Confronting the Cliff: Why You Should Revisit Your Estate Plan Before 2026

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Stacie Jacobsen: [00:00:00] Thanks for joining us today on the Pulse by Bernstein, where we bring you insights on the economy, global markets, and all the complexities of wealth [00:00:15] management. I'm your host, Stacie Jacobsen. Our focus today is on estate planning. Now that's a topic that many people often shy away from because it's associated with end of life.

However, a thoughtfully crafted estate [00:00:30] plan not only helps you secure your family's financial future, but it should also advance your long term goals and honor your family values.

Now is the time to reevaluate your estate plan. Currently, the federal exclusion, which is the amount of money you can [00:00:45] give away during life or at death, free of gift and estate tax, is 13.61 million per person.

However, Based off of current tax law, this amount is projected to fall to just over 7 million beginning in [00:01:00] 2026. Whether or not you should irrevocably transfer wealth out of your estate is no small decision. So to help us think through the potential impacts of this decision is Jennifer Goode.

Jennifer is one of our favorite experts on estate planning, tax planning, and wealth [00:01:15] transfer strategies. Jennifer, welcome back to The Pulse. Hi, thanks so much for having me. All right. So laid out for us, what is happening beginning in 2026 and the estate planning world

Jennifer Goode: while that kind of remains to be seen based on the upcoming election, but [00:01:30] under current law, what we expect to have happen is that the applicable exclusion that you have, meaning the amount that you can transfer free from gift and estate tax during life or at death is set to drop from what we anticipate will be a little over [00:01:45] 14 million to about 7.3 million.

Stacie Jacobsen: Okay. And why is it in an about number, right? Can you remind us how that 7. 3 will actually be calculated?

Jennifer Goode: So the reason I say about is because the applicable exclusion amount is indexed for inflation. So it [00:02:00] rises each year based on how inflation has impacted the markets over the past 12 months.

So whatever would have been in place for 2026 gets chopped in half and that's what we have left in 2026 moving forward. Now, one thing that's important to [00:02:15] recognize is that. While some people would like to make a transfer now to preserve the excess before it goes away, the upper half, if you will, that will disappear in 2026.

The way that the code is written is that you make a gift [00:02:30] from effectively the portion of your exclusion that will be left. I've actually compared it in the past to a cupcake. If we think of the part of the exclusion that will be left in 2026 as the cake, and the part that is available now, but will [00:02:45] be gone in 2026 as the icing, the code tells you that you gotta eat that cupcake from the bottom up.

So if you don't make a gift of all of your exclusion that will stick around in 2026, you don't actually get to using any of the excess, and whatever you don't [00:03:00] use, you lose.

Stacie Jacobsen: All right. I might just tell our audience now that you have a somewhat viral YouTube cupcake video. It's actually a really Goode explanation and visual as to how the exemption will work.

So I'd suggest anybody go look at the [00:03:15] cupcake estate planning video, and that's certainly helpful. So you started to explain how much somebody would have to give in order to actually use it and be beneficial prior to that period of time. Who's really affected by this change, right? Who should be calling their estate planning attorneys and even [00:03:30] thinking about transferring assets off their balance sheet earlier than they otherwise would have?

Jennifer Goode: This is really a concern for individuals who have What are currently taxable estates. So someone as an individual who has more than [00:03:45] say, potentially 14 million and potentially some folks who maybe don't have a taxable estate today, but will in 2026, what do I mean by that? Let's say I've got somebody who, it's a couple, they've got [00:04:00] 30 million.

So each individual has 13. 61 million of exclusion. So if we have a married couple, they each have an exclusion together. It's going to be roughly over 27 million of exclusion that they can use. But come 2026. They're only going to have 7. [00:04:15] 3 per person, so just over 14 million of exclusion. All of a sudden, their exposure to estate tax liability has increased greatly.

