5 Tax-Efficient Wealth Transfer Strategies to Consider Before 2026

(The Street) - With a new administration in the White House and many of the benefits provided by the Tax Cut and Jobs Act (TCJA) expiring soon, future tax laws remain in flux. Notably, historically high lifetime gift, estate, and generation-skipping tax exemptions are scheduled to revert to their pre-TCJA levels at the end of 2025.

Although no one knows for certain what the new tax code will look like, the wealthiest Americans are likely to feel an impact. If you expect these changes to affect your family, you may want to consider the following strategies to reduce your potential estate tax liability.

#1: Annual and Lifetime Exclusion Gifts

In 2021, the annual gift tax exclusion is $15,000 per beneficiary ($30,000 for married couples). That means if you’re married, you and your spouse can gift up to $30,000 per recipient per year to reduce your estate.

Furthermore, the IRS has clarified that anyone taking advantage of the increased lifetime gift tax exclusion will not be negatively impacted after 2025 when it returns to pre-TCJA levels. In other words, any gifts you make under the current exclusion won’t be subject to future estate taxes.

Since the lifetime gift exclusion in 2021 is $11.7 million per recipient, any gift above the annual exclusion limit counts against your lifetime exclusion. This exclusion is expected to decline in 2026--meaning you still have time to take advantage of the increased exemption.

#2: Trusts

If you don’t want to gift your assets outright to your beneficiaries, you may want to consider gifting to a trust or UTMA account. These accounts allow you to retain some level of control over the gifted assets until the beneficiary reaches a certain age.

  • Funded Crummey Trusts. When you gift assets to a Crummey Trust, the trust’s beneficiary is given a time limit to withdraw those assets. If the beneficiary doesn’t comply, they lose the opportunity to withdraw the assets, and they remain in the trust. As the grantor, you can determine how long the assets remain in the trust, giving you more control over when your beneficiaries can take full ownership.
  • IRC Section 2503(c) Trusts. A 2503(c) trust can be a useful tool for gifting assets to a minor. Gifted assets are transferred to a professional manager, who serves as a trustee for the minor’s benefit and makes discretionary distributions. Any undistributed assets are passed to the minor when they reach age 21.
  • The Uniform Transfers to Minors Act (UTMA). An UTMA account can be another efficient way to gift assets to a minor. With an UTMA, gifted assets are transferred to a custodian for the benefit of the minor. The assets can then be distributed directly to the minor or for the minor’s benefit. Once the beneficiary turns 21, all account proceeds are distributed, and the beneficiary gains full control over the assets.

#3: Education Funding

The IRS allows you to pay anyone’s educational expenses tax-free, so long as you pay the institution directly. This not only applies for any level of education, but you can also prepay multiple years if the institution allows it.

Alternatively, you can contribute to a Section 529 Education Savings Plan (529 plan) up to the annual gift tax exclusion tax-free. In addition, the law currently allows you to gift up to five years of contributions to a 529 plan at once without incurring federal taxes.

#4: Medical Expenses

Similar to funding educational expenses, you can pay for anyone’s medical expenses tax-free if you pay the provider directly. The IRS typically allows you to pay for any legal medical and dental expenses incurred during a given tax year if the expenses aren’t otherwise covered by insurance.

#5: Charitable Donations

Finally, you can gift cash and other assets to a qualifying charitable organization to reduce your estate and in some cases, your tax bill in the current tax year. Furthermore, some sophisticated charities, donor-advised funds, and community foundations accept donations of highly appreciated assets like stock and real estate, which can help you avoid hefty capital gains taxes.

Update Your Estate Plan with a Trusted Advisor

Transferring wealth can be complex, and the tax laws governing these strategies are subject to change. Before making any substantial changes to your estate plan, be sure to consult with a trusted financial advisor or estate planning attorney to ensure you’re making the right decision for you and your family.

By Brian Littlejohn, CFP

About the Author: Brian Littlejohn, CFP®, CFA®

Brian Littlejohn, CFP®, CFA® is the founder of Sherwood Wealth Management, a boutique wealth management firm located in Glenwood Springs, Colorado. As a fiduciary financial advisor, Brian helps his clients navigate the complexities of sudden wealth.



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