In January 2026, provisions of the Tax Cuts and Jobs Act (TCJA), which had temporarily increased the federal estate and gift tax exemptions, are set to revert to their pre-TCJA levels, adjusted for inflation. This means the current lifetime estate and gift tax exemption ($12.92 million in 2023) will be cut in half. Families who do not take advantage of the current rules may lose the ability to save on estate taxes and potentially sacrifice millions in tax-free gifting. 

Watch our webinar recording on the upcoming estate tax sunset, or continue reading below. 

Estate tax planning

As the chart above illustrates, the estate tax exemption is expected to plummet from all-time highs unless there is a legislative change. This is historically unprecedented, and while no one can predict that there won’t be legislative intervention in the meantime, it’s best to plan to reduce tax liabilities, protect assets, and ensure wealth distribution according to clients' wishes. 

Here’s another representation that shows how much an individual or couple's estate bill can increase drastically:

Overnight, the increased estate tax bill will become $3,395,500 for an individual and $3,748,500 for a married couple!

Plan for growth

While the exemptions remain relatively high, some individuals or couples might not anticipate an estate tax issue. However, it’s still important to factor in the potential appreciation of those estate assets.  For example, a couple worth $12 million today may feel comfortable delaying or foregoing any planning as they would not have federal estate tax exposure in today’s dollars.

However, estates grow over time, and if we assume a 6% growth rate on those assets, their total estate would be worth about $14.29 million in 2026. It would put them just over the anticipated exemption level for couples at that time. If we fast forward 20 years, that same estate would be worth about $38.5 million. Therefore, individuals and couples need to think beyond the immediate horizon.  

General gifting strategies

There are a few basic gifting strategies that one can utilize to transfer assets out of their estate efficiently:

• Take advantage of current gift exclusions: In 2023, the limit is $17,000 per individual. Making outright gifts now will reduce the taxable estate and can be leveraged with the purchase of life insurance held outside the estate as an effective means of wealth transfer.
• Utilize an irrevocable life insurance trust (ILIT): Transferring a large portion of wealth outside the estate into a trust will help reduce the individual's estate tax burden. Holding life insurance inside the trust can increase the overall transfer of wealth. Also, making a significant gift now to a trust could be an effective way to exit existing plans, such as private split-dollar arrangements.  
• Charitable donations: Individuals can make periodic donations to a charity now to reduce the size of the overall estate. In addition, one can also arrange for assets to be gifted and left to the charity at death, creating an estate tax deduction down the road.  

Advanced planning strategies with trusts and life insurance

Life insurance can be a valuable vehicle for creating a tax-efficient gifting and estate planning strategy, especially during periods of legislative and market uncertainty. The best policy type will depend on the specific details of each case. The choice of strategy depends on individual financial goals, risk tolerance, and estate planning objectives. In some cases, however, individuals may be reluctant to make significant gifts or have limited gifting capacity but still need estate planning. There are alternative strategies that can mitigate these concerns, including:

1. Third-party premium finance: In this approach, the policyholder takes out a commercial loan to fund the policy, usually funded up to its maximum limit, without creating any adverse tax consequences. The policy builds cash value, which can help offset collateral requirements and be a source of funds to pay back the third-party loan (unless outside funds are utilized). One benefit of this strategy is that the initial interest payments are typically lower than the premium payments, reducing the size of the required gift to the trust. However, this may not be attractive if interest rates are high. 
2. Private finance: Private financing involves borrowing funds from a private lender, often the individual themselves or a family member, to pay insurance premiums. The trust is responsible for the ongoing loan interest on the note each year. It will eventually repay the loan, either during a lifetime using trust assets or at death through the policy death benefit. This approach requires a significant, upfront investment, but there is generally less risk involved than a traditional third-party loan arrangement. 
3. Private split dollar: Private split dollar involves an arrangement where two parties, typically a trust and an individual or business, share the costs and benefits of a life insurance policy. This can be structured in various ways and will depend upon the specific case details.
4. Sale to an intentionally defective grantor trust (IDGT): Like private financing, selling to an IDGT involves transferring an appreciating asset to a trust via a note. Asset growth stays out of the taxable estate, and income generated from the asset can cover loan interest and fund life insurance within the trust. Eventually, the note is repaid, either by utilizing the remaining trust assets or the policy death benefit.  

Case study

Background

Bob and Susan, aged 55 and in good health, are a married couple with a high net worth of about $40M. They have used most of their gifting capacity and wish to keep any future gifting to a minimum.  However, they also require approximately $15M in life insurance coverage for estate planning purposes. 

Solution

Their advisor suggested a private financing arrangement to accomplish both goals. First, they set up an irrevocable life insurance trust (ILIT), which will apply for and own a survivorship life insurance policy on Bob and Susan. Their premium on a $15M policy will be about $284,222 per year, paid for ten years*. The policy also includes a “return-of-premium” death benefit option where the total death benefit in any given year equals the original face amount plus all premiums paid into the policy. This ensures the net death benefit to the ILIT will be kept at $15M once the outstanding loan is accounted for and the arrangement is extinguished.

Bob and Susan will loan the premium to the ILIT each year, and the ILIT will be responsible for paying loan interest back to them until the loan is repaid, which is based on the Applicable Federal Rate (AFR) at the time the loan is made. In the first year, for example, they loan $284,000 to the ILIT, and based on a 4% AFR rate, the interest is approximately $11,369. 

Unless the ILIT has existing assets, this is the minimum amount that must be gifted to the trust to repay the loan interest to Bob and Susan in the first year. In the second year, they again loaned $284,000 to the ILIT, subject to the AFR rate at the time. The applicable loan interest will increase as each additional loan is made, so a sound exit strategy is essential. 

The ILIT can repay the loan at any point if there are sufficient trust assets, or it can be paid back at death using the policy death benefit. This arrangement keeps the couple’s gifting to a minimum while providing $15M in liquidity for estate planning.

*Based on a male and female, age 55 and preferred nonsmoker, with John Hancock’s Protection SUL.

Next steps

A tech-enabled brokerage like Modern Life can provide valuable tools and resources to insurance advisors that can help them prepare their clients for the upcoming estate tax sunset, including:

• A streamlined, end-to-end digital journey, from advice to in-force
• Instant, accurate ratings across multiple carriers
• Digital field underwriting
• A Generative AI chatbot to answer your financial planning, underwriting, and sales-related questions. 

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