Estate Planning Gifting Strategies

How will the potential decrease of the federal estate tax exemption affect your personal financial plans?

In this Insight, I’ll explain the 2026 federal estate tax exemption sunset and how it could affect some common estate planning and gifting strategies. 

Wealthstream Advisors hosted a webinar on “How to Prepare for the Sunset of the Gift and Estate Tax Exemption in 2026”  featuring guest speaker Dan Rubin, partner in the Trusts and Estates group of the law firm Farrell Fritz, P.C. Access the recording here.

What is the 2026 estate tax exemption sunset?

On December 31st, 2017, the Tax Cuts and Jobs Act (TCJA) doubled the federal lifetime gift and estate tax exemption from around $5.5M to about $11M. This higher exemption amount has continued to increase indexed for inflation and the exemption in 2024 is $13.61M.

After 2025, the TCJA is set to ‘sunset’ and the exemption reverts to pre-2018 levels. 

What will the estate tax exemption be in 2026?

Under current law, the TCJA estate tax exemption will sunset as of January 1, 2026. 

Unless Congress acts to extend or make it permanent, the estimated estate tax exemption will revert to about $7 million for individuals or about $14 million for married couples. These amounts represent half of the current exemption, adjusted for inflation.

Representative Estate Tax Exemption for 2026 Versus Today

Generally, estates valued at death under $13.6M (as of 2024), will not be taxed at the federal level. For example:

• If an individual passes away in 2024 with assets valued at $10M – their taxable estate will be $0, and there will be no federal estate taxes due.
• As the rules are today, if that same individual passes away in 2026 with assets valued at $10M – they will have a taxable estate of $3M ($10M minus $7M). 

Gift Tax Exemption

On an annual basis, individuals have an annual gift-tax exclusion amount of $18K (as of 2024) per donor, per donee. This means an individual can gift up to $18K to another individual with no federal gift-tax consequences and no required reporting. Any amount over the annual gift exclusion amount is considered a “taxable gift.”

How Estate and Gift Taxes Work Together Pre-2026

The $13.6M exemption (as of 2024) applies to gifts and estate taxes combined – whatever exemption you use for gifting will reduce the amount you can use for the estate tax. For example:

• An individual passes away in 2024 with assets valued at $11M, but also made $3M of taxable gifts during life. The $13.6M exemption is absorbed by the combined $11M assets and $3M of taxable gifts and results in a taxable estate of $400K.

• An individual made $10M of taxable gifts in 2023 and passed away in 2024 with assets valued at $1M. The combination of taxable gifts and assets at death is less than the $13.6M exemption. Therefore, the taxable estate will be $0 and there will be no federal estate taxes due.

• What if an individual made $10M of taxable gifts, trying to take advantage of the current higher gift exemption limit, but still has assets valued at $1M at death in 2026 when the exemption amounts step back down to pre-2018 levels?

The answer to the last question was unclear, causing concern for taxpayers until late in 2019 when the IRS confirmed the allowance of an estate to compute its estate tax credit using the higher of exemption amount applicable to gifts made during the life, or the amount applicable on the date of death.

Federal Estate and Gift Exemption Examples for High-Net Worth Individuals

Let’s look at a few examples to see the impact of this good news on high-net-worth individuals:

1. An individual passes away in 2026, made no lifetime taxable gifts, and has assets worth $13M. Their taxable estate is $6M ($13M minus $7M, the new stepped-down exemption).
2. An individual passes away in 2026 but made $4M of taxable gifts prior to 2026 and had remaining assets worth $9M. Because the amount of gift-tax exemption used prior to 2026 is less than the stepped down exemption amount, the credit applied to compute the estate liability is based on the $7M exemption. They used $4M during their life so they have $3M remaining. Their taxable estate is $6M ($9M minus $3M, the remaining exemption). There is only a benefit from making additional taxable gifts before 2026, if the total lifetime gifts exceed the stepped down exemption. The taxable estate is the same as if this individual used zero of the gift-tax exemption as shown in the first example.
3. That same individual passes away in 2026 but made $9M of taxable gifts prior to 2026, and now had remaining assets worth $4M. According to the regulations, the credit applied to compute the estate liability is based on a $9M exemption, the exemption amount absorbed when the higher limit was in place, instead of the new stepped own $7M exemption. There is now a taxable estate of $4M, instead of $6M.
4. That same individual passes away in 2026 but made $11M of taxable gifts prior to 2026, and now has assets worth $2M. The credit applied to compute the estate liability is based on a $11M exemption, the exemption amount absorbed when the higher limit was in place, instead of the new stepped down $7M exemption. There is now a taxable estate of $2M.

Although the assets gifted during life and the assets left in the estate totaled $13M in all of the examples above, the taxable estate decreases dramatically by taking advantage of the higher gift exemption limit in the years 2018-2025. Reducing the amount of the taxable estate can provide substantial tax savings. Estate and gift tax rates are 40% federal and many states impose an additional tax.

How will the 2026 federal estate tax exemption affect your personal financial plans?

Estate planning strategies must be evaluated in the context of real-life circumstances and needs. There could be large tax savings if these gifting strategies are implemented; but of course, there could be negative implications to gifting assets away – such as loss of control and the ability to use the assets to supplement lifestyle. Gifted assets also lose the “step-up” in basis at one’s passing.  

Before implementing the strategies above, make sure to consult with your estate attorney and financial advisor.

Ready to take the next step with your estate plan? Schedule a complimentary 30-minute consultation with one of our financial planners today!