2026 Estate Tax Exemption to be Cut
The federal estate tax exemption is due to be cut in half in 2026. For those with a high net worth estate, advanced planning may help you take full advantage of the current tax exemptions before they are cut.
$12 Million Today – $6 Million Tomorrow
The federal estate tax exemption was increased to $12.06 million in 2022, a benefit to high net worth estates in the United States. This threshold is set to decrease in 2026 to half of its then-current level. Unless Congress acts in the interim, those dying in 2026 or later will have an estate tax exemption of of $6.03 million, adjusted for inflation between now and then.
Gift Tax Exemption
The value of your taxable estate may be adjusted by the amount of money you have gifted over your life time. How does gifting impact the 2026 cut in estate tax exemption?
The annual gift tax exclusion is $16,000 in 2022. This means that each year you can give $16,000 to as many individuals as you like with neither you nor the recipient having to report the gifts to the IRS. But if you give anyone more than that amount in a single calendar year, you are supposed to report the excess on a gift tax return. (The recipient still does not have to report it.) It is still very unlikely that you’ll have to pay any tax because the gifts are only taxed when cumulatively they reach the $12 million threshold. But the total you have gifted over your life time may effect estate taxes later.
Example: If you give your brother $1,016,000 you will have to report a taxable gift of $1 million after the $16,000 annual exemption. This means that if you pass away before 2026, your estate tax exemption will be reduced to $11 million instead of $12 million.
Pre-2026 Gifts and Post-2026 Estates
The 2026 decrease in estate tax exemption raises the question as to what happens if a taxpayer makes a taxable gift before 2026 when the threshold is $12 million, but dies after 2026 when the threshold has been cut in half.
In most cases, if a taxpayer dies in 2026 or later, their estates will be taxed above the $6 million exemption amount, as if the higher threshold never existed. The exception is if they gave away more than $6 million over their life time.
Example: If you have been very generous to your brother and gave him $10,016,000 and you died in 2026 or later, your estate continues to have the annual $16,000 gift tax exemption and the additional $10 million taxable gift would be your new estate tax exemption instead of $6 million. Everything else in your estate would be subject to tax, but the $10 million you gave your brother would still be gift and estate tax-free.
In summary, the IRS has ruled that beginning in 2026 your estate tax exemption will be the greater of (1) the estate tax exemption then in place and (2) the total taxable gifts you have made during life.
Next Steps
If you have an estate of high net worth, proper planning can produce considerable estate tax savings. Baker Law Group would appreciate the opportunity to work with you. We offer a complimentary initial consultation to determine how we can best assist you.
To schedule a consultation:
781-996-5656 phone or
info@MBakerLaw.com email
