In early 2017, the provisions of the Tax Cuts and Jobs Act went into effect. The act contained a variety of provisions that were set to sunset at the end of 2025. One of the sunset provisions was tied to the estate and gift tax exemption.
The Tax Cuts and Jobs Act doubled the estate tax exemption up to roughly $11 million per person. With that exemption level indexed annually for inflation, the exemption in 2025 is $13.99 million per person. This means the first $13.99 million in a person’s estate at the time of death is exempt from estate taxes to the extent the exemption has not previously been used to offset gift tax for lifetime transfers.
Prior to the 2024 elections, the estate and gift tax exemption amounts were on schedule to sunset. Projections for the post-sunset exemption level placed the anticipated new amount at about $7 million per person. Keep in mind, every dollar over the exemption level is subject to a 40% tax. And keep in mind the estate tax applies to life insurance and retirement benefits owned by the deceased person. Although we cautioned our clients against assuming these worst cases scenarios would come to pass, many people implemented unnecessary planning with the attendant complexity and cost due to their fears.
With the 2024 elections in the rearview mirror, we now know the gift and estate tax exemptions did not sunset. Instead, those exemptions were extended and made permanent, permanent in the sense that they would no longer be subject to sunsetting. So, as we look ahead to 2026, the estate tax exemption will increase to an inflation adjusted $15,000,000 for persons dying on or after January 1, 2026, and for taxable gifts in calendar year 2026. The gift tax annual exclusion will remain at $19,000 per donor, per donee for qualifying gifts.
How does this affect your planning? First, if the value of your estate exceeds $15,000,000 (or $30,000,000 for married couples) you should plan to avoid the potential estate tax on your net worth in excess of this exemption level. Second, if you have an estate which includes appreciating assets and accumulation of after-tax income which is likely to increase the taxable value of your estate beyond the exemption, you should plan to avoid the potential estate tax. Third, even if you are not so fortunate as to have an estate value in excess of the exemption upon your passing, you should plan for the eventual transfer of your accumulated wealth upon your passing in a manner which accomplishes your wishes for your family and charitable causes (the objects of your bounty) with the least diminution in value due to costs of estate administration and taxes. Consideration of two very simple questions will put you on the path to a successful estate plan. Who do you want to receive the benefit of your wealth upon your passing? And, how and when do you want them to benefit from your wealth?
