The Federal Estate Tax is a tax on the transfer of property at death. The Federal Estate Tax Exemption sets the maximum value of assets an individual can leave to their heirs upon death without incurring Federal Estate Taxes. In other words, estates valued below the exemption threshold are not subject to Federal Estate Tax. The Tax Cut and Jobs Act of 2017 (TCJA) doubled the threshold, providing relief to many who faced estate tax liabilities. This increase is only temporary. On January 1, 2026, the exemption will revert, or “sunset,” to 2018 levels, established before the TCJA.

Current Federal Estate Tax Exemption Levels and Future Changes

For those who pass away in 2024, the exemption is $13.61 million for individuals and $27.22 million for married couples. In 2025, these amounts will increase for inflation adjustments to $13.99 million for individuals and $27.98 million for married couples. However, starting January 1, 2026, the estate tax exemption is set to be reduced by half, reverting to pre-2018 levels. After inflation adjustments, the exemption will decrease to approximately $7 million for individuals and $14 million for married couples, unless Congress takes action to extend or modify the provision.

Why Is There a Sunset Provision?

The law included a sunset provision for two main reasons: the budget reconciliation process and political compromise. First, budget reconciliation is a legislative process used to expedite high-priory fiscal legislation. It allows tax measures to pass with a simple majority in the Senate rather than the usual 60-vote majority, facilitating faster approval. However, the process imposes a condition; the legislation cannot increase the federal deficit beyond a 10-year period. Since the TCJA was passed through the budget reconciliation process, it was necessary for certain provisions, including the estate tax exemption increase, to be temporary.

Implications of the Lower Federal Estate Tax Exemption

With the lower Federal Estate Tax Exemption, many more estates will be subjected to federal estate taxes. Consequently, beneficiaries could face significant reduction in the value of their inheritance. Especially affected are those inheriting businesses, real estate, or significant investments, where a substantial portion of the estate may now be taxable. While the change affects wealthier estates the most, anyone with an estate value near the new threshold could face an unanticipated tax burden on their inheritance.

Estate valuation is based on the fair market value of assets at the time of the decedent’s death, not the original purchase price or the fair market value when purchased. This is important, as it may leave an inaccurate understanding of the true value of one’s estate. For instance, real estate values have surged in recent years, potentially pushing estates over the exemption threshold even if previously exempt. Without proper planning, heirs may face unanticipated estate taxes due to asset valuation incorrectly relying upon original investments. Estates typically include cash, securities, real estate, insurance policies, trusts, annuities, business interests, and more, all of which are subject to valuation and taxation.

The lower threshold will increase the importance of strategic estate planning. Proper planning can help minimize tax burdens on heirs. As 2026 approaches, those with estates that may be affected should consider proactive measures to assess their assets and plan to reduce the potential impact of estate taxes on their beneficiaries.

Possible Legislative Changes

The upcoming 2024 election could influence the future of the Federal Estate Tax Exemption. Historically, Kamala Harris and the Democratic party have supported policies aimed at increasing taxes on the wealthy to address income inequality and fund social programs. Under a Harris administration, it is likely the Federal Estate Tax Exemption would revert to pre-TCJA levels.

Conversely, Donald Trump and the Republican party have supported reducing tax burdens, as seen in their advocacy for the TCJA. Republican administrations often prioritize lowing taxes on estates and businesses, aiming to support wealth accumulation. Therefore, it is reasonable to speculate that a Trump presidency could favor extending the current Federal Estate Tax Exemption. However, any extension would still depend on the broader political dynamics and negotiations with Congress.

Ultimately, while it’s wise to consider the impact of the upcoming election on the Federal Estate Tax Exemption, relying solely on the election outcome to forecast Congress’s action is risky. Even if Trump is elected, legislative negotiations and fiscal consideration will play significant roles in determining the current exemption levels are extended or allowed to sunset.

Given the uncertainty and democratic disfavor of the higher threshold, it’s prudent to prepare for the scheduled sunset, which will take effect in a little over a year. This proactive approach ensures that your estate plan aligns with both current law and potential changes, minimizing the impact of an exemption reduction.

Strategies to Consider

Now is the time to assess whether estate planning could benefit you before the estate tax exemption sunsets. Estate planning can be complex, and there is no one size fits all plan. Effective strategies should be tailored to your unique situation. Options to consider include charitable giving, establishing trusts, and utilizing lifetime gifting. Contact Carl Eastwick, Esq. to discuss a customized plan that will safeguard your assets and maximize available tax strategies.