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Estate Tax Exemptions Expiring: How Will This Change Your Tax Plans?

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The estate tax exemption is the largest it has been in decades. Taxpayers who pass away in 2024 can transfer up to $13,610,000 of assets to the next generation without their estate incurring tax. This number will be adjusted upward for inflation in 2025.

But in 2026, the exemption gets cut nearly in half.

A key provision of the Tax Cuts and Jobs Act is set to expire in 2026, reverting the estate tax exemption to what it was in 2017. Unless legislators introduce another law that boosts the exemption, you may need to adjust your estate tax plans to accommodate the change.

Why is the expanded exemption expiring?

The Tax Cuts and Jobs Act (TCJA) that was passed at the end of Trump’s presidency was the most impactful tax law in over 25 years. Most TCJA provisions that affected businesses (like corporations and partnerships) were permanent changes to the tax code, but the provisions that affected individual taxpayers were only temporary. Most individual tax provisions — including the boosted estate tax exemption — were only valid from 2018 through 2025; in 2026, those provisions are set to “sunset,” or expire.

What is the current exemption, and what will it be in 2026?

The estate tax exemption is currently at a whopping $13.61 million per person. This means that married taxpayers can transfer up to $27.22 million of assets at the end of their lives without incurring any estate tax.

This is how the estate tax exemption has changed in the last decade:

TCJA table revised

The IRS hasn’t finalized the exemption for 2025 or 2026, but once the TCJA’s provision expires in December 2025, the estate tax exemption will likely drop to around $7 million.

How does the estate tax exemption work?
In essence, the estate tax is a tax on property that you transfer when you die. All assets that you own at death — cash, real estate, annuities, certain trusts, insurance proceeds, securities, business interests, etc. — will become part of your taxable estate. However… this doesn’t mean that all your assets are taxable. You can use the estate tax exemption to remove all those assets (or at least a large portion of them) from taxation. 

Let’s look at an example. Let’s assume that Taxpayer has assets valued at $15 million when they die and hasn’t used any of their exemption during their lifetime. After applying the $13.61 million estate tax exemption, their taxable estate drops from $15 million to only $1.39 million, which will be taxed at the current rate of 40%.

The estate tax exemption is sometimes called a “lifetime exclusion” because it’s something that you can begin to use up while you’re still alive. Most gifts above a certain dollar amount that you make during your lifetime will “eat away” at your lifetime exclusion, and however much remains at your death is what will apply against your estate.

What can I do to maximize the estate tax exemption before the TCJA provisions expire?

If you want to maximize your estate tax exemption before it drops back down to pre-TCJA levels, talk to your tax advisor. Together, you may want to employ some of the following techniques:

Technique 1: Make gifts below the annual gift tax threshold.

The simplest way to avoid the estate tax is to keep your estate’s value low so there is nothing to tax when you die. You can do this by making gifts throughout your life that are below the annual gift tax threshold. Each year, you can gift up to $18,000 to each person in your life: children, grandchildren, parents, distant family members, neighbors, friends, friends of friends — you get the picture. As long as your gifts stay below the annual threshold, you can make $18,000 gifts every single year without using any of your lifetime exclusion.

Technique 2: Make tax-free gifts.

Most large dollar value gifts that you make — either during your lifetime or at your death — will eat away at your lifetime exclusion, but the IRS provides for a few exceptions. The following gifts are not considered taxable and will therefore not impact your lifetime exclusion:

  • Paying someone’s tuition directly to an educational institution
  • Paying someone’s medical bills directly to a hospital or medical provider
  • Charitable contributions
  • Gifts to a spouse
  • Certain political contributions

Technique 3: Use your entire estate tax exemption now.

The estate tax exemption is the highest it’s been in some time. Why not use it now?

In 2019, the IRS released final regulations that confirmed that taxpayers who use the expanded lifetime exclusion today will not owe taxes once the exemption drops in 2026. The IRS’s anti-clawback rule ensures they will not be punished for following the letter of the law as it stands today; they have every right to use the higher exclusion levels between the years 2018 and 2025, even if they know the exemption will fall back down again in 2026.

Technique 4: Gift assets that will appreciate.

You may get more bang for your buck if you prioritize gifting assets that are likely to appreciate. Doing so would remove the asset and its future appreciation from your estate. While this technique shouldn’t be applied indiscriminately across the board, it’s important to consider appreciation potential when choosing which assets to gift during your lifetime.

What can we expect going forward?

Lawmakers seem to always have their sights set on estate taxes. In recent years, legislators have been focusing on the exemption, but in prior periods throughout history, they’ve made big changes to the tax rate itself. Because 2024 is an election year, it’s possible the estate tax laws will change once again. But until those provisions get written into law, we can only plan for what we know. 

For more information on Estate Tax Exemptions Expiring, contact us.

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