Will the Federal Estate and Gift Tax Exemption Be Reduced in 2026?
January 16, 2025 | Patricia C. Marcin | |The federal estate and gift tax exemption changes from year to year. The current combined federal estate and gift tax exemption amount of $13.99 million per person ($27.98 million per married couple) is scheduled to “sunset” automatically on January 1, 2026, and revert to $5 million indexed for inflation (guesstimated at $7.5 million), unless Congress takes action. This exemption amount applies to the total taxable gifts made during an individual’s lifetime and the value of property transferred at death to someone other than a spouse or charity. Once the gifts combined with transfers at death exceed the exemption amount, a federal tax of 40% will be imposed on the excess.
Many had waited to address additional gifting until after the presidential election in November 2024 and are feeling more comfortable that the higher exemption level will remain intact. However, there is no guarantee that Congress will act effectively to extend the higher exemption level. If your financial situation warrants it, you should strongly consider gifting sooner rather than later to use your exemption and to remove the appreciation on gifted assets from your estate. If an individual does use the increased exemption amount prior to the end of 2025 and the exemption decreases in 2026, an Internal Revenue Service directive made clear that gifts made prior to December 31, 2025, and totaling no more than the higher exemption amount, will not be subject to additional gift and estate taxes.
For example, if Mary made a $13 million gift in 2025 to her daughter, Gwen, (when the exemption amount is $13.99 million) and then dies in 2026 (when the exemption amount decreases to about $7.5 million) the approximately $6.49 million in gifts over the 2026 federal exemption amount would not be added to Mary’s total lifetime and death transfers and would not increase the federal estate tax due on her estate.
While many are waiting to see what happens to the exemption amount before January 1, 2026, the clock is ticking. It takes time to complete an effective gift plan, including potential recapitalizations, transfers and appraisals, so waiting too long may not give you the time to get the gifting done before the exemption declines. Therefore, those considering making substantial gifts should do so well before the end of 2025.
This article appeared in the January 2025 issue of Stroll Lloyd Harbor.