An Ugly Sunset – How the Federal Estate Tax is Set to Change in 2026
At Sequoia Advisor Group, one of our roles is to help our clients protect their assets and ensure their legacies are passed down to the next generation in a tax-efficient manner. Sometimes this means considering the impact of the federal estate tax. Currently, only individuals with significant wealth have to be concerned about the applicability of this particular death tax. With upcoming changes in 2026, however, this fact could change and more individuals and couples may need to implement proactive planning to avoid writing the government a potential massive check.
What is the Federal Estate Tax?
The federal estate tax is a tax on the transfer of wealth upon an individual’s death. It is currently a progressive tax that maxes out at a whopping rate of 40%! The federal estate tax is assessed on the value of your estate— think everything you own at the time of your passing, including real estate, investments, cash, personal property, and, shocking to some, life insurance—before it is passed on to heirs. If you are reading this and starting to sweat thinking about a 40% tax on your assets at death, take a breath. Currently, this tax only impacts the wealthiest estates, as the vast majority of Americans fall below the “Basic Exclusion Amount” – or what is commonly known as the federal estate exemption threshold.
The Current Federal Estate Tax Exemption
As of 2024, the federal estate tax exemption is $13.61 million per individual, or $27.22 million for a married couple. These numbers will be adjusted upwards for inflation in 2025. This means that an individual can currently leave up to $13.61 million to his or her heirs without being subject to the federal estate tax. If you are married, you and your spouse can typically leave double that amount federal estate tax free. If your estate exceeds that amount, however, the federal estate tax would apply to the excess over the exemption amount.
The current exemption amount is the highest it has even been due to the the Tax Cuts and Jobs Act (TCJA) pass in 2017. The TCJA doubled the previous exemption amount, setting up the generous exemption levels we have today. These provisions, however, are set to sunset at the end of 2025.
The Sunset of the TCJA in 2026: Why You Should Plan Ahead
Unless Congress takes action, the current estate tax exemption amount will revert to pre-TCJA levels starting January 1, 2026. This means the exemption will drop to $5 million adjusted for inflation per individual. Most experts currently estimate the exemption amount to settle around $7 million. Married couples will still be able to double the exemption amount. While still a significant amount for most Americans, this reduction in the exemption will result in more individuals and couples being forced to consider the potential impact of the federal estate tax on their assets now and in the future.
So Who Should Be Worried?
Obviously, if your estate is already worth close to, at, or above the current federal exemption amounts of $13.61 million for an individual or $27.22 million for a married couple, the best time for you to start planning was yesterday. The next best time is today.
If your estate is currently valued between the estimated reduced exemption amount of $7 million and the current federal estate tax exemption level of close to $14 million, you should also consider whether planning for the sunset makes sense. The IRS has published regulations that protect individuals who take advantage of today’s higher federal estate tax exemption from potential future tax penalties. These rules, known as the anti-claw back regulations, ensure that if you use the larger exemption for lifetime gifts now, your estate won’t face additional taxes in 2026 when the exemption is expected to drop.
Finally, if your estate is valued near the $7 million threshold (or $14 million for a couple), you should also pay attention to the looming 2026 change. Investment appreciation, real estate gains, or business growth could push your assets over the exemption amount. Without proactive planning, your heirs could face a substantial tax bill, significantly reducing the amount they inherit.
What You Can Do Now
Consider Lifetime Gifting: One way to reduce the size of your taxable estate is by making lifetime gifts. The current gift tax exemption is aligned with the estate tax exemption, so you can take advantage of this larger limit before it decreases.
Establish Trusts: Trusts can be an effective tool for reducing estate taxes. Certain types of trusts allow you to move assets out of your taxable estate while still providing for your heirs.
Review Your Estate Plan: If you haven’t reviewed your estate plan recently, now is a good time to do so.
Speak with Your Advisor: Every situation is unique, and the best strategy will depend on a person or family’s specific circumstances. Our team is here to help our clients navigate these changes and work together to grow true, lasting wealth for generations to come.
Conclusion
If you have questions about how the upcoming changes might affect your estate, or if you’d like to explore strategies to minimize your tax exposure, we’re here to help. Contact us today to schedule a consultation.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Written by:
Matthew D. Doane, JD
Director of Estate Planning, Sequoia Advisor Group
Attorney, Redwood Legal Group
doane@sequoiaadvisorgroup.com