There’s a song I used to love back in college, written by the great American bandleader and songwriter Louis Jordan.
My favorite tune was a surprisingly cheerful little earful called Up Jumped the Devil in the White Night Gown. I still like to quote the title around the office whenever anyone is alarmed by infelicitous events, market or otherwise. No one seems tired of it yet.
My musical tastes eventually changed in more refined directions (Erik Satie, Napoleonic marches, Joy Division), but the jazz-jumping rhythm still tells its tale: watch out, there’s ugly surprises out there waiting to spring. Curiously, trouble often lurks in easily observable hides and shouldn’t surprise anyone – and yet it does.
Take the case of January 1, 2026. There’s no use hiding behind a hangover on the day, because when this one leaps up, you’d better be ready. It’s the deadline for the great reversion: the enriched estate and gift tax exemptions introduced by the Tax Cuts and Jobs Act (TCJA) in 2017 will vanish like a dull tax attorney’s dreary carriage, spot on midnight.
Five and a half years may seem like a long way to run, but we’re warning everyone who’ll listen: the day will be here before you know it. As the coronavirus pandemic winds down, we pray, financial professionals will strive mightily to return business to normal. We hope nothing falls through the cracks, particularly in terms of estate and taxation planning. The last thing you want, ten seconds after midnight, is a host of unhappy HNW clients calling you ‘pumpkinhead’.
The TCJA established that for people who die between 2018 and 2025, estates exceeding $11.2 million will be assessed at a 40% estate tax, up from around $5 million previously. Married couples can combine their exemptions to $22.4 million; unified estates north of this amount will also be taxed at 40%. The exemptions are indexed to inflation; for 2020, they sit at $11.58 million per individual and $23.16 million for couples. In 2026, the exemptions will return to pre-TCJA amounts, adjusted for inflation.
Some wealthy clients are taking advantage of the heightened TCJA exemptions to make large-scale gifts. They sometimes ask what might happen if they live beyond the end of 2025 – a curious query, on its face: will eventual estate taxes be assessed based on the old $5 million exemption? Fortunately, the IRS has ruled: there will be no ‘clawback’ on gifts made under the elevated TCJA estate and gift tax exemptions.
Now is a particularly good time to transfer wealth via gift giving. The temporary TCJA exemptions are favorable, and additionally, many assets have lost considerable value recently, struck down by the economic shock of the pandemic. The lifetime gift tax exemption currently sits at nearly $11.6 million, and double that for spouses.
The 2025/26 reversion is drawing renewed attention to the ‘portability’ strategy, which can be employed by married couples. When a spouse dies, the survivor can inherit the deceased spouse’s estate tax exemption. To lock in portability, the survivor must file IRS Form 706 within nine months (a six-month extension is possible) of their spouse’s death.
Portability can dramatically reduce estate taxes, but under the elevated exemptions of TCJA, it’s currently only useful to the very rich and therefore, often overlooked. As of January 1, 2026, many moderately wealthy people may find the strategy applicable to their estate. Don’t let them miss the opportunity to benefit.
Here’s an example of how portability works: a couple has an estate worth $30 million. One dies, and for whatever reason, portability is not employed by the survivor. Let’s say spouse one dies in 2020; spouse two, in 2026. The second spouse’s estate tax exclusion for that year would be $5 million, leaving a taxable estate of $25 million. This implies a tax bill of $10 million.
If portability is elected at the first spouse’s death, the then-current $11.4 million exemption would be added to the second spouse’s $5 million in 2026. Final estate tax bill: around $5.4 million. While this may not put smiles on the faces of grieving heirs, it could help remove some weighty burdens.
The times might seem advantageous for wealthy couples and individuals, but the TCJA’s heightened exemptions have led, in some cases, to short-sighted decisions.
Consider the case of HNW married couples who, before the tax reform, created irrevocable life insurance trusts. These ILITs manage their life insurance, which provides a death benefit sufficient to cover the estate’s eventual tax bill. Under TCJA’s exemptions, some couples found that their estates were no longer liable for an estate tax assessment, so they wound down their ILITs in order to save on the premiums.
Unless you can prognosticate your own death and place it before 2026, this is a very unwise decision. When the exemption returns to $5 million, people may find they’ve undermined their own estate, and depending on age and health, may find it hard to reinsure.
We would not counsel waiting to take advantage of the TCJA estate and gift tax advantages. In the wake of the viral crisis, states facing parlous budgets could act unpredictably. Meanwhile, a national election is approaching, and one never can tell. Time flies; surprises spring up. The current tax law’s provisions should not be ignored and today is the day to act.