And so these folks might want to be trying to think about, do they try and preserve some of the excess today by [00:04:30] making a large transfer, or do they otherwise just sort of have a check in with their planner to make sure that their plan makes sense for them given this rather drastic change in law.

Stacie Jacobsen: So Jennifer, if somebody currently has a taxable [00:04:45] estate, how do you help to evaluate whether or not they should be making irrevocable gifts at this point in time?

Jennifer Goode: So I think where we want to start from is thinking about them and their interests holistically. I am a big fan of not letting the tax tail wag the [00:05:00] dog.

As I mentioned, this change in law is a good excuse to check in with your planner to make sure that your plan fits you and your needs. After that sort of check in, you may realize that part of that adjustment to your plan is making an [00:05:15] irrevocable gift to a trust, a transfer that you can't take back, that under most circumstances you're not really going to be able to access those assets, at least not in the same way.

So it may be that that makes sense for you, that you want to use some of that excess [00:05:30] exclusion by funding a trust now, and that's going to further support your goals for your family by eliminating tax exposure, by furthering your trust. other financial objectives. It also may be that you look at your financial goals, [00:05:45] and some of these goals require that you retain liquidity on your balance sheet.

And that's why I do recommend that you talk to your estate planner, but I think it also is key to involve your other advisors in your life. So if you're a financial advisor, your accountant, the other [00:06:00] folks that can weigh in on all the ways in which your balance sheet needs to support the people that you care about, the entities that you care about, and your ultimate goals and values to ensure that we are setting you up for what I like to refer to as a long, happy life [00:06:15] rather than a unexpected death.

Stacie Jacobsen: All right, so let's talk about it because so often it is the tax tail. That's the reason why people do shift assets off their balance sheet when quite honestly, they may not be ready for it. Their [00:06:30] beneficiaries may not be ready for it, or there could be reasons that Actually, it might be worth paying some tax to keep those assets on your balance sheet.

So what are those other considerations besides just the estate tax that you help clients think through?

Jennifer Goode: Some of the things that [00:06:45] we tend to talk about or think about are spending. You know, I, I had a situation in which I was walking a client through an analysis and we were sort of showing how if they put a certain amount of money into a [00:07:00] trust and let it go over time, how it would reduce their estate tax exposure.

And at the end of the analysis, we have sort of the ta da slide that shows how the different pools of assets grow over time and how that can impact that estate tax [00:07:15] payment at the end of life. And. To my surprise, he sort of looked at the what I would call the do nothing scenario. But what he saw in that scenario was a larger bucket of liquidity.

And he identified that and said, I like that because [00:07:30] while I have to pay more estate tax. I have a larger bucket of assets. If my competitor comes up for sale, I can go ahead and buy them. If I want to buy a boat, I'm going to buy a boat. I am an entrepreneur. I have lived my life [00:07:45] accessing liquidity when I needed it and being able to pivot to turn on a dime.

And so that was something that was a priority for him based on his own personal values and based on his goals for the future. And I think being able to identify How that value stacked [00:08:00] up against, say, his interest in estate tax planning. He could kind of look at those scenarios and say, that's the one that most represents me and what I want my future to feel like the other examples I might come up with are thinking about, you know, charity to the extent that [00:08:15] someone is philanthropic and they really want to engage in some meaningful charitable planning that may take the pressure off.

They may not need to engage in this pre 2026 planning because They're already going to be engaged in estate tax planning in the form of [00:08:30] the gifts that they're giving to charity.

Stacie Jacobsen: Alright, so spending, charity, I'd imagine preparing the beneficiaries and family to receive gifts would be on your list as well, if I can add that there.

Jennifer Goode: Absolutely. I've had situations in which clients have looked at a transfer [00:08:45] to trust and been thrilled with the impact on their potential estate tax. But then they see how big that trust becomes over time. And all of a sudden it goes from, Yay, I'm going to save on estate tax to, Whoa, Nellie, I don't want to leave that much to my children.

