Time to Update Your Estate & Giving Plans?

Gift & Estate Tax Limits Are Slated to Shrink in 2026. Here’s What You Need to Know.

For families with significant assets to account for in their estate plans, understanding how those assets are treated for tax purposes is essential to ensuring their estates pass to their heirs as efficiently as possible. Fortunately, the IRS allows families to make gifts free of federal estate or gift taxes — but only up to a certain threshold. This is known as the lifetime gift tax exemption and it currently sits at $12,920,000.

However, this exemption amount will “sunset” on January 1, 2026, when it drops to $5 million plus an adjustment for inflation.

The difference is substantial, particularly when considering that estate taxes of 40% will be levied on anything exceeding this amount. And this only represents the federal tax rate — some states may charge an additional estate or inheritance tax. Those with substantial assets may benefit from taking another look at their estate and giving plans before the end of 2025. If this describes you, here are some things to keep in mind.

What’s the Gift & Estate Tax Exemption?

The lifetime gift and estate tax exemption is one of the ways that the IRS allows for the transfer of wealth from one generation to the next. Currently, you can give up to $12.92 million over the course of your life without your beneficiaries incurring additional taxes.

This exemption applies to both gift and estate taxes, so using any part of the exemption for gifts will decrease the portion available for estate taxes. Each donor has their own lifetime exemption that must be exhausted before any direct gift taxes are applied. Further, couples who file separately may combine their exemptions to get a total exemption of $25.84 million. As noted previously, these totals are slated to shrink considerably in 2026.

Annual Exclusion vs. Lifetime Exemption

In addition to there being a lifetime exemption, individuals can gift up to a certain amount each year without incurring extra taxes. This is referred to as the “annual exclusion” and the limit currently sits at $17,000, or $34,000 for spouses filing separately.

Gifts that exceed the annual exclusion amount must be reported and the difference will count against your lifetime gift tax exemption. Filing a gift tax return for such gifts is essential for record-keeping, and these records should be retained permanently.

What Could This Mean for You?

As with every aspect of your financial plan, a bit of proactivity can go a long way toward helping improve your financial future. Now is the time to start planning, and here are some tips to consider:

  • Consider taking advantage of the current exemption amount by passing assets to your heirs before the exemption amount decreases in 2026.
  • Establish a dynasty trust with your lifetime gift tax exemption. Though you will lose control of these assets, the trust ensures they’re not subject to estate taxes and can still provide for your beneficiaries, potentially for multiple generations. As a form of irrevocable trust, the terms of a dynasty trust may not be easy to change should you change your mind down the road.
  • If charitable giving is part of your financial plan, consider adjusting your giving strategy to lower your taxable income in light of the new exemption limits.
  • Take advantage of the individual exemption amounts, which are “portable” between spouses. If no estate tax return needs to be filed, the surviving spouse has a five-year window to make the tax portability election.
  • Don’t disregard typical “gifts” that should be filed as part of your lifetime gift tax exemption. These can include larger cash gifts for weddings, down payments for a car or home, or other kinds of financial assistance.
  • A lot can happen between now and 2026. In the past, anticipated cuts like these have not always come to fruition. Create a “just in case” plan built around the current, higher exemption amounts before 2025 concludes to ensure you’re prepared for any possibility.

Giving assets to your loved ones while you’re still alive is often more tax-efficient than doing so through an estate, so if you hope to pass down substantial assets, you should consider getting started today. If you have the ability to, giving today means your loved ones can benefit from your gifts immediately. Those gifts can appreciate in their hands, rather than yours, which can help reduce the size of your taxable estate.

Reach out to a financial or tax professional for help positioning your estate and giving plans.

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