Upcoming Changes to the Estate Tax Exemption: What You Need to Know
You’ve spent your life working hard, building your wealth, and planning for the future—but what happens when a significant portion of your estate is suddenly at risk of being taxed?
While California doesn’t impose a state estate tax, the federal estate tax is another story, and big changes are coming.
By 2026, the federal estate tax exemption will be cut nearly in half, meaning many families who never had to worry about estate taxes before could now face hefty financial burdens.
If your estate is valued over $5 million, the time to act is now!
Here’s what you need to know to protect your wealth and ensure your loved ones receive the inheritance you intend for them.
What is the Estate Tax Exemption?
The estate tax exemption is the amount of money an individual can pass on to their heirs without incurring federal estate tax.
Anything above this exemption amount is taxed at rates up to 40%. Thanks to the Tax Cuts and Jobs Act (TCJA) of 2017, the current exemption is historically high—but this is set to change.
What Are the Recent Changes to the Estate Tax Exemption?
As of 2024, the estate tax exemption is $13.61 million per person (or $27.22 million for married couples). However, unless Congress intervenes, this exemption will drop to around $5 million per person (adjusted for inflation) starting January 1, 2026.
This means estates that were once safe from federal taxes may suddenly owe millions.
Why Does This Matter?
Well, let’s put this into some perspective:
Say you have an estate worth $10 million in 2024. Under the current $13.61 million exemption, your estate would owe zero federal estate tax if you passed away today.
But if you passed away in 2026, when the exemption drops to $5 million, your estate would owe tax on the remaining $5 million. With a 40% tax rate, this could result in a $2 million tax bill for your heirs.
How Can You Prepare for the Estate Tax Exemption Drop?
With the exemption set to decrease, now is the time to take action. Here are some strategies to consider:
Gifting Strategies: This annual gift tax exclusion allows you to give up to $18,000 per recipient in 2024 without affecting your lifetime exemption.
Establish Trusts – Trusts like irrevocable life insurance trusts (ILITs) or grantor-retained annuity trusts (GRATs) can help remove assets from your taxable estate, ensuring that wealth passes to your beneficiaries more efficiently.
Consider Charitable Giving – Donating to charities can help reduce your taxable estate while supporting causes you care about.
Business Succession Planning: If you own a business, consider transferring ownership strategically to take advantage of tax benefits.
Estate planning isn’t just for the ultra-wealthy—it’s essential for anyone who wants to ensure their assets are distributed according to their wishes while minimizing tax liabilities.
With the Estate laws ever-changing. It’s important to keep up with current events.
Working with a professional can help create a plan that minimizes taxes and ensures your wealth is passed on as intended.
Remember, a little preparation today can save your heirs from a hefty tax bill down the road.
Need estate planning advice? Now is the time to consult a professional and secure your legacy.