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KEY PROVISIONS IN 2017’s Tax Cuts and Jobs Act (TCJA) will expire in 2026 unless Congress steps in. That means folks have a two-year window to prepare.
What’s at stake? Income-tax rates will increase for many taxpayers. This creates an incentive to boost income over the next few years by, say, undertaking Roth conversions to shrink traditional retirement accounts and thereby lowering future required minimum distributions.
The sunsetting of key TCJA provisions would also cut the threshold for federal estate taxes in half, from an estimated $14 million per individual in 2025 to $7.1 million in 2026. The limit for married couples is double these amounts, though—to capture a deceased spouse’s estate-tax exclusion—the surviving spouse must typically file an estate tax return within nine months of the first spouse’s death.
Got wealth that’s above the projected 2026 threshold of $7.1 million for individuals and $14.2 million for married couples? You should almost certainly consult an estate attorney. Two common strategies are to use trusts or lifetime gifting to capture today’s high exemptions before 2026. The IRS has confirmed that there will be no “claw-back” if you take advantage of today’s high threshold.
The lower 2026 estate exemptions of $7.1 million or $14.2 million—assuming today’s higher limits are allowed to sunset—would continue to cover 99.8% of us. Still, retirees with a few million dollars of financial assets might want to review their estate plan, especially if they’re married or if they have significant assets in traditional retirement accounts, where all withdrawals are taxed as ordinary income.
Why? Married couples can face tax and income penalties after the first spouse dies—what’s commonly referred to as the “widow’s penalty.” The surviving spouse is potentially subject to the quadruple whammy of a reduced standard deduction, filing as a single taxpayer rather than married filing jointly, less Social Security income and possibly higher Medicare premium surcharges, otherwise known as IRMAA. These penalties could be further exacerbated if higher income-tax rates return in 2026.
Until now, my wife and I have followed the conventional estate-planning playbook, which is to name your spouse as the primary beneficiary, and then include children and possibly grandchildren as contingent or secondary beneficiaries. Some folks set up trusts so the surviving spouse receives income from the deceased spouse’s estate, with the estate then passing to later generations upon the second spouse’s death. For minor children or grandchildren, a trust often includes restrictions, so the inheritance is distributed slowly rather than all at once.
Given the various widow’s penalties, married couples with significant assets might consider an alternative beneficiary strategy, splitting the first spouse’s estate between the surviving spouse and the children. This may be especially worthwhile for those with “more than enough” wealth who have assets held in traditional retirement accounts. A hefty concentration in such accounts is an issue for us. Nearly three-quarters of our family’s financial assets are in traditional IRAs.
Adding children as partial IRA beneficiaries after the first spouse’s death offers at least three potential benefits: These assets get to their final destination sooner, the income-tax hit is spread across multiple beneficiaries and two “death periods,” and it helps reduce the surviving spouse’s taxable income. There’s also the chance for some tax-rate arbitrage if the children’s tax backets are lower than the surviving spouse’s marginal tax rate.
How do those two “death periods” help? Nonspouse beneficiaries now typically have to empty inherited retirement accounts within 10 years. By bequeathing a portion of traditional retirement accounts to children upon the first spouse’s death, rather than waiting to pass along the entire balance upon the second spouse’s death, the children will have two separate 10-year withdrawal periods to empty their inherited IRAs. This potentially reduces the income-tax hit by spreading withdrawals over a longer period.
True, this won’t help much if the spouses die soon after each other. But surviving spouses often live a decade or more after the first spouse passes. Keep in mind that, unlike with traditional retirement accounts, you might want to wait until the second spouse’s death to pass Roth accounts to the next generation, so the tax-free growth continues for longer.
The good news: All this is easy enough to do by simply changing retirement account beneficiary designations. My wife and I each took one of our IRAs, removed the other spouse as primary beneficiary and added our adult children instead.
We’re comfortable we won’t need this money to pay for our own retirement. What if we later change our minds—or tax laws change yet again? We can adjust our beneficiary designations at no cost, and without making potentially costly revisions to our estate-planning documents.
John Yeigh is an author, coach and youth sports advocate. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.
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Ohhhhh the poor pitiful pearl Upper Class twits don’t have enough money to add 10 more feet to their private jets.
The Horror! The Horror!
Anyone who thinks $7 Million isn’t enough should resign in disgrace from the Human race.
Great article and agree adjusting beneficiaries could be a good tactic. That said, a primary beneficiary can always disclaim all or a portion of an inheritance and the assets then flow to the contingent beneficiaries. So if you don’t take the step of changing beneficiaries, there is still a way to accomplish the same intent after death.
Thank you for an interesting and informative article. Another consideration is state estate taxes. In many cases, the threshold is far lower than the federal one. In Illinois, for example, it’s $4M–and doesn’t double for a surviving spouse and is not adjusted annually for inflation. Many retirees allegedly move to Florida (or Wisconsin or Indiana) to avoid the estate tax. A few other states have even lower thresholds.
Another excellent informative article as always John!
We’re in a very similar situation—most of our net worth is in retirement accounts, and because of the SECURE ACT 2.0, we won’t have to take RMDs until age 75 (we’re 63 now). If both of us make it to/past 75, the survivor is going to have one whopper of a tax bill because of those RMDs stacked onto the widow’s penalty. Changing beneficiaries as you describe is a really interesting idea, and as you note, we don’t even have to pay for our estate attorney’s time to do it.
