pour one trust into another when that original trust sees a change in circumstances that means it doesn’t work as intended anymore. You can create a new trust, and through a court process, you can decant the assets from the old trust into the new trust. There are rules to follow, but the courts are increasingly amiable to this.”