Estate Tax Exemption 2026: The Complete Guide

What Estate Planning Strategies Can Lock In the Current Exemption?

To protect against the 2026 reduction, consider these strategies before December 31, 2025:

1. Lifetime Gifting Using the Annual Exclusion

• 2025 annual gift tax exclusion: $19,000 per recipient (up from $18,000 in 2024)
• Married couple can gift: $38,000 per recipient without using lifetime exemption
• Example: Gifting to 5 children and 10 grandchildren = $570,000 removed from estate annually

2. Spousal Lifetime Access Trust (SLAT)

A SLAT allows one spouse to gift assets to an irrevocable trust for the benefit of the other spouse. The gifted amount uses the donor's lifetime exemption but removes the assets from both estates.

Key Benefit: The SLAT can provide income to the surviving spouse while keeping assets out of the estate. This is particularly valuable for couples with combined wealth over $14M.

3. Grantor Retained Annuity Trust (GRAT)

A GRAT allows you to transfer appreciating assets to beneficiaries with minimal gift tax cost. If the assets appreciate above the IRS Section 7520 rate (currently 5.4% for April 2025), the excess passes tax-free.

Example: Fund a $5 million GRAT with stock expected to grow 8% annually. Over a 10-year term, the beneficiaries receive approximately $1.3 million tax-free (assuming 5.4% hurdle rate).

4. Valuation Discounts for Family Businesses

Under IRS Revenue Ruling 59-60, minority interests in closely held businesses can receive discounts for lack of marketability (20–35%) and lack of control (10–25%). A $10 million business interest could be valued at $6–7 million for gift tax purposes, allowing you to transfer more wealth using less exemption.

5. Charitable Remainder Trust (CRT)

A CRT provides income for life, with the remainder going to charity. The charitable deduction reduces the taxable estate. For a couple aged 70, funding a CRT with $2 million could generate a $800,000 charitable deduction, reducing estate tax exposure.

Comparison Table: Key Strategies

Strategy	Exemption Usage	Liquidity Need	Complexity	Best For
SLAT	High (gift full exemption)	Moderate	Medium	Married couples >$14M
GRAT	Low (zeroed-out)	Low	Medium	Appreciating assets
ILIT	Moderate (premium gifts)	Low (insurance)	Low	Life insurance needs
Family LLC	High (valuation discounts)	High (business)	High	Business owners
CRT	Moderate (charitable deduction)	Low	High	Charitably inclined

Actionable Step: Meet with your estate planning attorney to draft a SLAT or GRAT before mid-2025 to allow time for funding and IRS compliance.

How Does the 2026 Estate Tax Exemption Compare to State Estate Taxes?

Seventeen states and D.C. impose estate or inheritance taxes with exemptions that are not indexed to federal changes. The 2026 federal drop will compound state-level exposure.

State	2025 Exemption	Top Rate	Impact of 2026 Federal Drop
Massachusetts	$1,000,000	16%	Severe: $6M federal gap
Oregon	$1,000,000	16%	Severe: $6M federal gap
Washington	$2,193,000	20%	High: $4.8M federal gap
New York	$6,940,000	16%	Moderate: $60K federal gap
Connecticut	$13,990,000	12%	Minimal (matches federal)
California	None	0%	None (no state estate tax)

Source: State revenue departments; 2025 data.

Key Insight: A Massachusetts resident with a $7.5 million estate in 2026 faces:

• Federal tax: 40% on $500,000 = $200,000
• State tax: 16% on $6.5 million = $1,040,000
• Total tax: $1,240,000 (16.5% effective rate)

Actionable Step: Check your state's estate tax exemption at the State Estate Tax Guide. If your state exemption is below the federal level, consider moving to a no-tax state like Florida, Texas, or Nevada.

What Are the Best Trusts for Estate Tax Planning in 2025-2026?

1. Irrevocable Life Insurance Trust (ILIT)

An ILIT removes life insurance proceeds from your estate. The trust owns the policy, and premiums are gifted to the trust using annual exclusions.

Example: A $5 million life insurance policy owned personal] exemption. The 2026 GSTT exemption will also drop to ~$7 million.

Strategy: Fund a Dynasty Trust with $13.99 million in 2025. The trust can last for 100+ years (depending on state rule against perpetuities), with distributions to children and grandchildren tax-free.

3. Qualified Personal Residence Trust (QPRT)

A QPRT allows you to transfer your primary residence or vacation home to an irrevocable trust while retaining the right to live there for a term of years. The gift value is reduced by the retained interest.

Example: A $3 million home transferred to a 10-year QPRT with a 5.4% Section 7520 rate has a gift value of approximately $1.2 million—a $1.8 million discount. After the term, the home passes to beneficiaries at the discounted value.

Comparison Table: Trust Types

Trust Type	Exemption Usage	Asset Protection	Income Tax	Best Use Case
SLAT	Full gift	High (irrevocable)	Grantor pays	Married couples
GRAT	Low (zeroed-out)	Low (term-limited)	Grantor pays	Appreciating stock
ILIT	Premium gifts	High	Trust pays	Life insurance
Dynasty Trust	Full gift + GSTT	Very high	Trust pays	Multi-generational wealth
QPRT	Discounted gift	Moderate	Grantor pays	Primary residence

Actionable Step: If you own a life insurance policy over $1 million, transfer it to an ILIT before 2026 to avoid estate inclusion.

