The current record-high federal estate and gift tax exemptions are set to expire in 2026. Currently, people can gift a certain amount during their lifetimes, but these limits could be halved in 2026 unless Congress extends the duration or makes the amendments permanent. People may not be allowed to gift as much as they want under new rules, and their estates could face greater taxation after they pass. For this reason, many individuals and families are leveraging estate planning strategies to avoid or reduce estate and annual gift tax exclusions before they sunset in 2026.
In this guide, you will learn about the federal estate and tax exemption sunset in 2026 and some strategies to reduce or avoid taxes. Barulich Dugoni Suttmann & Cummins Law Group, Inc. can assess your situation and help you determine the most practical estate planning option according to your needs.
What Will the Estate Tax Exemption Be in 2026?
The Tax Cuts and Jobs Act of 2017 made several changes to the Internal Revenue Code. One significant amendment was doubling the federal estate tax exemption from $5.6 million in 2017 to $11.18 million in 2018. Due to inflation, the exemption was further increased to $13.61 million for individuals and $27.22 million for married couples in 2024. However, this exemption is temporary and will automatically sunset to $5.6 million on January 1, 2026, indexed for inflation, unless Congress acts. So, what does this mean?
The estate tax exemption allows you to transfer assets up to the maximum amount to your heirs without paying federal estate tax. The federal exemption also applies to gifts or transfers made during your lifetime. Estate transfer valued above the financial threshold may attract up to 40% federal estate tax rate on the excess amount. Additionally, the maximums apply to lifetime gifts and transfers after your passing combined, so any portion of the exemption you use for gifting will reduce the amount you can use for the estate tax.
Considering that the exemption is temporary, it’s best to implement strategies before it sunsets. The 2026 estate tax exemption has yet to be announced, although there have been some projections. Affected persons can use the current law to make decisions as the future is uncertain.
Who Will Be Affected by the Estate Tax Sunset in 2026?
The estate tax exemption sunsetting in 2026 applies to married couples and individuals who transfer assets valued above the maximum exemption amount. As noted earlier, individuals can transfer assets up to $13.6 million in 2024. Anything transferred over that amount is subject to gift or estate tax, depending on whether the transfer took place during the donor’s life or after their passing. The lifetime gift threshold for married couples is $27.22 million in 2024.
After the end of 2025, the threshold would revert to the 2017 levels, adjusted for inflation. Experts predict the amount will be about half the current value – around $7 million for individuals and $14 million for married couples. If the value of your estate exceeds that threshold, your heirs would need to file and pay estate taxes when the assets transfer to them. The effective exemption for any estate is the one in place on the date of the individual’s death. The federal estate or gift tax ranges from 18%-40% on the amount exceeding the exemption limit.
Different estate planning options are available to individuals and families who want to leverage the current benefits. Your strategy should be tailored to your needs and implemented according to the law. Speak to an experienced attorney for legal advice before taking any steps.
How to Prepare for the 2026 Estate Tax Exemption
You can prepare for the gift and estate tax exemption sunset in 2026 in several ways. The strategy should be carefully thought-through and align with your financial goals. Estate planning can be technical, but we have simplified some examples to broaden your understanding:
1. Irrevocable Trusts
Trusts are legal arrangements where a person called the grantor or settlor transfers properties into a trust for the benefit of a beneficiary. The trust also has a trustee, who manages or controls the property. With an irrevocable trust, the grantor cannot easily change or end it once created. Irrevocable trusts allow you to transfer assets to beneficiaries and potentially avoid paying estate tax on the transferred assets.
The subject matter of the trust could be any asset, such as real estate property, shares in a business or life insurance. In the case of life insurance trusts, the grantor can make periodic or lump sum payments to cover the premiums. When the grantor passes, trust assets are generally excluded from their estate.
Spousal Lifetime Access Trust (SLAT)
SLAT is a type of irrevocable trust that allows a spouse to transfer assets to the other spouse for their lifetime. This strategy removes the properties from the estate, helping them avoid estate taxes. In this arrangement, the grantor names the spouse as the trust’s primary beneficiary. The grantor may not subsequently alter the terms of the trust or remove the assets. A downside of this strategy is that the beneficiary may still claim ownership of those assets if the couple divorces.
2. Gifts Inter Vivos
Gifting assets to beneficiaries before you pass can help reduce future taxable estates. Note that there is a lifetime gift limit and a federal annual limit. To avoid paying federal gift taxes, the amount or value of the gift should be within the federal annual limit. Once the donee receives the gift, the value can grow without affecting the donor’s taxable estate.
This strategy is ideal when you already plan to transfer the assets to the donee after you pass. The only difference is that you make the transfer earlier. Considering how sensitive and complicated such situations can be, it’s best to consult an experienced attorney for tailored advice.
3. Family Businesses
An integral aspect of estate planning is balancing the assets you want to give away and the amount you want to control. One way of achieving this balance is through the family business. Family limited liability companies (FLLCs) or family limited partnerships (FLPs) allow you to transfer assets across generations.
In the case of FLLCs, you can transfer business assets to the beneficiaries as limited interests, usually at a discounted gift tax value. This arrangement lets you retain control of management decisions. FLPs can work similarly to FLLCs. For example, a married couple can maintain control as managing partners and grant limited partnerships to their children.
Learn More About Estate Tax Exemption Sunset in 2026
The amendments made to the tax code have brought significant benefits for asset management. The downside is that the current rules are set to expire in 2026. People with high-value assets should consider estate planning before the exemptions sunset. It’s best to consult an attorney before making decisions.
Barulich Dugoni Suttmann & Cummins Law Group, Inc. provides estate planning services to individuals and families in California. Our team of experienced attorneys has practical knowledge of estate planning and tax laws. We assess situations and provide tailored solutions, as we believe every matter requires unique attention. Want to learn more? Contact us now!
