Even Smaller Estates Can’t Afford to Ignore the 2026 Estate and Gift Tax Sunsets

By Christopher L. Sassone, CFP®, CLTC®, Financial Consultant/Investment Advisor

Let’s dive into the world of estate and gift tax laws. With big changes on the horizon, understanding these shifts is crucial for your financial future and passing on your estate. After all, this doesn’t impact just the ultra-wealthy. If your estate is worth from as little as $1 million to $5 million, your future tax obligations can escalate dramatically if we don’t map a strategy quickly.

Or, on the flip side, some people with large estates come to us for help because they can’t get their arms around it alone. I’ve even worked with a few people who have gotten part-way through their planning and become stuck, not knowing about the creative options available.

First things first: What’s the situation with estate and gift taxes? These are the taxes that the federal government levies on transfers of wealth, either during an individual’s life (gifts) or after their death (estate). The good news is that these taxes have generally only applied to fairly hefty transfers, thanks to the current exemption thresholds.

THE TAX CUTS AND JOBS ACT OF 2017 AND ITS IMPACT

Flashback to 2017, and we hit a fiscal milestone with the Tax Cuts and Jobs Act. This act was a game-changer, essentially doubling the amounts most people could pass on without large tax repercussions. As the years progressed, these exemption amounts have further increased, thanks to inflation-based adjustments, giving us more flexibility in estate planning strategies.

UPCOMING SUNSET OF THE DOUBLE EXEMPTION

But there’s a sunset clause on this golden period. Without legislative intervention, the end of 2025 will bring a seismic shift as the doubled exemptions are set to be cut, reverting to the pre-2017 era.

According to the IRS, in 2021, only about 1,900 tax returns were filed for estates above the exemption threshold, which constituted less than 0.1% of the 2.7 million people who passed away in the previous year. That low rate will surely increase when these changes go into effect.

So, for those who have been making the most of the higher limits, the time is now to develop a forward-thinking strategy.

LIFETIME GIFTING STRATEGIES

Beyond the substantial federal estate tax lifetime exemption, the annual gift tax exclusion offers another avenue in your financial strategy. You’re entitled to gift up to $18,000 per person each year as of 2024, without dipping into your lifetime exemption.

It’s time to think outside the box with this exclusion. Consider using it for funding your grandchildren’s education through college savings plans or establishing trusts. This approach can significantly lower your taxable estate.

Fully leveraging these annual gifts means you can strategically shrink the size of your taxable estate, a wise move in anticipation of the forthcoming decrease in exemption thresholds.

By maximizing the use of these annual gifts, you’re effectively reducing the size of your taxable estate. This strategy can be particularly savvy.

PORTABILITY AND ITS BENEFITS FOR MARRIED COUPLES

Married couples have a unique advantage thanks to a provision known as ‘portability’. This allows a surviving spouse to add any unused exemption from their deceased partner’s estate to their own, effectively doubling the benefit.

For instance, if a spouse were to pass away, the survivor would be entitled to their own exemption plus any portion of their spouse’s exemption that remains unused. It’s a doubling up that can make a world of difference in how the surviving partner plans their next moves.

Today, this exemption stands at $12.92 million, but brace yourself—it’s set to revert to a $5 million baseline, adjusted for inflation, when the calendar flips to January 1, 2026.

PREPARE NOW FOR THE 2026 EXEMPTION REDUCTION

With the exemption reductions looming, proactive planning is critical. The sunset marks a pivotal shift, potentially halving the current generous exemption limits and impacting many estate plans.

The good news is there’s still time. The bad news is that the attorneys we work with are often backed up working through these considerations with their clients. So, it’s not something that can be put off.

At Davie Kaplan, we can help craft a strategy that maximizes the current limits, such as establishing trusts, spending down assets or charitable donations. Together, give you a head start—helping you stay tax-efficient and pursue your long-term goals.

At the end of the day, estate planning should flex with the ever-evolving tax scene. By staying engaged, seeking wise counsel, and being adaptable, you can ensure your plan meets today’s needs and anticipates future changes, no matter the size of your estate.

Contact us to get started.

See also: Time Is Running Out on Estate Tax Limits