Estate Tax Exemption Could Decrease to $6M on January 1, 2026

Editor’s Note (December 13, 2024):

Following the U.S. election, the federal estate tax exemption remains scheduled to decrease from $13.61 million to $6 million on January 1, 2026. While the new administration may extend this deadline, effective planning is still essential. Strategic gifting through trusts, for example, can lock in current asset values and shield future appreciation from estate taxes. This is a valuable tool for high-net-worth individuals, allowing you to retain control while minimizing future tax liabilities. The strategies outlined in this blog continue to be relevant for those seeking to optimize their estate planning before any changes take effect.

The federal estate tax exemption is the amount you may give away during your lifetime and own at your death without that being subject to the IRS’s 40 percent estate tax. Any assets you own at your death that exceed the current estate tax exemption are subject to a 40 percent tax on its fair market value. Everything owned at one’s time of death and any gifts made during one’s lifetime are currently subject to this 40 percent estate tax. Under current law, the estate tax exemption is $13.61 million. The combined exemption for a married couple is $27.2 million, which provides taxpayers with an opportunity to pass a greater amount of wealth to their heirs.

This exemption is scheduled to decrease to an estimated $6 million as of December 31, 2025. This means we could experience a $7,610,000 reduction in the exemption. Were you to pass away on January 2, 2026, for example, with an estate of $13.61 million, your estate would need to pay $3 million more in taxes than it would if you passed away on December 31, 2025. Approximately 20 states also have an estate or inheritance tax. Many of those states have lower limits on the amount subject to estate tax, e.g., Massachusetts, which taxes estates worth $2 million or more. Massachusetts’ tax rate is graduated from 0-16 percent depending on estate size.

The Treasury Department and the Internal Revenue Service issued final regulations confirming that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 through 2025 will not be adversely affected after 2025, which is when the exclusion amount is scheduled to decrease to pre-2018 levels.

What We Advise

With higher exclusion amounts slated to sunset after 2025, AAFCPAs advises that clients review their assets’ potential worth and take advantage of the higher gift and estate tax exemptions while possible.

Gifting Strategies

Many clients are concerned about gifting strategies because they do not necessarily want to relinquish control of their assets. AAFCPAs advises clients on the many strategies and techniques available that allow continued control and access to their assets even after making completed gifts.

The Spousal Lifetime Access Trust (SLAT), for example, allows married couples to make gifts to each other, so each maintains control over one-half of those assets and removes a significant portion of their estates from the estate tax. Additionally, the future appreciation in these assets is also removed from their taxable estates. For couples with estates exceeding $2 million but less than the current $13.61 million exemption, AAFCPAs may advise a similar technique whereby one spouse gifts all assets to a trust for the second spouse. This technique uses the first spouse’s estate tax exemption but preserves the second spouse’s exemption for future use.

A Beneficiary Defective Inheritor’s Trust (BDIT) is a specialized trust created by someone other than the primary beneficiary, designed to provide tax and asset protection benefits while retaining significant control over the assets. It is structured as a grantor trust, making the primary beneficiary responsible for income taxes on the trust’s income, which is effectively a tax-free gift to the trust, allowing the trust assets to grow tax-free and remain outside the beneficiary’s estate for estate tax purposes. This strategy is particularly useful for assets with significant potential for appreciation such as interests in limited liability companies (LLCs).

The Intentionally Defective Grantor Trust (IDGT) is another gifting strategy that allows for the tax-free sale of assets in exchange for a note. The sale moves assets with the potential for appreciation out of your estate while leaving a note that only decreases in value in your estate. The SLAT, BDIT, and IDGT are some examples of strategies that let clients use their current $13.61 million exemption while maintaining control and access to assets.

How We Help

Every tax situation is unique and requires a careful and comprehensive plan. AAFCPAs counsels clients on strategic options based on their individual circumstances. Proactive planning for the use of estate and gift tax exemptions may help to reduce future estate, gift, and generation-skipping transfer taxes and preserve significant wealth for future generations. Note that the planning process may be lengthy and many planning strategies may require the assistance of valuation professionals and attorneys who may not accept work or may notably increase fees as the sunset dates for these provisions draw near.

AAFCPAs advises that clients begin planning as soon as possible so they can take advantage of this new higher gift tax exclusion while available. Remember, most states have their own estate tax, e.g., Massachusetts’ $2 million exemption. So proper planning that employs various trusts is essential for taxpayers looking to safeguard their wealth for beneficiaries.

If you have questions, please contact Camila Gonzalez Whalen, CPA, Director, Tax at 774.512.9078 or cwhalen@nullaafcpa.com, Joshua England, LLM, Esq., Partner & Tax Attorney at 774.512.4109 or jengland@nullaafcpa.com, Daniel Seaman, CPA, Tax Partner at 774.512.4025 or dseaman@nullaafcpa.com—or your AAFCPAs Partner.