NEWS & RESOURCES

Authored by: Kyle Meissner, CPA, Financial Advisor & Member 

As we approach 2026, individuals and families must reassess their estate planning strategies to align with changing tax laws and exemption limits. With the Federal Estate Exemption set at $13.61 million per person for 2024, there is a unique opportunity for wealth transfer planning before significant changes occur in 2026.

The Tax Cuts and Jobs Act (TCJA), which introduced these higher exemption limits, is scheduled to sunset in 2026, reducing the exemption amount to an estimated $6-7 million per person. For married couples, these amounts are doubled, and with spousal portability, the surviving spouse automatically inherits any unused portion of the deceased spouse's exemption.

The Importance of Gifting Before 2026

The reduction in the Federal Estate Exemption after 2026 makes it imperative for those with significant estates to consider gifting assets. The $13.61 million exemption allows individuals to transfer wealth without incurring federal estate taxes. However, any gifts made during your lifetime above the annual exclusion amount of $18,000 per person will reduce your lifetime exclusion. By gifting assets now, you can lock in the higher exemption and minimize your estate's exposure to future taxes. This strategy is particularly beneficial for those who expect their estates to exceed the post-2026 exemption limits.

Understanding Washington State's Estate Tax Landscape

While federal estate taxes impact a smaller percentage of the population, Washington State's lower estate tax exemption of $2.193 million per person affects a broader range of taxpayers. Unlike federal law, Washington State does not allow spousal portability, meaning that to preserve the deceased spouse's exclusion, a credit shelter provision must be included in the estate plan. Additionally, Washington State has no gift tax, so lifetime gifts do not reduce the state's estate tax exemption.

For those with Washington taxable estates but who are not at risk of exceeding the federal exemption, a Federal-only Qualified Terminable Interest Property (QTIP) election can be a valuable tool. This allows assets to receive a second step-up in basis upon the death of the surviving spouse while keeping them out of the surviving spouse's taxable estate, thereby reducing the overall estate tax burden.

Considerations for Retirement Accounts and Asset Selection

The recent changes to inherited IRA distribution rules have increased the tax burden on beneficiaries, making it more important than ever to evaluate strategies such as accelerating IRA distributions or converting traditional IRAs to Roth IRAs. The goal is to optimize your current and future tax brackets and minimize the tax impact on your heirs.

When selecting assets to gift during your lifetime, it is essential to consider the basis of those assets. In many cases, the income tax on the sale of an asset is higher than the Washington State estate tax, especially if the asset has appreciated significantly. Gifting assets with a basis close to their fair market value or those that are unlikely to be sold during the recipient's lifetime can help minimize overall taxes. Additionally, preserving enough liquidity to cover living expenses after making gifts is crucial, particularly for estates comprised mainly of illiquid assets, such as real estate.

Proactive Planning is Key

The changes to federal and state estate tax laws highlight the importance of proactive estate planning. With the impending reduction in the Federal Estate Exemption and the complexities of Washington State's estate tax system, now is the time to consult with your legal, tax, and investment advisors. They can help you craft a strategy that minimizes both income and estate taxes while ensuring that your estate plan aligns with your long-term financial goals. Taking action now will not only protect your wealth but also provide peace of mind for you and your family in the years to come.

While Cordell, Neher & Company, PLLC does not perform legal services, we advise clients with estate and legacy planning needs and help with the implementation by coordinating with attorneys to prepare associated wills, Power of Attorney documents, and living wills. For more information about estate planning, or our other financial services, visit our website at cnccpa.com. Call any of our qualified advisors, CPAs, or accountants at (509) 663-1661, and we’ll begin helping you, your family, or your business today.