As the calendar turns to April, taxes are on the minds of many people I meet with. For the past few years, there's been an impending deadline for many people to consider as they approach their estate planning, the reduction of the estate tax exemption. We've known about this upcoming reduction for years now, but the date it becomes effective, January 1, 2026, is fast approaching. On that date, the estate tax exemption is set to be significantly reduced, and understanding whether to take estate tax planning action now could save millions in taxes.
Currently, individuals can leave estates valued up to $13.61 million (or $27.22 million for married couples) without facing the 40% federal estate tax. This generous exemption will see an inflation adjustment in 2025 before halving in 2026. The looming reduction sparks a vital question:
Should you act now to leverage the higher exemption?
Who Should Consider Taking Action?
The decision varies widely based on individual circumstances. For example, if a couple with a $27 million estate were to pass away at the end of 2025, their estate tax bill would be zero due to the current exemptions. However, delaying just a day into 2026 could result in a tax bill exceeding $5 million.
For estates in the $5 million to $50 million range, the unified gift and estate tax system offers a unique opportunity to use the current exemption through gifts or inheritance. However, the IRS's anti-clawback rule ensures that a deceased person's exemption is the greater of what they used during their lifetime or the exemption at their death, offering strategic gifting opportunities.
Strategic Gifting Before 2026
Since we still have more than 18 months until the exemption dips to $6 million, there are strategies that you should be considering as part of your estate planning. For example,
- An individual could make significant gifts using the current exemption, reducing their taxable estate upon death.
- For instance, an $18 million estate could make a $5 million gift in 2024, reducing the taxable estate but still benefiting from the larger exemption at death.
- A more aggressive strategy involves gifting up to the full exemption amount ($13.6 million in 2024), significantly lowering future estate tax liabilities.
Guidelines for Estate Tax Planning Action
For each family, it's important to work with professionals to create the plan that crafts the legacy you want to leave for your family. These are generalizations, but here's some ideas for your plan depending on the size of your estate:
- Married Couples with Estates Under $15 Million: Likely no action needed due to the high current exemption levels.
- Estates Between $15 Million and $40 Million: Consideration of annual gifting and potential utilization of the current exemption is crucial, albeit with considerations around control and comfort with gifting significant assets.
- Estates Over $40 Million: These estates stand to benefit significantly from maximizing current exemptions through large gifts, assuming the donors are comfortable with the implications for their remaining assets.
Factors such as sudden wealth increases or business successes can dramatically change planning strategies. The landscape of estate and gift taxes is likely to change with future legislative changes, making it imperative to base decisions on current laws and professional advice. As the 2026 changes approach, individuals with significant estates should consult with estate planning professionals to navigate the complexities of the tax landscape and make informed decisions.
Do You Need an Estate Plan?
If you don't already have an estate plan, or if you have one that needs to be updated, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you to work with an estate planning attorney to get your estate plan prepared.
