The Estate Tax Exemption Sunset in 2026: Implications and Considerations

The estate and gift tax, colloquially known as the “death tax,” has been a subject of debate and scrutiny for decades. Generally, when someone is deceased (known as the “decedent”), it is a federal tax levied on the combined value of their lifetime gifts and their estate in excess of a certain exemption amount.

The current gift and estate tax exemption amount is $12.92 million, so that’s how much a decedent can gift and bequeath before a 40% marginal tax rate is applied to any excess value.

The gift and estate tax exemption amount (known as the “lifetime exemption”) has been a focal point of discussion among policymakers and taxpayers alike. Let’s dive into the upcoming lifetime exemption sunset scheduled for 2026 and explore some key implications and planning considerations.

The Tax Cuts and Jobs Act of 2017 (TCJA)

The TCJA significantly increased the lifetime exemption, which spared many families from having to pay the gift and estate tax. Under the TCJA in 2018, the lifetime exemption limit was raised to $11.18 million per individual (annually indexed for inflation). For a married couple, this meant they could transfer a combined $22.36 million of value without any gift or estate tax in 2018.

The estate tax exemption sunset

Due to legislative rules, the TCJA includes a sunset provision that requires the lifetime exemption to revert to its pre-2018 levels after December 31, 2025. This means that unless legislative action is taken to extend or modify these provisions, the lifetime exemption will revert to $5.5 million per individual (adjusted for inflation) in 2026. After being adjusted for inflation, we estimate the lifetime exemption will be approximately $7.27 million per individual, or $14.54 million for a married couple.

Implications:

1. Increased Exposure to the Gift and Estate Tax:

Many individuals who were previously exempt from the gift and estate tax may be facing substantial tax liabilities upon their passing. For example, a couple with a combined estate of $20 million would not be subject to the estate tax if they transfer it in 2025 but could have $5–$6 million of value subject to estate tax if they transfer it in 2026.

2. State Estate Taxes:

Many states have their own gift and estate taxes, with varying exemption amounts. Changes at the federal level can have implications for state gift and estate tax liabilities as well.

3. Political Uncertainty:

As with all tax laws, the gift and estate tax is often subject to political debate and legislative changes. As 2026 approaches, individuals should closely monitor legislative proposals and the congressional and presidential landscape.

Considerations:

1. Seek Professional Guidance:

It is crucial to reach out to your Wealth Advisor to help you navigate the complexities of gift and estate taxation and craft a tax-efficient strategy.

2. Start Gift and Estate Planning Early:

Given the uncertainty surrounding gift and estate tax laws, individuals with substantial estates should engage in early and comprehensive gift and estate planning to utilize the current lifetime exemption and minimize tax liabilities with proper time to engage and implement recommendations.

3. Include Gift and Estate Planning Flexibility:

The changing lifetime exemption underscores the importance of proactive, flexible gift and estate planning. Individuals and families need to consider how the evolving tax environment might affect their estates, requiring adjustments to their financial, gift and estate planning strategies.

The changes coming to the gift and estate tax law in 2026 underscore the importance of staying informed about evolving tax laws and seeking professional guidance to help you prepare. Corient has a deep bench of experienced advisors to help you and your family navigate the constantly evolving gift and estate tax landscape. Reach out to your Wealth Advisor to discuss actions you may need to take prior to 2026.

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