A big change is scheduled for the United States estate tax code. It is set to begin in 2026.
Now, you may be wondering why we’re even talking about this. After all, it’s only 2023. Surely you don’t need to think about a tax code change that won’t take effect for a couple years.
But here’s the thing: your donors are already thinking about this. In fact, they are already talking to their financial advisors about it. And if you aren’t a part of the conversation, then you could miss out on a key opportunity to partner with your donor on their philanthropic vision.
Before we get into what this change is all about – here’s a 30-second overview of the current estate tax law.
Prior to 2018, a U.S. citizen who died was able to pass on up to $5.49 million without paying estate tax. For a married couple, it was possible to maximize their estate tax savings at between $10 and $11 million, but only with some complex estate planning. Without planning, they would only be able to pass $5.49 million tax-free.
Starting in 2018, that amount substantially increased to over $11 million. And it automatically doubled for a married couple. Currently, an individual can pass over $12 million tax-free. That amount doubles for a married couple, who can pass over $25 million without paying any estate taxes.
Given that the estate tax rate is 40%, and will rise to 45% in 2026, this is an important event for wealthy donors.
Starting in 2026, the amount that can be passed tax-free is scheduled to revert to the pre-2018 rules. This will again allow a lesser amount to pass tax-free. This amount will be the old value of $5.49 million, adjusted for inflation. That figure is yet to be released, but it is expected to be around $6 to $6.5 million.
Most estate planners and other financial professionals already have this on their radar and are discussing it with their wealthiest clients.
Yet, many fundraisers (understandably) aren’t aware of this upcoming change. So, fundraisers aren’t talking to their donors about what the donors may do when faced with higher estate taxes once again.
While $6 million sounds like a very large sum, one must consider how the estate tax is assessed. One important thing to know is that many assets which would not be probated or affected by a will are nonetheless taxed for estate tax purposes. For example, the value of a jointly owned home, retirement plans, life insurance payments, and other jointly owned assets are all the types of things that will be assessed for estate tax purposes. Many people are often surprised at how large their estate is when they look at what they own and what would be taxed for estate tax purposes.
For your wealthiest donors, this may cause a great deal of concern. It will require them to re-do any existing complex estate planning. Currently, many people have a simple will or trust and will need different documents and arrangements for their assets. One fundraiser I recently spoke to said he’s been mentioning this to donors. Several of them have been very surprised, concerned, and thankful that the fundraiser brought it up.
There are only two ways to avoid estate taxes on anything above $6 million. One, leave it to a spouse (if married). Or two, leave it to charity. This creates a great opportunity to talk to your donors about how a bequest to your organization can benefit both your donor and your mission.
We recommend being mindful of this scheduled change when talking to donors. Let them know that they may wish to review their plans if appropriate. (Be cautious not to provide any legal or financial advice. Direct them to their financial advisor if they are unaware of this change.)
Of course, only a few of your donors will have these estate tax concerns. But these donors also have the capacity to make substantial gifts to your organization. You can be of great service to your donors by helping them to be alert to this change and partnering with them on any developments with their philanthropic interests that relate to this.
So, when will this happen? Unless congress passes a law to halt the change, it will happen automatically after 12/31/2025. Now is a great time to start the discussion.
And if you want to learn more about this topic (and get your questions answered live), sign up for our upcoming live Q&A session. We’re hosting TWO sessions to provide you with options that will best fit your schedule. You can sign up here.
Robert Shafis is the Director of Planned Giving Services at Veritus Group. He has been a successful fundraiser, speaker, and attorney for over 30 years. Programs under his direction have accounted for over $750 Million in major and planned gifts. As Director of Major Gift Planning at Chicago’s Museum of Science and Industry, and Director of Major and Planned Giving for The Field Museum, he participated in campaigns of over $200 Million each. Bob is a board member of the National Association of Charitable Gift Planners and speaks to national and local groups about planned giving, estate planning, charitable tax issues, and the process of fundraising.