How to Minimize Your Federal Estate Tax Exposure Before 2026

Clifford PendellWritten by Clifford Pendell
Without congressional intervention, many provisions in the Tax Cuts and Jobs Act will expire on December 31st, 2025.

On January 1, 2026, the current estate tax exemption is set to decrease from its projected all time high of about $14.4 million to roughly $6,800,000 per individual

If your estate is worth more than $6,800,000 ($13,600,000 for married couples), taking action is essential, and time is of the essence. 

In our insider's guide to estate planning for 2026, we offer two strategies to help reduce or avoid estate taxes on the assets you intend to leave behind. We've also outlined the steps to establishing an irrevocable life insurance trust and the ideal policy for this situation. 

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The Return of Estate Taxes in 2026

In 2017, President Trump enacted the Tax Cuts and Jobs Act which brought significant changes to the tax code. These changes included a higher standard deduction, reduced deductions for state and local taxes, and a substantial increase to the Federal Estate Tax Exemption. By 2025, the exemption will peak at approximately $14.4 million per individual, an all-time high.

However in 2026, the estate tax exemption will revert to its pre-TCJA levels, which is roughly half this amount, or about $6.8 million after being adjusted for inflation. Without intervention, estate tax rates are also set to increase from 40% to 45%. So if your estate is worth $10 million, and you're single, your heirs will be facing an estate tax obligation of about $1.44 million.

While there is still time for Congress to introduce new legislation to maintain these exemptions, the recent removal of Kevin McCarthy as speaker, along with the general the division among the members of the House makes it unlikely. This gives large estate owners about two years to protect the assets they intend to leave behind.

It also important to note that a handful of states levy their own estate or inheritance taxes. Oregon is the most infamous among these states with an estate tax exemption of just $1,000,000 per individual. To learn more about state imposed estate taxes, see our article, "The Complete List of States with Estate Taxes (Updated for 2024)."

How Do the Very Wealthy Avoid Estate Taxes?

The very wealthy avoid estate taxes by creating a trust and funding it with permanent life insurance, also known as estate planning. To utilize this strategy, an estate owner must establish an irrevocable list insurance trust or ILIT and purchase a permanent life insurance policy on their life.

To prevent the life insurance policy from being considered as an asset under the estate owner's control (and subject to estate taxes) the trust needs to be listed as the owner and payor of the policy when the application is submitted.

After the policy is approved, the estate owner can utilize the annual federal gift tax exemption to gift their trust $18,000 per year ($36,000 for married couples) per trust beneficiary to pay the policy's premiums without creating a tax liability. Term life insurance is not a suitable option for estate planning because you do not want to risk outliving your policy.

When the estate owner passes away, their life insurance policy will pay the death benefit to the trust, and their appointed trustee will use the money to settle their estate's outstanding tax obligations with the IRS. This prevents your loved one's from owing taxes on the assets you intend to leave behind.

How Do You Create an Irrevocable Life Insurance Trust?

To execute a proper estate plan, you need a reliable trustee, an estate or trust attorney, and a knowledgeable life insurance agent. The estate tax attorney will be responsible for creating your trust, while the life insurance agent will help you select a permanent life insurance policy with a death benefit sufficient to cover your estate's expected tax liabilities.

how-to-create-an-irrevocable-life-insurance-trust

While you have the option to create your trust using an online service, we strongly advise consulting an attorney to avoid potential errors. According to Legalzoom, establishing an irrevocable trust can cost as much as $7,000, but we consider this expense to be a worthwhile investment.

It's also important to select a reliable trustee. While appointing a friend or family member is an option, most people assign this duty to a bank manager or attorney. Your trustee cannot have a personal interest in your estate, and you are not allowed to be the trustee of your own irrevocable trust.

Before the enactment of the Tax Cuts and Jobs Act, estate planning enjoyed greater popularity. However, with over 99.9% of American households no longer falling within this threshold, interest has diminished. Estate planning is expected to make a resurgence in the next two years however. 

Transfer Wealth Before Your Window Closes

Transferring wealth to your loved ones is primarily done in two ways. One is to leave an inheritance after you pass away, the other is to gift it to them during your lifetime. If your estate is worth less than the current exemption, but more than $6.8 million, you can take advantage of the existing exemption and gift assets to your heirs now.

There is no clawback on the estate tax exemption, so the assets you transfer will not be subject to taxes at a later time. You can also gift your heirs up to $18,000 per year ($36,000 if you're married) without creating a tax liability. However, if your wealth continues to grow, you may need to reconsider your need for an irrevocable trust in the future.

Most estate planning attorneys are expecting an influx of business, so its better to get an early start on things if your estate's value will exceed the reduced exemption. New legislation to close this loophole or decrease the existing exemption could also be enacted before 2026.

