ESTATE TAX REDUCTION LOOMING

($13.6 Million back to about $6 Million in 2026)

As of January 1, 2026, the current lifetime estate and gift tax exemptions will sunset and revert back to President Obama amounts, resulting in exemptions that will be roughly half of what they are today. As such, if you are married and have a net worth in excess of approximately $6 million then you could potentially save a significant amount of tax dollars by making strategic changes to your estate and financial plans now. 

The federal government (and some states but not Ohio) taxes the transfer of assets at death. Fortunately, for the vast majority of people no tax will be due because there is a rather larger exemption.  President Obama signed The American Tax Payer Relief Act (ATRA) on January 2, 2013.  This law permanently increased the estate, gift and generation skipping transfer tax exemption to $5,000,000 and provides that it will be indexed for inflation.  Subsequently, on December 20th, 2017 Congress passed the "Tax Cuts and Jobs Act" (TCJA), which become law on January 1, 2018.

The TCJA exemption more than doubled the previous year’s ATRA estate tax exemption of $5,490,000 per individual to $11,180,000. For married couples, the estate tax exemption also doubled when adjusted for inflation, from $10,980,000 per ATRA to $22,360,000 per TCJA.  These exemptions are scheduled to increase with inflation each year until they peak in 2025. In 2026, however, the estate tax exemption levels will be cut in half or reverted back to the ATRA 2017 schedule after adjustment for inflation.  Based on the figures we can assume that the estate tax exemption in 2026 will be roughly $6,000,000 per individual or $12,000,000 per married couple with proper planning.

In addition to the lifetime exemption, an individual can give up to eighteen thousand ($18,000) per year, per person, with no federal gift or estate tax consequence.  The annual exclusion amounts are in addition to and will not reduce the lifetime exemption, so we should look at ways to use this exclusion because estate tax is going to be a problem.  These gifts are not cumulative however, and any year an exclusion is not used it is lost forever.

Married couples have a unique advantage thanks to a provision known as ‘portability’. This allows a surviving spouse to add any unused exemption from their deceased partner’s estate to their own, effectively doubling the benefit.  Portability is a wonderful tool as it can be applied at the time of death when all the facts and circumstances surrounding the decedent’s assets are known.  Nevertheless it only applies to the current exemption.  Right now you could port $13.61 million from your deceased spouse, however, in 2026 you can only port roughly $6 million from your predeceased spouse.   

You will not need to worry about the government coming in latter only to undo what you have done to save taxes prior to 2026 due to the anti-clawback rule.  The anti-clawback rule was codified in 2019 and explains that an individual or estate will not be taxed on completed gifts that is gifts that were made prior to 2026.

With the exemption reductions looming, proactive planning is critical. Developing a comprehensive and cohesive financial and estate plan with an attorney prior to 2026 is essential and could save you and your family millions in taxes.   

Any information provided is for illustrative and educational purposes only, it is intended to provide only general information and is not and should not be construed as legal advice.  Furthermore, any information herein is general in nature and does not form an attorney-client relationship between the reader and this law firm.