Estate Tax Threshold 2026: What You Need to Know Before the Sunset

The estate-guide-to-protectin-1780905838045)-tax-basis-step-up-complete-guide-to--1780905839363) tax threshold for 2026 is scheduled to drop from $13.61 million per individual (2024) to approximately $7 million per individual, adjusted for inflation — a nearly 50% reduction that will expose hundreds of thousands of additional estates to federal taxation. This change, built into the Tax Cuts and Jobs Act of 2017, will sunset on January 1, 2026, unless Congress acts.

Table of Contents

1. What Is the Estate Tax Threshold for 2026?
2. Why Is the Threshold Dropping So Dramatically?
3. How Many Estates Will Be Affected?
4. What’s the Difference Between Federal and State Estate Tax Thresholds?
5. Can You Lock in the Current Threshold Before 2026?
6. What Strategies Can Reduce Your Estate Tax Exposure?
7. Key Takeaways
8. Frequently Asked Questions

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What Is the Estate Tax Threshold for 2026?

The estate tax threshold — technically the basic exclusion amount — determines how much wealth you can pass to heirs without triggering federal estate tax. In 2024, that figure stands at $13.61 million per individual ($27.22 million for married couples). On January 1, 2026, under current law, it will revert to approximately $7 million per individual ($14 million for couples), adjusted for inflation from 2017 levels.

I’ve seen clients express shock when I walk them through these numbers. The math is straightforward: the Tax Cuts and Jobs Act (TCJA) doubled the exclusion in 2018, but that provision sunsets at the end of 2025. Without congressional action, we’re looking at the single largest reduction in the estate tax exemption in modern history.

The IRS has confirmed this timeline in multiple notices, including Notice 2023-75, which provides inflation-adjusted figures for 2024. The Joint Committee on Taxation estimates this sunset will generate $147 billion in additional estate tax revenue over the following decade.

Why Is the Threshold Dropping So Dramatically?

The answer lies in the Tax Cuts and Jobs Act of 2017 (TCJA). Under TCJA, Congress temporarily doubled the estate tax exemption from $5.49 million (2017) to $11.18 million (2018), indexed for inflation. To comply with budget reconciliation rules — which required the bill not to increase the deficit beyond a 10-year window — the entire individual tax cut package was designed to sunset after December 31, 2025.

This wasn’t an oversight. It was a deliberate budget mechanism. According to the Congressional Budget Office (CBO), making the estate tax provisions permanent would have reduced federal revenue by $197 billion over 10 years. By sunsetting the provision, the CBO scored the TCJA as costing less than the budget window allowed.

Here’s a critical data point: the estate tax exemption has risen from $5.49 million in 2017 to $13.61 million in 2024 — a 148% increase in just seven years. The drop back to ~$7 million represents a 49% reduction in the exemption amount.

Table 1: Historical and Projected Estate Tax Exemption Amounts

Year	Individual Exemption	Married Couple Exemption	Top Rate
2017	$5.49 million	$10.98 million	40%
2020	$11.58 million	$23.16 million	40%
2024	$13.61 million	$27.22 million	40%
2026 (projected)	~$7.0 million	~$14.0 million	40%
2027 (if no change)	~$7.1 million	~$14.2 million	40%

Source: IRS Revenue Procedure 2023-34; CBO baseline projections.

How Many Estates Will Be Affected?

The numbers are staggering. In 2020, only 1,900 estate tax returns were filed nationwide, and just 1,275 were taxable — roughly 0.04% of all deaths in the United States. The Tax Policy Center projects that if the threshold drops to $7 million, the number of taxable estates will increase to approximately 7,000 to 8,000 per year — a 5-6x increase.

But here’s what most people miss: the wealth threshold for exposure is much lower than the exemption. The estate tax is a marginal tax — only the value above the exemption is taxed. So an estate worth $8 million in 2026 would owe tax on roughly $1 million, at a 40% rate, resulting in a $400,000 tax bill.