[00:09:00] Because there's a very big difference between leaving two kids ten million dollars and leaving them 90 million, which, you know, as these assets grow over time and with some of these strategies, the numbers can get really big over time. And that may not actually [00:09:15] ultimately fit into the client's vision of what they want to provide for their children.

There are a fair amount of people who are worried about significantly altering the trajectory of their children in terms of their financial and professional future. I do think it's really important to look not [00:09:30] only at sort of impacts today, but 40 years out and make sure all of that aligns with your goals.

Stacie Jacobsen: Yeah. I think that goes back to just because you can, doesn't mean you should.

Jennifer Goode: 100%.

Stacie Jacobsen: Let's say we do have [00:09:45] somebody who's like, you know what? This is actually something I need to take seriously. My kids are ready. I don't need the liquidity and I will have a significant taxable estate if I don't take action.

Yeah. Everything needs to be customized to each individual family, but just in general, what are the [00:10:00] strategies that you're seeing used right now to help transfer wealth off of a balance sheet?

Jennifer Goode: We're seeing a lot of transfers into irrevocable trust, which is sort of a vanilla strategy. There might be, if we want to put some sprinkles on that vanilla strategy, we might be [00:10:15] utilizing, say, a SLAT.

I don't know why I'm drawn to dessert analogies. I just am. So a SLAT, a Spousal Lifetime Access Trust, is effectively an irrevocable trust of which your spouse is a beneficiary. But this is a trust where individuals can transfer [00:10:30] assets and then those assets can be used to benefit their spouse. It's their children, their descendants.

So it accomplishes some transfer tax planning, but still creates this pool of assets that can be used to support their family to further [00:10:45] their family's interests. The one thing I'll note about that is that that type of trust typically triggers what we call grantor trust status. That's an income tax concept.

One thing that we need to be really aware of is that the gift and [00:11:00] estate tax system and the income tax systems are totally separate systems. They run on parallel tracks and there are times that they influence each other, but they're separate. So this grantor trust Status is the strategy that takes advantage of the fact [00:11:15] that you have these two separate systems.

What I mean by that is if I create a slat, I transfer assets to that trust and for gift and estate tax purposes, the transfer is complete. I no longer own those assets, but for income [00:11:30] tax purposes, because it's a separate system, the grantor trust that slat is actually disregarded. It's like I never made the transfer.

Just a reminder, gift and estate tax purposes, I'm no longer the owner. Income tax [00:11:45] purposes, I still own those assets. What does that mean in practice? It means that any income generated inside that trust flows through to my personal 1040 and I pay the income taxes. Mm

Stacie Jacobsen: hmm.

Jennifer Goode: Now, in no [00:12:00] other sphere would anyone be excited about paying for someone else's income taxes, but because estate planners are crafty, we've actually turned this into a benefit.

So if I pay the income taxes for that trust, I'm using [00:12:15] assets from my pool of assets that would otherwise be subject to estate tax to help the assets inside the trust that will not be subject to estate taxes grow at a faster clip. So it's a way of shifting wealth without making [00:12:30] additional taxable gifts.

And that strategy can be incredibly powerful. We've done a lot of analysis and research that shows that even small gifts, if they're made to a grantor trust can honestly move mountains when it comes to transfer tax planning. [00:12:45] I raised that. Because with slats, sometimes we forget that that grantor trust status is ultimately going to mean that we have to continually pay taxes for that trust over a long, long period of time.

[00:13:00] So we want to be cognizant of what that'll do to our pool of assets outside of trust. If I'm an entrepreneur that wants to buy a boat when I want to buy a boat, I need to make sure there's enough money in my non trust account To pay for both my [00:13:15] slats taxes and the boat of my dreams.

Stacie Jacobsen: What might be some other drags to a slat strategy?

With SLATS,

Jennifer Goode: uh, some of the sort of comfort that comes with it is the fact that you could make a distribution potentially to your spouse, and so that's a way to [00:13:30] kind of benefit the marital unit. Now, of course, that access could potentially be limited if unfortunately something happens to your spouse, whether that's because The marriage comes to an end or because your spouse passes away.