In July 2021, President Biden's administration suggested a reduction in the federal estate tax exemption to $3.5 million for individuals or $7 million for married couples. This mirrors the figures suggested by Senator Bernie Sanders in his proposed "For the 99.8% Act" in December 2020.

Common Mistakes To Avoid When Estate Planning

The likelihood of changes to the existing estate tax exemption, rampant inflation, the Great Wealth Transfer, and the continually increasing costs of home ownership have sparked renewed public interest in preserving wealth for future generations. Here are the seven most common mistakes to avoid when estate planning:

1. Procrastinating - Don't wait until its too late to protect your wealth from estate taxes. Take advantage of the current exemption buy life insurance while you can still qualify for coverage.

2. Not Using An Attorney - We know attorneys are expensive, but you don't want any holes in your estate plan when millions of dollars could be on the line. Avoid using an online service and hire an attorney you can meet in person.

3. Owning Your Own Policy - You cannot have any control of your life insurance policy for it to be exempt from estate taxes. This is why its vital to name your trust as your policy's owner. 

4. Being Your Own Trustee - You cannot control your own trust, otherwise the IRS will consider it as a personal asset. Its also important to avoid anyone that is bad with money or non-trustworthy. 

5. Buying Term Insurance - Most term life insurance policies expire before the age of 80. Don't take the risk of buying a policy that could expire before you do. Buy permanent life insurance. 

6. Working With A Local Agent or Call Center - An experienced agent will save you money and ensure that your policy is set up correctly. Avoid large call centers with high turnover or local agents that focus on home and auto insurance.  

7. Buying A Policy That Has Risk - If your purchasing life insurance to fund your irrevocable trust, do not purchase a policy that carries an investment risk. Purchase a policy with level rates and a guaranteed death benefit.

Frequently Asked Questions About Estate Planning

Q. What's the difference between a revocable an irrevocable trust?

A. A revocable trust can be modifed by the owner or grantor, but it is subject to estate taxes since its assets remain under the owner's control. An irrevocable trust is not subject to estate taxes because you cannot change the terms of your trust on your own. Older irrevocable trusts used to be very difficult to modify without court or beneficiary approval, but modern irrevocable trusts can be quite flexible through the use of powers of appointment. This is why its vital to work with an experienced attorney that knows how to draft flexibility into your trust. 

Q. How do I calculate my federal estate tax liabilities?

A. To calculate your estate tax liabilities, subtract the current exemption ($13.61 million for 2024) from your estimated estate value and multiply this number by .40. Keep in mind that the exemption amount changes annually, and in 2026, the estate tax rate is expected to increase to 45%.

Q. What's the difference between a captive and non captive insurance agent?

A. A captive life insurance agent exclusively offers products from a single company like State Farm or Farmers, which typically specialize in home an auto insurance. As a result, they tend to be less competitive with life insurance. On the other hand, an independent agent represents a variety of life insurance companies, giving you the flexibilty to choose a policy from any of these companies. Furthermore, most independent agents focus solely on life insurance.

Q. How does guaranteed universal life insurance differ from traditional universal life insurance?

A. Traditional universal life insurance offers more flexibilty but it also comes with increased risk due to market conditions. Alternatively, a guaranteed universal life insurance policy, or GUL, provides a fixed death benefit and level premiums. In other words, a GUL policy offers guaranteed rates and coverage untilage  of 90 or later, whereas a traditional universal insurance policy can become underfunded if its investments underperform.

Q. What can I do if my life insurance premium is greater than the annual gift exclusion amount?

A. If your insurance premium exceeds the annual gift exclusion, several solutions are available. These include split dollar financing, third party financing, and the utilization of your spouse's exemption amount if you are married. For more in-depth information, please refer to our article, "What to Do if Your Life Insurance Premium is Greater than the Annual Gift Tax Exclusion."

How We Can Help

Our independent agency specializes with a permanent life insurance product called guaranteed universal life insurance. Unlike other forms of non-guaranteed universal life insurance coverage, these policies do not carry any investment risk. They offer level rates and fixed coverage until the age of 90, 95, 100, 105, 110, or 121.

Guaranteed universal life insurance is the best option for funding an irrevocable life insurance trust because as long as you pay your premiums, your coverage will extend until age 90 or later. Term life insurance policies are designed to be outlived, and other forms of permanent coverage carry too much risk, or don't offer enough coverage.

We've helped thousands of families and businesses with their life insurance needs and we can help too. Our experts offer at least 10 years of experience, and we're well versed in estate planning. Call us today at 1-800-247-9555 or enter your information below to instantly compare your options for permanent life insurance.

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Written by:

Clifford Pendell

Clifford Pendell

Managing Partner and Co-founder

Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.

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