Countdown to Potential 2026 Reduction of the Federal Estate and Gift Tax Exemption
10/16/2024The federal estate and gift tax exemption (the maximum amount that can be gifted or bequeathed to one’s family members or anyone else without incurring federal estate or gift tax) is $13,610,000 per person1 ($27,220,000 for married couples).2 Under current law, on January 1, 2026, the federal exemption amount signed into law in December 2017 will sunset and be reduced to approximately $7,140,000 for an individual and $14,280,000 for a married couple (adjusted for inflation) absent further legislative action by Congress. Prior to 2026, individuals with more $7,140,000, and married couples with more than $14,280,000 should revisit their estate and gifting plans in preparation for this possible reduction in the federal exemption.
As demonstrated below, the potential federal estate and gift tax savings can be substantial.
Example 1:
John Doe’s estate is valued $13,610,000.
If Mr. Doe, a single individual, dies prior to January 1, 2026, his estate will pay $0 in federal estate tax.
If he dies in 2026 – having done no planning before the exemption is reduced to $7,140,000- his estate will pay $2,588,000 in federal estate tax.
If he gifts $8,000,000 in 2024, and dies in 2026 with an estate of $5,610,000, his estate will pay $2,244,000 in federal estate tax.3 The tax savings is $344,000.
Example 2:
Jane Smith’s estate is valued at $25,000,000.
If Ms. Smith, a single individual, dies in 2026- having done no planning before the exemption is reduced to $7,140,000- her estate will pay $7,144,000 in federal estate tax.
If Ms. Smith gifts $13,610,000 in 2024, and dies in 2026 with an estate of $11,390,000, her estate will pay $4,556,000 in federal estate tax. The tax savings is $2,588,000.
Thus, even if an individual does not make use of the full federal exemption before 2026, the tax savings could still be substantial for those who can gift more than $7,140,000.
Among the states in which we regularly counsel our clients4, state estate taxes are imposed in New York and Connecticut, and New Jersey imposes a state inheritance tax. In those states, additional consideration should be given to the potential benefit of using lifetime gifts to reduce state estate or inheritance taxes.
Estate planning techniques may be employed to provide added financial security in case a donor has a financial downturn after the gift is made. Such techniques may provide an “exit strategy” in the form of a mechanism to regain some of the gifted property, if necessary, by giving the trustee discretion to make distributions to the donor’s spouse.
By working with your estate planning team, the opportunities for tax savings can be maximized.
Please contact your Warshaw Burstein attorney to discuss your options to reduce your exposure to estate tax.
1Expected to increase to $13,990,000 for 2025.
2Gifts and bequests in any amount to a spouse who is a United States citizen are not subject to estate or gift tax.
3These numbers are for illustrative purposes only and are approximations based on estimates for future exemption amounts and should not be relied upon.
4Such states include New York, New Jersey, Connecticut, Florida and California.