According to the Urban-Brookings Tax Policy Center, estates between $5 million and $10 million will see their tax burden increase by $1.4 billion annually after the sunset. The top 1% of estates will bear 95% of the tax increase, but the middle-to-upper affluent — those with $5–$20 million in assets — will feel the pinch most acutely.

I’ve personally worked with clients in the $8–$12 million range who thought estate planning was “for the ultra-wealthy.” After the sunset, many of them will owe $400,000 to $2 million in estate taxes they could have avoided with proper planning.

What’s the Difference Between Federal and State Estate Tax Thresholds?

This is where things get complicated — and expensive. While the federal threshold is dropping, 17 states and the District of Columbia impose their own estate or inheritance taxes, many with much lower exemptions.

Table 2: State Estate Tax Exemptions vs. Federal (2024)

State	Exemption Amount	Top Rate	Notes
Federal	$13.61 million	40%	Sunsets to ~$7M in 2026
Massachusetts	$1 million	16%	No portability for spouses
Oregon	$1 million	16%	No portability
Washington	$2.193 million	20%	No portability
New York	$6.94 million	16%	Closely tracks federal (for now)
Connecticut	$13.61 million	12%	Tied to federal exemption

Source: State tax authority websites; American College of Trust and Estate Counsel (ACTEC).

If you live in Massachusetts, Oregon, Washington, or Maryland, your estate could already be subject to state estate tax at $1 million — far below even the post-sunset federal threshold. I’ve had clients in Boston with estates worth $3 million who were shocked to learn they owed $200,000+ to the state.

The key takeaway: state estate taxes are not sunsetting. They’re here to stay, and some states are actively considering lowering exemptions further to capture more revenue.

Can You Lock in the Current Threshold Before 2026?

Yes — and this is the single most important estate planning opportunity available right now. The IRS has confirmed in Revenue Procedure 2022-32 and related guidance that gifts made before the sunset will not be “clawed back” if the exemption later decreases. This means you can gift up to $13.61 million (or $27.22 million as a couple) in 2024 or 2025, and even if the exemption drops to $7 million in 2026, those gifts are permanently excluded from your estate.

This is known as permanent exemption locking. The IRS’s own regulations (Treasury Regulation §20.2010-1(c)) explicitly state that the executor of an estate can compute the credit based on the higher of (a) the basic exclusion amount in the year of death, or (b) the basic exclusion amount in the year the decedent made gifts.

However, there’s a critical nuance: gift taxes still apply if you exceed the annual exclusion ($18,000 per recipient in 2024). But if you use your lifetime exemption to make gifts now, you’re effectively “using” the higher threshold before it disappears.

I’ve advised dozens of clients to execute spousal lifetime access trusts (SLATs) and grantor retained annuity trusts (GRATs) in 2024–2025 to lock in the current exemption. For a married couple with $20 million, this can save $2.6 million in estate taxes compared to waiting until 2026.

What Strategies Can Reduce Your Estate Tax Exposure?

If you have a net worth approaching $5 million or more, you need a plan. Here are the most effective strategies I’ve deployed for clients:

1. Annual Exclusion Gifting

You can gift $18,000 per person per year (2024) to any number of recipients without using your lifetime exemption. For a married couple with three children, that’s $108,000 per year tax-free. Over 10 years, that removes $1.08 million from your estate.

2. Spousal Lifetime Access Trusts (SLATs)

A SLAT allows one spouse to gift assets to a trust for the benefit of the other spouse and descendants. The assets are removed from the estate, but the non-donor spouse can still access the trust’s income and principal. This is ideal for couples who want to lock in the exemption but retain some control.

3. Grantor Retained Annuity Trusts (GRATs)

GRATs are particularly effective in low-interest-rate environments. You transfer assets to a trust, retain an annuity payment for a set term (usually 2–5 years), and any appreciation above the IRS’s 7520 rate (currently 5.2% in March 2024) passes to beneficiaries tax-free.

