For the last five years, taxpayers have benefited from the historically high gift and estate tax exemptions introduced under the Tax Cuts and Jobs Act of 2017, which doubled the exemption for 2018 from approximately $5.5 million to $11 million per person adjusted for inflation.

In 2023, the estate and gift tax exemption increased another $860,000 due to inflation to $12.92 million per person. This “Double Exemption” amount has allowed many individuals and families flexibility with their estate planning in recent years due to their estates being under the estate tax filing threshold.

With portability of the exemption between spouses, a married couple may gift up to $25.84 million in 2023, either during life or at death, without incurring any federal gift or estate tax. A timely-filed estate tax return is required to elect portability of the deceased spouse’s unused exemption to the surviving spouse. Assets gifted in excess of the exemption amount are generally taxed at a 40% rate.

Scheduled Sunset of Double Exemption

However, unless additional action is taken by Congress, the Double Exemption provisions of the Tax Cuts and Jobs Act of 2017 are going to “sunset” on December 31, 2025, and the estate and gift tax exemption will essentially be cut in half, resulting in an exemption for 2026 somewhere between $6 million and $7 million, depending on inflation.

Below is a simplified comparison of how a married couple with a $20 million taxable estate would be taxed at death in 2023 under current law versus in 2026 with the sunsetting of the Double Exemption:

Note that any unused exemption amount of a taxpayer who dies prior to 2026 may be transferred, or “ported,” to their surviving spouse, provided that the executor of the deceased spouse’s estate files a federal estate tax return. If this is done correctly, the surviving spouse will be able to use the remaining exemption amount to reduce or eliminate their own tax liability, even after 2026.

For example, if a taxpayer dies in 2023 with an unused exemption amount of $12,000,000 that is properly ported to the surviving spouse on a federal estate tax return, then after the sunset in 2026, the surviving spouse will have his/her own exemption (estimated $7 million), plus the ported exemption of $12,000,000.

Lifetime Gifting Considerations

The federal estate and gift tax exemption is a unified exemption for transfers made during a taxpayer’s lifetime or at death. In other words, gifts made during life count against the taxpayer’s remaining exemption available at death. However, in addition to the lifetime exemption, each taxpayer also has an annual gift tax exclusion, which allows each taxpayer under current law to gift up to $17,000 (2023) per donee per year, without incurring gift tax and without reducing the taxpayer’s lifetime exemption.

For example, by making split gifts, a married couple could each make annual exclusion gifts of $34,000 to their three children and to each child’s spouse, thereby reducing their taxable estate by $204,000 free of estate and gift tax under current law. There are various other creative ways to utilize annual exclusion gifting, including but not limited to funding 529 plans for grandchildren, discretionary minor’s trusts for kids or grandkids, or irrevocable life insurance trusts for the purpose of paying life insurance premiums.

How to Prepare for the Sunset

For taxpayers with an estimated estate value that is near or over the anticipated exemption for 2026, the time to explore planning opportunities is now. Estate planning professionals will be working with taxpayers over the next two years to determine what planning strategies could be implemented to help reduce estate tax exposure after the sunset.

Before meeting with your estate planning and tax professionals to discuss estate and gift tax planning, you will want to gather information regarding the nature and value of your assets, including any life insurance and closely-held business interests, as well as copies of your existing estate planning documents, such as last wills, trust agreements and powers of attorney. There is no one-size-fits-all estate plan – you will want to take time to fully discuss your options and objectives, determine a plan and implement that plan correctly.

Estate Planning is a Journey

Estate and succession planning for you, your family, and your business is more of a journey than a destination. Change is inevitable in all aspects of life – there are births and deaths, marriages and divorces, tax increases and tax decreases, and everything in between. Given the ever-present dynamic for change, taxpayers should keep in mind the adaptability and flexibility of their estate planning documents in order to implement potential tax efficiencies consistent with their overall desires for their assets following their death.

An estate plan that works well for both you and your family is not merely a set of documents that were signed, placed in a drawer 10 years ago and forgotten about. In order to achieve the best possible outcomes for your family in the event of your incapacity or death, you will want to regularly evaluate and update your estate plan as needed to account for changes in your life, your business, and changes to the Internal Revenue Code. Estate planning is a process – not an event.