Given the potential for the historically high estate tax exemption to be cut in half with the sunset of key parts of the Tax Cuts and Job Act in 2026, wealth advisors are likely to be fielding a lot of questions about what the pending policy change could mean.
But even advisors who focus their business on serving wealthy clients are likely to be working with relatively few families with the necessary wealth to take advantage of the full $26 million lifetime exemption for a married couple.
In fact, Jessica Perna, a private tax partner at EY, says the bigger focus for most advisors today should be on the potential for all of their clients, particularly those in the highest income-tax tier, to face higher tax brackets after the Trump-era tax legislation expires. The highest earners will see their marginal tax rate grow nearly three percentage points, from 37% to 39.5%.
There's also the potential for key tax filing policies to revert to their pre-TCJA status, ranging from the standard deduction amount to the application of alternative minimum taxes and the availability of mortgage interest deductions and state and local tax write-offs.
So yes, Perna said, taking advantage of the estate tax and lifetime gifting exemption is an important consideration when serving the wealthiest families, but the bigger cumulative effects will likely come from changes in the tax brackets and broad filing policies applying to all Americans regardless of their wealth level.
Speaking recently with ThinkAdvisor, Perna echoed other tax experts in that she is currently advising clients to "hang tight" until we see the results of the federal elections in November. While no one has a crystal ball, the election results should help to provide some added clarity about the potential tax policies that will emerge in late 2025 and early 2026.
Tax Bracket Shifts
As Perna recalled, the Republican-led tax overhaul enacted in 2017 decreased the tax rates and changed the brackets to which those rates applied.
The tax rates are currently 10%, 12%, 22%, 24%, 32%, 35% and 37%. Barring any legislative action before January 2026, the rates will automatically return to their pre-TCJA amounts of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
The income brackets to which those rates are to apply will also be different and are adjusted for inflation each year, Perna explained. The result of all this is that clients who currently have their financial lives in a relatively fine balance between spending, saving and paying taxes could see their equilibrium disrupted.
"You can imagine a scenario where, once your tax rate goes up by three or four percentage points, maybe you find yourself in a in a cash crunch," Perna noted. "Or there could be situations where, even though a person is wealthy, maybe a lot of their wealth is illiquid, and they could suddenly find themselves in an awkward situation with a bigger tax bill."
What Advisors Can Do
Even as advisors wait for more post-election clarity about potential tax policies, they can help their clients anticipate any potential disruptions from higher tax burdens. They can also help clients prepare to communicate with their employers about ensuring the proper amount of withholdings in 2026 and beyond.