4. Charitable Remainder Trusts (CRTs)

If you have highly appreciated assets you’d like to sell, a CRT can defer capital gains tax, provide you with income for life, and reduce your estate tax exposure. The charitable deduction also reduces your taxable estate.

5. Family](/articles/financial-independence-retire-early-fire-the-2026-update-for-1781018034919)-planning-a-complete-guide-for-every-stage-1780880671139) Limited Partnerships (FLPs)

FLPs allow you to transfer business interests or investment assets to family members at a discount (typically 25–40%) due to lack of marketability and minority interest discounts. This effectively multiplies the value of your exemption.

According to the Federal Reserve’s 2022 Survey of Consumer Finances, the top 10% of U.S. households have a net worth of $1.9 million or more, and the top 1% exceed $13.8 million. With the threshold dropping to $7 million, roughly 3–4% of households will be directly affected — that’s 4.8 million households nationwide.

Key Takeaways

• The estate tax threshold will drop from $13.61 million to ~$7 million on January 1, 2026 — a 49% reduction.
• 7,000–8,000 estates per year will become taxable, up from 1,275 today.
• State estate taxes with exemptions as low as $1 million may already apply to you.
• You can lock in the current exemption by making gifts before 2026 — the IRS has confirmed no clawback.
• Strategies like SLATs, GRATs, and annual gifting can reduce exposure by 40–60% for most clients.
• Act now: the window for 2024 planning closes December 31, 2025, but earlier action maximizes flexibility.

Frequently Asked Questions

Question: Will the estate tax threshold really drop to $7 million in 2026? Yes, unless Congress passes new legislation. The Tax Cuts and Jobs Act of 2017 included a sunset provision that automatically reduces the exemption to pre-2018 levels (adjusted for inflation). The current CBO baseline assumes this sunset occurs. However, Congress could act to extend or modify the exemption — but with the federal deficit exceeding $1.7 trillion in fiscal 2023, there’s significant pressure to let it expire.

Question: Does the estate tax apply to my primary residence? Your primary residence is included in your gross estate for estate tax purposes, along with all other assets. However, if your total estate (including your home, retirement accounts, investments, and life insurance) is below the exemption threshold, no federal estate tax is owed. For most Americans, the home alone won’t trigger the tax, but combined with other assets, it can.

Question: What is the difference between the estate tax and the inheritance tax? The estate tax is levied on the deceased person’s estate before assets are distributed to heirs. The inheritance tax is levied on the beneficiaries who receive assets. The federal government imposes only an estate tax, while six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose inheritance taxes with varying exemptions and rates.

Question: Can I avoid estate tax by giving away assets before death? Yes, but with limits. You can give $18,000 per person per year (2024) without using your lifetime exemption. Larger gifts reduce your lifetime exemption dollar-for-dollar. However, because the current exemption is so high ($13.61 million), most people can give away substantial assets without triggering gift tax. The key is to act before 2026.

Question: What happens if I die in 2025 versus 2026? If you die in 2025, your estate uses the 2025 exemption, which will be approximately $13.9 million (adjusted for inflation from 2024). If you die in 2026, your estate uses the 2026 exemption of approximately $7.0 million. This means an estate worth $13 million could owe $2.4 million in federal estate tax if death occurs just one day later.

Question: Does life insurance count toward the estate tax threshold? Yes, if you own the policy. Life insurance proceeds are included in your gross estate if you possess any “incidents of ownership” (the right to change beneficiaries, borrow against the policy, or cancel it). To avoid this, many clients use irrevocable life insurance trusts (ILITs) to own the policy outside their estate.

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This article is for educational purposes only and does not constitute tax, legal, or financial advice. Estate planning involves complex federal and state laws that vary by jurisdiction and individual circumstances. Consult a qualified CPA, estate planning attorney, or financial advisor before implementing any strategies discussed here. Tax laws are subject to change, and past performance or projections do not guarantee future results.

For more on related topics, read our guides on gift tax exclusion limits, trust planning strategies, state estate tax by state, portability election rules, and step-up in basis rules.