The Lifetime Gift Tax Exemption is scheduled to be cut in half in 2026. It is estimated that at this time, the lifetime exclusion will drop to around $6.2 million. This decrease will affect not only estates over the current exemption amount of $12.92 million but also those in the $6–$13 million range, as these estates will suddenly find themselves subject to taxation at a rate of 40%.
Let’s say, for example, you have a $13 million estate in 2023. Suppose you have done no prior gifting. Let’s assume your estate grows 6% per year until 2026 and that the lifetime exemption drops to a conservative $7 million in 2026.
If you gifted $12.5 million in 2023, you would have zero tax liability on that gift since it’s below the 2023 Lifetime IRS Gift Tax Exemption of $12.92 million.
However, if you did nothing and then passed away in 2026, your estate tax liability would be approximately $3.2 million! That’s because your $13 million estate will have grown to $15 exemption. The remaining $8 million would be taxed at 40%, meaning a tax of ($8 million x 40%) = $3.2 million.
Whether you have an estate to leave loved ones, or you may be inheriting an estate, we recommend you start planning and implementing strategies NOW—before the exemption drops in 2026. An easy (and satisfying) way to reduce your tax liability is to gift some of your estate either to your heirs or to worthy causes.
Gifting Now Will Preserve Your Wealth Later
Because the Lifetime Gift Tax Exemption cut is not a sure thing, it’s especially important to act as if it’s a done deal and start gifting right now.
Reason one to gift now: The example above shows exactly how that makes sense. Gifting up to the current limit now assures (according to the above calculations) that you would not owe tax on total gifts or estates between $6 and $13 million.
Reason two to gift now: Your assets grow post gift, which the IRS won’t tax because it’s no longer part of your estate.
Reason three to gift now: Many wealthy people will be adopting this strategy and professionals such as attorneys and appraisers will be overwhelmed with work in 2025. If you procrastinate, you may not be able to gift in time even if your intent is to do so!
Best News: Gifting Now Won’t Hurt Your Estate After 2025
In the IRS Estate and Gift Tax FAQs dated November 26, 2019, the IRS declared that individuals who take advantage of the increased gift tax exclusion figure in effect from 2018 to 2025 “will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.” The IRS formally made this clarification in the final regulations released on November 26, 2019. The regulations implement changes made by the Tax Cuts and Jobs Act (TCJA) tax reform legislation enacted in December 2017.
Special Rule for Computing the Estate Tax Credit: The regulations provide a special rule that allows the estate to effectively compute its estate tax credit employing the greater of the BEA (Basic Exclusion Amount) related to gifts made during life, or the BEA applicable on the death date.
What it means: People planning to make large gifts between 2018 and 2025 can avoid worrying that they will lose the tax benefit of the higher exclusion level even after it decreases.
Gift now!
Conclusion
The unified estate and gift tax exclusions are at all-time high levels. The exclusions are set to go back to $5-7 Million depending on inflation in 2026, at which point your ability to save on estate taxes will be greatly reduced (ending December 31, 2025). Don’t let this happen. Contact your LSL advisor today to discuss your particular situation with us. We’ll work with you to implement a gifting strategy that will preserve your wealth before the exemption drops in 2026.
