The 2026 Sunset of the Increased Lifetime Estate and Gift Tax Exemption: What You Need to Know

The current lifetime estate and gift tax exemption, which was significantly increased under the 2017 Tax Cuts and Jobs Act (TCJA), is set to expire at the end of 2025. If Congress does not act to extend the higher exemption, it will revert to pre-TCJA levels, adjusted for inflation, starting January 1, 2026. This means the exemption will likely drop from its current level (approximately $13.99 million per individual in 2025) to an estimated $7.2 million per person in 2026.

This change will have significant implications for estate planning, gift transfers, and wealth preservation strategies. Here’s what you need to know:

Understanding the Lifetime Exemption and Its Sunset

The lifetime exemption allows individuals to transfer a certain amount of wealth during their lifetime or at death without incurring federal estate or gift taxes. Under the TCJA, the exemption was doubled from its previous level of $5 million (adjusted for inflation) to $10 million (also inflation-adjusted). As a result, in 2025, the exemption stands at approximately $13.99 million per individual (or $28 million for a married couple).

However, this provision is temporary. If no legislative action is taken, the exemption will “sunset” on January 1, 2026, reverting to an estimated $7.2 million per person (or $14.4 million for married couples) due to inflation adjustments.

Key Implications of the Sunset

1. Increased Estate Tax Exposure

The reduction in the exemption will subject more estates to federal estate tax, which is currently imposed at a 40% rate on amounts exceeding the exemption threshold. Individuals and families with estates valued above $7.2 million (or $14.4 million for couples) will need to reassess their estate plans to minimize tax liability.

2. Potential Need for Accelerated Gifting

For those with large estates, utilizing the current high exemption before it decreases could be a strategic move. The IRS has confirmed that gifts made under the higher exemption will not be “clawed back” when the exemption decreases in 2026. This means taxpayers can take advantage of today’s higher exemption by making tax-free gifts before the sunset.

3. Uncertainty in Future Legislation

While the sunset is currently scheduled for 2026, Congress could take action to extend the higher exemption or implement new tax reforms. Given the political landscape, estate planners should prepare for multiple scenarios.

What Should You Do Now?

1. Review Your Estate Plan – If your estate is above the projected exemption of $7.2 million (or $14.4 million for couples), consult with an estate planning professional to assess potential tax liability.
2. Consider Gifting Strategies – Utilize the higher exemption before it sunsets to transfer assets tax-free.
3. Explore Trust Options – Irrevocable trusts can help remove assets from your taxable estate while maintaining control over how they are distributed.
4. Stay Informed – Monitor legislative developments that could impact the exemption amount.

Conclusion

The sunset of the increased lifetime exemption will significantly affect estate planning for high-net-worth individuals. With the exemption expected to drop to $7.2 million per person in 2026, proactive planning is crucial. By taking action now, individuals can maximize tax savings and ensure their wealth is preserved for future generations.