Major changes to gift and estate taxes will take effect on January 1, 2026, upon the expiration of the Tax Cuts and Jobs Act of 2017. These changes mean many families should reconfigure their estate planning as soon as possible to avoid hefty tax bills.
The gift and estate taxes impose a tax on large gifts made during a person’s lifetime and large amounts left to heirs upon that person’s death. The tax is on the donor, not the recipient. If the combined value of gifts during a person’s lifetime and that person’s estate, once he or she is deceased, exceeds the exemption amount, then the IRS imposes a significant tax on the value of the gifts and estate exceeding the exemption amount (note that married couples can get joint exemptions).
The exemption amount adjusts annually for inflation and is $13.61 million for individuals and $27.22 million for married couples in 2024. In 2025, these numbers increase to $13.99 million and $27.98 million. Individuals with gift or estate values exceeding these exemption amounts are taxed at 40%.
On January 1, 2026, the exemption amount is set to fall to about $7 million for individuals and $14 million for married couples, a massive decrease. This could change if Congress legislates otherwise, but given the frequent bitter gridlock in US politics, the chance of this drop in the exemption amount is serious and approaching quickly.
For that reason, individuals and married couples must lock in the high exemption amount if they anticipate exceeding the 2026 exemption amount in coming years. Several tax planning tools can help avoid negative tax consequences from the lower exemption amount.
First, intentionally defective grantor trusts (IDGTs) allow people to gift to such trusts at low valuations using the current high exemption amount while paying the trust’s tax bill from their personal estate, meaning the assets appreciate in the trust but outside the person’s estate. For couples, each spouse can have a SLAT (a type of IDGT), which must be drafted extra carefully to receive protection from the gift and estate taxes. IDGTs can also provide life insurance with advantageous tax consequences. At bottom, IDGTs can lock in the high exemption amount before it plummets. Other types of trusts also exist for more complicated planning strategies.
Those trusts are not the only protective strategy. A variety of charitable options exist by which people can avoid estate tax, benefit their community, and retain significant control of their assets. A few options include donor-advised funds, charitable lead trusts, and charitable remainder trusts.
In addition to the lifetime exemption amount, individuals can give the annual gift exclusion amount ($18,000 for individuals and $36,000 for married couples in 2024; $19,000 and $38,000 in 2025) to an unlimited number of beneficiaries without it counting toward their lifetime exemption amount. They can also pay medical and educational expenses directly for loved ones without any limit.
Our estate planning attorneys are prepared to assist clients and develop sophisticated solutions geared toward their particular situations, using the above and other tax planning options.
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