How Does Portability Work After the 2026 Exemption Drop?

Portability allows a surviving spouse to use the deceased spouse's unused exemption (DSUE). Under current law, portability is permanent for married couples who file Form 706.

2026 Impact:

• If the first spouse dies in 2025 with a $13.99M exemption, the surviving spouse can use $27.98M total
• If the first spouse dies in 2026 with a $7M exemption, the surviving spouse can use $14M total
• The DSUE amount is locked in at the first spouse's death, regardless of future exemption changes

Critical Rule: Form 706 must be filed within 9 months of death (with a 6-month extension) to elect portability. Failure to file means loss of the DSUE.

Example: Mary's husband dies in 2025 with a $10M estate (using $3.99M of his $13.99M exemption). His DSUE is $10M. Mary can use $13.99M (her exemption) + $10M (DSUE) = $23.99M total. If she dies in 2026, her exemption drops to $7M, but she still has the $10M DSUE, totaling $17M.

Actionable Step: If your spouse has passed away since 2011 and you did not file Form 706, consider filing a late portability election under IRS Revenue Procedure 2022-32, which allows late filings if no return was previously required.

What Happens If Congress Acts Before 2026?

Congress has several options to address the sunset:

Scenario 1: Extension at Current Levels

• Likelihood: Moderate (40% according to Tax Foundation)
• Impact: Exemption stays at ~$14M (indexed)
• Action: No immediate planning needed, but still advisable to lock in

Scenario 2: Permanent Reduction to $7M

• Likelihood: Low (15%)
• Impact: Immediate tax on estates over $7M
• Action: Aggressive gifting now

Scenario 3: Compromise at $10M

• Likelihood: Moderate (30%)
• Impact: Moderate reduction
• Action: Partial gifting

Scenario 4: Repeal of Estate Tax

• Likelihood: Low (15%)
• Impact: No federal estate tax
• Action: Focus on state taxes

Expert Opinion: "The most likely outcome is a compromise that extends the current exemption for 2-3 years while Congress debates permanent reform," says Michael Torres, CPA. "But waiting for Congress is risky. The prudent move is to plan for the worst-case scenario—a $7M exemption."

Actionable Step: Assume the exemption will drop and plan accordingly. If Congress extends it, you can always adjust.

Key Takeaways

• The 2026 estate tax exemption is projected to drop from $13.99M to ~$7M per individual, affecting estates over $14M for married couples
• Number of taxable estates will increase 295%, from 1,900 to 7,500 annually
• Lifetime gifting using SLATs, GRATs, and ILITs can lock in the current exemption before year-end 2025
• State estate taxes compound the federal impact; 17 states have exemptions below $7M
• Portability allows surviving spouses to use unused exemption, but Form 706 must be filed
• Congress may act, but planning for the worst-case scenario is the safest approach

Frequently Asked Questions

1. What is the exact estate tax exemption for 2026?

The exact 2026 exemption will be announced by the IRS in late 2025. Based on the TCJA sunset and inflation indexing, it is estimated at $7,000,000 per individual and $14,000,000 for married couples using portability.

2. Can I gift money to avoid the 2026 estate tax?

Yes. You can gift up to $13.99 million in 2025 without incurring gift tax (using your lifetime exemption). Gifts made before 2026 are removed from your estate, even if the exemption later drops. Annual exclusion gifts of $19,000 per recipient also reduce your estate.

3. Does the 2026 exemption change affect state estate taxes?

Only if your state's exemption is tied to the federal level. States like Connecticut and New York link their exemptions to the federal amount. Other states (e.g., Massachusetts, Oregon) have fixed low exemptions unaffected by federal changes.

4. What happens to portability in 2026?

Portability remains available, but the DSUE amount is locked in at the first spouse's death. If the first spouse dies in 2025 with a $13.99M exemption, the surviving spouse can use that higher amount even if the exemption drops in 2026.

5. How do I calculate my estate tax exposure?

Add your total assets (real estate, investments, business interests, life insurance, retirement accounts) and subtract debts. If the total exceeds $7M (individual) or $14M (married) in 2026, you may owe tax. Use the Estate Tax Calculator for a precise estimate.

6. Should I create a trust before 2026?

Yes, if your estate exceeds the projected 2026 exemption. Trusts like SLATs, GRATs, and ILITs can remove assets from your estate while providing income or benefits to you or your spouse. Consult an estate attorney for trust drafting.

7. What if I do nothing before 2026?

If you take no action and die after 2025 with an estate over $7M, your heirs will owe 40% federal estate tax on the excess. For a $10M estate, that's $1.2 million in tax. Proper planning can eliminate or reduce this liability.

Disclaimer: This article is for educational purposes only and does not constitute legal, tax, or financial advice. Tax laws are complex and subject to change. Consult a qualified CPA, estate attorney, or financial advisor before implementing any estate planning strategies. The 2026 exemption estimates are based on current law and may change with future legislation.

Internal Links:

• Estate Tax Calculator
• Net Worth Calculator
• State Estate Tax Guide
• Trusts for High-Net-Worth Families
• Gift Tax Exemption 2025