So that's something that most planners are going to [00:13:45] raise. And it's not again, to be a Debbie Downer or to make you feel uncomfortable in their office, but it's because these are risks that we want to kind of consider, you know, as an estate planner, uh, death, divorce, and disability. These are like the three things that I talk the most about, which [00:14:00] is likely why I am the most fun cocktail party guest ever.

So I will say that, you know, sometimes these risks and facts can be. concerning to the point where maybe someone doesn't feel comfortable sort of putting all of their eggs in that particular [00:14:15] basket. Maybe they have enough assets that they need to, or they want to engage into some pre 2026 planning, but they ultimately decide that, you know, over time, a 13.

6 million gift with that grant or a trust [00:14:30] status, you know, it's sort of absorbing your liquid assets as you pay the taxes over time. There've been situations where I've shown it to a client that 30 years out. Nine tenths of their overall wealth is now inside of this trust, which the person who created it could lose access to if [00:14:45] something, God forbid, happens to their spouse.

Sometimes that can be sort of an unsettling sort of realization when they look at it over the long term. And so, in that case, my typical response is, don't worry. There are other ways that we can [00:15:00] prepare for and protect against the estate tax. And again, it's kind of about horizons. So if we look at, just for example, I had a client who was considering funding one trust with 13 million, they looked at [00:15:15] how that was going to grow over time, and I found that to maybe not be the best fit for their long term goals.

So instead, we looked at each spouse creating a trust with 6 million. Now, I know what you're thinking, Stacy. You're thinking, but that doesn't do anything for the [00:15:30] 2026 law change. You got it. As usual. You're absolutely right. Because we were able to leverage the grantor trust treatment, because we could feed those trusts over time with things like grants and annual exclusion gifts, there were enough tools in our [00:15:45] toolbox to still appropriately address their estate tax liability.

When we looked now over that 30 year period, We were able to really shrink down their receipt tax exposure to a level that was pretty comparable to where we got with the one transfer to trust. And we did it [00:16:00] in a way in which if something happened, unfortunately, to one of the spouses, it wouldn't be that the person, the other spouse would be completely left high and dry.

Stacie Jacobsen: Got it. Okay. What are some of the other strategies that you are seeing now for the next 18 or so months? [00:16:15]

Jennifer Goode: The issue is really that if you are trying to make transfers prior to 2026, you are trying to utilize your exclusion. So a lot of the transfers that we normally talk about, we're trying to transfer assets without using exclusion.

Things [00:16:30] like a sale to a trust, things like Uh, grantor retained annuity trust, a grant. Like these are strategies where we're trying to keep the value of the asset and just move appreciation all in the interest of [00:16:45] using as little of our exclusion as possible. If we are trying to use our excess exclusion, remember we got to eat all the cupcake here.

We got to make a gift of more than 7. 3 million. We're not really focused as much on those same transfers. So a lot of it is just [00:17:00] about establishing an irrevocable trust and moving assets. And a little bit less about sort of some of the appreciation only strategies or maybe even sort of the charitable strategies, although that's still going to [00:17:15] play a role in someone's plan because Those are going to be strategies that we want to rely on for individuals, you know, who are maybe not in a position to make a gift of 7.

3 or more. And they're still going to be a part of the plan for even [00:17:30] individuals who are making those massive gifts right now. Because ultimately they're going to want to try and keep the size of their estate. small enough that these upfront gifts will really solve for their estate tax exposure and, and kind of keep maintenance by [00:17:45] small gifts like annual exclusion gifts.

You know, you can give 18, 000 to anybody, uh, every single year without using your gift tax exclusion grants. Sales, all of these things.

Stacie Jacobsen: Okay. So Jennifer, beyond just what strategy [00:18:00] to use, which is a big decision, but there's also follow on questions as well. Like how much do you want to fund that trust with, and then what assets do you want to use to fund it?