We each have a rollover IRA (from our previous jobs). I have 403b and 457 accounts from my current job, and he has a 401K. I’d thought we’d roll all of those into our IRAs when we retire just to simplify things, but your idea here is going to make me think more about this.
When we set up our new estate plan about a year ago, we also created a trust for our daughter. I believe I could just put her trust as the beneficiary for the retirement account(s).
Hi Dana – Indeed, the Secure Act’s RMD extended start age allows more time to accumulate tax-deferred earnings, but this may be somewhat of a two-edged sword as it potentially increases the widow’s penalty and now requires non-spouse heirs to empty IRAs within 10 years.
IRA owners should be able to consolidate their tax deferred accounts into one account and still utilize this flexible beneficiary process by specifying percentages to the spouse, children, trust or other heirs – while my wife specified 100% of her IRA to our children, I split my IRA to she and the children. Her IRA is smaller since we have been Roth converting mainly her account due to her likely longevity. As Michael1 pointed out, IRA owners can readily change these beneficiary allocations depending upon changes in personal circumstances or tax laws.
Also, most IRA account providers like Vanguard or Fidelity allow either a person or a trust to be named as a beneficiary. I presume your trust then controls the distribution to heirs, but you should check with your attorney as we don’t need or have a trust since our family situation is different than yours. I’ve written on HD how our experience with two family trusts mainly resulted in complexity and very high costs.
Great article. I look at all of the current tax brackets up through the 24% bracket as a steal! The next bracket takes a pretty steep jump to 32%. Filling the brackets at least through the 22%, if not the 24%, seems wise to me. Hard to imagine with $34T in debt and rising fast that rates will be lower than that ever again.
At my asset level I consider the increase from 12% to 22% a steal, as in the government is stealing almost twice as much. Because even in retirement we live a simple life, and we have a taxable brokerage account we are limiting our taxable income to the 12% tax bracket for the next two years. I thought of converting a larger amount of my traditional IRA each year, but even with the 12% bracket increasing to 15% if the TCJA expires the jump to the next level will still be too large to make sense.
Interesting post John. A great thing about your approach as opposed to many estate planning strategies is that if you decide to do it, it’s very simple – take five minutes and change beneficiary designations. And if you change your mind, it’s not irrevocable – change them again. Simple.
John, thanks for the interesting post. It’s such a challenge to plan for your demise when you hope it is far, far away! We also have a significant portion our assets in TRAD IRAs, and the potential tax hit my wife would face is a concern, albeit a good problem have. I have to consider that my desire (some say obsession) to optimize my current tax bill may not be the best long term estate plan.
As part of the American Taxpayer Relief Act of 2012, portability of the estate and gift tax exemption was permanently added to the estate and gift tax regulations. Permanently in the tax code simply means the provision in the law you are relying upon just is not currently scheduled to sunset. Congress can and does change the tax laws.
For portability from the first to die spouse to apply for the second to die spouse a form 706 is required to be filed for the estate of the first to die spouse. Fortunately, if a 706 is filed only for portability, there is currently a streamlined process for items passing to the surviving spouse or a charity that only requires estimates of total value rather than having to detail all items.
The problem is if neither a comprehensive form 706 or the streamlined 706 is filed within the statutory period including extensions the portability benefit is loss.
When an estate reaches the size to be taxable the federal estate tax rate is currently 40% estate tax. If a large portion of the second to die spouse’s estate is made up of traditional deferred retirement assets those gross amount of the tIRA or t401(k) will also be taxable for income taxes purposes to the beneficiary or the estate at their own income tax rates. Any estate tax is due nine months after the date of death of the decedent.
Besides using the annual gift exclusions, a common action to reduce the size of an expected taxable estate is to convert traditional deferred accounts to Roths during life. Doing so does cost you income taxes now but those paid income taxes reduces the size of the taxable estate and the related estate tax. You can pay Sam some now or more later. I am not a fan of paying IRMAA surcharges but the money hit from doing so for a single year may be less than the the estate tax for a larger estate. Change happens, plan accordingly.
I would imagine this post would be most useful to Humble Dollar readers with more than $7.1 million in assets. Even I am not among them…..yet!
Ormode – I believe the concept might be worth considering for couples having much less than the $7 million threshold – anything approaching $2 million held in tax-deferred accounts where there is still a significant tax obligation. In this case, a surviving spouse may jump to the 28% tax bracket (assuming TCJA is not reinstated) and also start the climb into higher IRMAA brackets from social security plus RMDs alone, let alone any other income or pensions.
Also, once any couple amasses a couple million dollars of assets, income should be healthy just assuming the standard 4% withdrawal rate. Also, the heirs may be in a lower tax bracket than the surviving spouse.
While a beneficiary change may not work for many families, a partial designation may be worth considering for any couple approaching a “more-than-enough” situation. This probably occurs well below $7 million for most of us.
No guarantee rates will go up in 2026. Depends who is controlling Congress and the WH
Very Timely information while we still have time to take action. January 1, 2026 is looming for this issue