One of the biggest—and most talked about—changes enacted by the Tax Cuts and Jobs Act was the increase in the estate tax exemption. But that's not the only change that could impact your estate plan. Here's why now is a good time to review your wealth transfer plans with your wealth advisors.
Check for unintended consequences
The Tax Cuts and Jobs Act increased the estate tax exemption from $5.2 million to $11.18 million per individual, or up to $22.36 million for a married couple. And those amounts are set to increase each year to keep pace with inflation.
If your estate is worth less than that newly increased amount, you may think you can breathe a sigh of relief. "In many cases estate plans are indeed being simplified," says Wells Fargo Private Bank Wealth Advisor Allison Gregory. "But reviewing the details of older estate plans is critical to make sure there are no unintended consequences."
For example, imagine that an estate plan set up under the previous law put $5.2 million out of a $7 million estate into a family trust, with the surviving spouse getting the $1.8 million remainder but having no access to the family trust's assets. If the trust was set up to automatically protect assets equal to the entire exemption, it's possible that the new law might mean that the entire $7 million—since it would all be exempt from estate tax—would need to go into the family trust. The surviving spouse could be left with nothing.
"Reviewing the details of older estate plans is critical to make sure there are no unintended consequences." — Allison Gregory, Wealth Advisor, Wells Fargo Private Bank
Also, 19 states and the District of Columbia impose their own estate tax and/or inheritance tax in addition to the federal estate tax. This layer could further complicate funding formulas in existing documents or require new funding formulas to reduce potential state estate tax.
"That's why you need to review your estate plan with your wealth, tax, and legal advisors and make sure the funding formula still works," Gregory says.
Trust in a trust
While any changes to a wealth transfer plan should be carefully thought out and should be in line with the individual's values and goals, the expanded exemption does have an end date: It's scheduled to revert to 2017 values January 1, 2026. For some people, that might make setting up a trust now even more attractive.
Gifting assets to a trust now would let individuals take advantage of the exemption while they're still living. That means more assets could be protected from the estate tax, even if the death that triggers that liability happens after December 31, 2025.
But gifting to trusts can also be a point of concern for many clients who worry about giving too much during their lifetimes and not having enough left for themselves. "As a result," Gregory says, "we are seeing an increase in use of vehicles such as Spousal Lifetime Access Trusts (SLATs) which uses the increased exemption and allows one spouse to gift assets in trust to the other as well as the children to solve for both needs."
"A SLAT is a type of irrevocable trust established by one spouse for the benefit of the other spouse," shares Senior Wealth Planner Cody Tresselt-Warren. When a SLAT is established, the donor spouse utilizes his or her federal estate tax exemption to fund the trust. A variety of assets can be used to fund the trust, including cash, securities, real estate, life insurance, and closely held business interests.
"Careful consideration should be given to the source of funding as the assets will appreciate free of any future estate tax," says Tresselt-Warren. "Closely held business interests are often used as they may have very significant future appreciation."
During the lifetime of the beneficiary spouse, he or she will have access to the funds, typically limited to health, education, maintenance, or support needs. "The trust could also be structured to benefit children and grandchildren—either during the spouse’s life or after—ultimately creating a generational wealth transfer opportunity," says Tresselt-Warren.
Thoughtful planning is required when constructing a SLAT; be sure to give careful consideration to potential benefits and alignment with your values and goals. “It is also important to communicate between spouses and future generations the goals and thought behind establishing the trust to help avoid wasting the exemption,” says Tresselt-Warren. A conversation with your advisors at Wells Fargo Private Bank and your tax and legal advisors can help you determine if a SLAT is an appropriate wealth transfer strategy for your needs.
Other planning considerations
Estate tax provisions aren't the only change in the law that could affect planning for wealth transfer.
“There has been a estate planning shift,” Gregory says. “Instead of a focus on reducing potential estate taxes, the focus is on building flexible documents with an eye toward income tax planning. This may be more impactful for estates under the exemption amount. For example, it may make more sense for assets to be includable in the surviving spouse’s estate to take advantage of the step up in basis at their passing.”
“In addition, clients who own real estate, oil and gas interests, or closely held business via pass-through entities like limited partnerships and LLCs need to understand how the tax law changes may impact them. We work with our client’s tax advisors to inform them of the potential benefits and impacts on their unique situation and help them make any necessary adjustments.”
Gregory says, “The bottom line is that the new tax law has opened up some interesting tax planning opportunities for our clients as well as some potential pitfalls. It is critical that you work with your advisors to understand their effects on your family’s unique circumstances.”
Act sooner instead of later
While 2026 might seem like a far-off deadline, waiting to address your estate plan could be a costly gamble.
"These changes may sunset earlier, depending on what happens with Congress and elections," Gregory says. "We feel there's a limited window to work with your wealth, tax, and legal advisors and get some of this tax planning done."