What Is Not Taxable Today Might Be Taxable Tomorrow

Counting Down to 2026: Will We Keep the $10 Million Estate Tax Exemption?

The year 2026 is fast approaching, and it brings substantial changes to discuss with your clients regarding estate taxes. The Tax Cuts and Jobs Act (TCJA) introduced a significant increase in the federal estate tax exemption, setting it at an impressive $10 million, adjusted for inflation, per individual. However, the countdown has begun for the potential sunset of this generous exemption—what is not taxable today might be taxable tomorrow. 

History of the Estate Tax Exemption

Delving into the history of the estate tax exemption offers insight into arguments for and against its continuation. The federal estate tax was first enacted in 1916 to generate revenue for the government. Over the years, it has undergone various changes in exemption limits and rates.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) gradually increased the estate tax exemption and reduced the tax rate until it reached zero in 2010. However, the estate tax was set to return to the 2001 amounts for deaths occurring in 2011 unless further legislative action was taken. In 2011, the estate tax exemption was restored to $5.0 million.

Legislative Intent

In 2017, the TCJA was developed to stimulate economic growth and job creation. Doubling the estate tax exemption from $5.49 million to nearly $11 million was a key part of this strategy. At $13.61 million in 2024, it continues to adjust for inflation, offering individuals an unprecedented opportunity to pass on substantial wealth tax-free.

The TCJA’s Sunset Provision

A sunset provision was embedded within the TCJA. The increased estate tax exemption, which will reach $13.61 million in 2024, is set to expire on December 31, 2025. Without legislative intervention, it will revert to the 2017 limit of $5 million adjusted for inflation. Adjusting for inflation, the Congressional Budget Office estimates the exemption amount will be $6.4 million in 2026. This may create a potential estate planning crisis for high-net-worth families with larger estates who previously were not subject to the estate planning tax. These individuals must prepare for both scenarios—the sooner, the better.

Why the Current Estate Tax Exemption May Continue

Maintaining the high estate tax exemption could be seen as a move that benefits the wealthy, broadening the tax burden for others. It can also be seen as maintaining the status quo. And the current law ensures that most people will not be subject to federal estate taxes. 

A higher estate tax exemption was intended to foster economic growth and capital investment by allowing wealthier individuals and families to reinvest their wealth in businesses and job creation. Yet the federal government relies on estate tax revenue to fund various programs and initiatives and obviously will not want to reduce a lucrative revenue source. Without the estate tax, other revenue sources would have to foot the bill for these programs and face cuts in the benefits and services provided.

For the estate tax exclusion to remain at the higher amount beyond 2025, Congress will need to take action.

Why the Estate Tax Exemption May Revert Back

The TCJA was part of a short-term tax cut package. Lawmakers had to make room in the budget for the tax cuts introduced by the legislation. They did this by temporarily increasing the estate tax exemption. 

Proponents of sunsetting the estate tax exemption maintain that a lower exemption amount will generate more revenue by increasing the number of people who pay the tax and increasing estate tax exposure to those with net wealth above the current exemption amount. This means that people with estates valued at less than $10 million may once again be impacted by federal estate tax law. Estate tax revenues are projected to increase sharply after 2025 with the drop in the exemption amount. Over the 2021–2031 period, combined estate and gift tax revenues are estimated to be $372 billion. 

Commitment to the Trusted Advisor Role

As we begin 2024, it is crucial to inform your clients about the potential changes in the federal estate tax exemption and help them prepare for possible scenarios. Encourage them to review their estate plans to ensure that their money and property are protected and their financial legacy is preserved. There may be several strategies to navigate potential estate taxes effectively.

Advise your clients to make informed decisions based on the current legal framework before 2025 while keeping a watchful eye on any developments in the future. Preparation offers families new planning opportunities and peace of mind. Whether the exemption is set at $6.4 million or $13.6 million, it still provides protection from estate taxes.