How do you help your clients think through those two questions as well?

Jennifer Goode: So

Stacie Jacobsen: with [00:18:15] respect

Jennifer Goode: to how much you want to put into trust, I think that harkens back to the earlier part of our conversation and that we are trying to identify how much you can give away comfortably without negatively impacting the rest of your goals, whether they be [00:18:30] financial or otherwise.

With respect to what assets you give away, some of that is actually also going to deal with kind of aligning your goals for The beneficiaries of the assets. So let's just consider, for example, something like an [00:18:45] alternative investment. When we talk about alternatives, I typically mean things that may be sort of, we think about like hedge funds, private credits, real estate, things like that.

These things can sometimes be [00:19:00] income tax inefficient. So they might generate a lot of growth, but they're generating a lot of income that's going to get taxed at less favorable rates. One of the major concerns is that they can sometimes, not always, but sometimes come with what we refer to as a lockup period.

[00:19:15] So you get great return, but it's because you say that you are going to give them your investment for a series of, let's say three to six years, and you're not going to be able to get that money out. It's not the same as like a stock that you could just buy and sell at whim. It's [00:19:30] really based on the client and their specific circumstances.

So for example, if I have an asset that has a lockup period, You know, my question would be, Okay, well, are we anticipating the beneficiaries of this asset? Let's say we're giving [00:19:45] it to a trust. Are the beneficiaries looking to dip into that asset pool in the next three to six years? Do those beneficiaries have maybe a longer term investment horizon such that an asset that's going to grow substantially, [00:20:00] but at the cost of being a liquid for a series of years still makes great sense?

Because the beneficiaries don't need to access it for a while, and they would like that sort of additional growth power. If we are in a position where we're using maybe an income tax [00:20:15] inefficient asset, does that make sense? Well, tell me, am I putting this into a trust that's a grantor trust? Is that part of my plan?

And it's going to be a matter of doing some careful thought about What your goals are [00:20:30] for your balance sheet, what your goals are for the beneficiaries and then hopefully having an advisor who can help you balance those priorities and show how the growth of that asset might impact those two things.

Stacie Jacobsen: And I'm really glad that you started with the ability to potentially [00:20:45] use alternative assets because I think all too often we think more about business interests or the liquid assets that you may have your balance sheet to transfer. So my

Jennifer Goode: message

Stacie Jacobsen: is

Jennifer Goode: that a, this whole process should be highly [00:21:00] personalized, but also that there's not just one way to get ready for 2026 or to just plan for estate tax generally, that there are plenty of tools in your estate planners toolbox.

And I think really the crux of the issue is just identifying [00:21:15] which ones are going to work the best for you.

Stacie Jacobsen: And as I was listening to you talk, it just sounds more and more like this is certainly something that you want to make sure that you have the right professionals helping you with to achieve your goals, because this isn't one size fits all.

It should be really customized to each family. [00:21:30]

Jennifer Goode: Absolutely. And if I can put in a little plug for my estate planning brethren and my financial advisor brethren, I think that's all the more reason to reach out sooner rather than later. I lived through 2012, the last time we feared this huge drop in the [00:21:45] exclusion amount, and there were a lot of people who created trusts or funded trusts and then came to maybe have some buyer's remorse on the back end.

So start early, engage your advisors when they have the bandwidth to really work with you and make sure that this decision is one that [00:22:00] best suits you. Suit to you and your goals. And please don't wait until October, November 2025.

Stacie Jacobsen: All right, Jennifer, you've given us a lot to think about today. And as I'm thinking through our conversation that, you know, wealth transfer planning really can be emotionally [00:22:15] charged, but the decisions that are being made today really can impact generations to come.

Thanks to everyone for listening. We'll be back in two weeks with another episode. I'm your host, Stacie Jacobsen, wishing you a great rest of the week.