April 23, 2025
By: Jasmine Beringer & Lyzz Leise
The estate tax exemption is scheduled to significantly decrease at the end of 2025. This change could have a profound impact on many people's estate and financial planning strategies. Currently, individuals can leave up to $13.99 million to their heirs without paying federal estate tax. However, beginning in 2026, that exemption is expected to drop to approximately $7 million. This reduction means more estates may be subject to taxation – potentially cutting deeply into the wealth passed on to heirs.
Here’s why it’s crucial to start planning now.
The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily increased the federal estate tax exemption, allowing individuals to transfer up to $13.99 million (as of 2025) without federal estate tax liability. For married couples, this amount effectively doubles. However, this expanded exemption is set to expire after December 31, 2025. Starting January 1, 2026, the exemption will revert to $5 million per individual – estimated to be about $7 million after inflation adjustments.
Once the exemption is reduced, estates exceeding the threshold could be subject to a federal estate tax of up to 40%. For families with substantial assets, this change could result in a significant tax burden - potentially requiring the sale of family businesses, real estate, or other assets to meet tax obligations.
This is especially relevant for those who own:
• Closely held businesses
• Agricultural land
• High-value investment portfolios
• Appreciated real estate
1. Make Use of the Higher Exemption. Under current IRS rules, individuals can make lifetime gifts using the increased exemption amount without fear of a future claw back. This means you can potentially remove millions from your taxable estate by gifting assets now.
2. Avoid Future Complications. Tax laws are always subject to change, especially with shifts in political priorities. By taking action now, you can lock in current benefits that might be reduced or eliminated by future legislation.
3. Time to Strategize. Effective estate planning is not something to rush. It often involves complex strategies like setting up trusts, restructuring businesses for tax efficiency, and transferring assets in a way that aligns with long-term family goals – all of which take time. Starting early allows for thorough planning and strategic decision-making.
4. State Taxes. Several states impose their own estate or inheritance taxes, often with much lower exemptions than the federal level. Coordinated planning can help mitigate both federal and state tax liabilities.
With the estate tax exemption set to decrease in 2026, now is a critical time to evaluate and update your estate plan. Proactive planning can help preserve your wealth, ensure a smooth transfer of assets, and reduce the tax burden on your heirs.
If you have any questions or need help navigating these changes, please don't hesitate to contact us.
This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with an attorney.
