The 2026 Sunset of Increased Estate and Gift Tax Exemption

The 2026 Sunset of Increased Estate and Gift Tax Exemption

At midnight on December 31, 2025, the increased federal estate and gift tax exemption under the Tax Cuts and Jobs Act of 2017 (TCJA) is scheduled to “sunset,” and in the absence of new legislation, the federal estate and gift tax exemption will drop by approximately half.  For 2024, the estate and gift tax exemption amount is Thirteen Million Six Hundred Ten Thousand Dollars ($13,610,000), which can in some cases effectively be combined with a spouse’s exemption amount for a total of up to Twenty-Seven Million Two Hundred Twenty Thousand Dollars ($27,220,000).  On January 1, 2026, the increased exemption amount is scheduled to “sunset” and the exemption amount will revert to pre-TCJA levels, indexed for inflation, which is estimated to be approximately Seven Million Dollars ($7,000,000) for an individual.  This memorandum highlights certain implications of the currently increased estate and gift tax exemption and explains certain strategies which may be used to take advantage of the historically high exemption amount.  However, not all aspects of the estate and gift tax exemption are addressed in this memorandum, and the strategies are covered only in a summary format.

The exemption levels under the TCJA are the highest in the history of the estate and gift tax.  As a result of the increased exemption and the confirmation by the IRS that it will not attempt to “claw back” any gifts made under the increased exemption amount (subject to certain anti-abuse exceptions), this period of increased exemptions represents a unique opportunity to transfer assets free of estate and gift tax.  Accordingly, there will be significant planning to be done before the end of 2025, and it will be an extremely busy time for estate planners as well as appraisers and other professionals.  Our firm may reach capacity for such planning, so we recommend that clients considering the use of their increased exemption begin their planning as soon as possible. 

What is the estate and gift tax exemption?     

The federal estate tax is levied on the transfer of the “gross estate” of a deceased individual, which generally includes the total value of any assets owned or controlled by such individual at his or her death.  Similarly, the federal gift tax applies to certain gratuitous transfers during an individual’s lifetime.  Both taxes are calculated based on the value of the transferred assets.  Each individual has an “exemption” against the federal gift tax for gifts made during life, which for 2024 is Thirteen Million Six Hundred Ten Thousand Dollars ($13,610,000).  Each individual also has an “exemption” against the federal estate tax for transfers made at death, which for 2024 is Thirteen Million Six Hundred Ten Thousand Dollars ($13,610,000).  However, to the extent an individual uses gift tax exemption during his or her life, it reduces the amount of estate tax exemption available at the individual’s death.  In other words, the current estate and gift tax system imposes tax on an individual’s assets through a “unified” exemption, which applies to transfers made during lifetime and at death.  Further, the current exemption amount is indexed for inflation each year.  For example, if an individual has used all of their gift tax exemption as of the end of 2023, such individual received an additional Six Hundred Ninety Thousand Dollars ($690,000) of exemption to utilize during 2024. 

Importantly, the IRS has confirmed that gifts made under the increased exemption amount will not be subject to estate tax in the future even if the exemption amount is later reduced.  Consequently, there is a significant advantage in utilizing the increased exemption amount before 2026.  By making gifts at the current high exemption levels, clients can effectively shield these assets from future estate taxes, regardless of potential reductions in the exemption amount, which could lead to substantial estate tax savings for certain high net worth individuals.  Therefore, we strongly recommend considering the strategic use of the current high exemption amount.

 What techniques can be utilized to take advantage of the increased exemption levels before 2026?

1. Gifting of Assets

Strategic use of gifting in estate planning can offer significant estate and gift tax benefits, particularly in removing appreciating assets from your estate.  When you gift assets that are likely to increase in value by the time of your death, you transfer the asset itself and also any future appreciation of those assets from your estate by the time of your death, essentially “freezing” the value of the assets for estate tax purposes as of the time of the gift.  In other words, any future appreciation in connection with any gifted assets may be sheltered from the reach of the estate and gift tax system.  To “supercharge” this technique, you can gift interests in closely-held businesses or fractional interests in real estate, which may qualify for valuation “discounts,” effectively increasing the amount that can be transferred tax-free when utilizing your gift tax exemption. 

2. Irrevocable Trusts

In making gifts and removing assets from your estate, an effective strategy involves gifts to irrevocable trusts, which can offer both the tax advantages described above and certain asset protection benefits for the beneficiaries such as potential protection from creditors.  One technique is an Intentionally Defective Grantor Trust (“IDGT”).  With an IDGT, the grantor (i.e., the creator of the trust) transfers assets to an irrevocable trust for the benefit of the trust beneficiaries, who are often the children and/or grandchildren of the grantor.  This transfer of assets by the grantor to the IDGT is often structured as a gift in order to utilize the grantor’s gift tax exemption.  The assets in the IDGT, along with any growth in the value of such assets, are then excluded from the grantor’s estate for estate tax purposes, potentially resulting in significant estate tax savings at the time of the grantor’s death.  Additionally, the grantor may retain the obligation to pay income taxes for the IDGT, which allows the assets within the IDGT to grow income tax free while such income tax payments further reduce the grantor’s estate for estate tax purposes. 

A Spousal Lifetime Access Trust (SLAT) is a type of IDGT in which one spouse (the donor) sets aside assets for the benefit of the other spouse (the beneficiary).  A SLAT allows the beneficiary spouse to have access to the trust assets during the beneficiary spouse’s lifetime, and this may allow the donor spouse to indirectly benefit from the assets in the SLAT because of the beneficiary spouse’s access to the SLAT assets.  However, it is important to note that due to the irrevocable nature of the SLAT, the donor spouse cannot reclaim the assets once they are placed in the trust 

Limited Partnerships, Limited Liability Companies, and Closely-Held Businesses—Clients should also consider gifting via a Limited Partnership (LP), Limited Liability Company (LLC), non-voting stock in a corporation, or other closely-held business structure.  Such gifts may allow for valuation discounts (for lack of control and marketability).  Where applicable, such gifts can effectively increase the amount that can be transferred without incurring gift tax.  Additionally, LPs and LLCs can provide asset protection benefits in some circumstances and facilitate the orderly transfer of assets and cohesive management/control of such assets to succeeding generations.

Given these potential changes to the tax laws, you may wish to update your estate planning.  We invite you to call our office and schedule an appointment with one of our attorneys if you have any questions about the sunset of the exemptions or if you would like any additional assistance with your estate planning.

Disclaimer:  This memorandum is for informational purposes only and does not, and is not intended to, constitute legal advice.  The receipt of this memorandum does not create an attorney-client relationship.  The topics covered in this memorandum are not comprehensive and should not be substituted for competent legal advice from a licensed attorney.