Federal Estate Tax
To understand the estate tax exemption, you must also understand the estate tax, which is called sometimes the Death Tax. The estate tax is the amount at which your estate is taxed when you die and leave assets to your family or friends. While some states also have estate taxes, we are focusing here on the federal estate tax, which will impact high net-worth families across the US. The estate tax is a tax to be paid to the federal government based on the fair market value of assets in a deceased person’s estate. The tax is levied against assets over a certain amount, which is called the “exemption amount.” That amount changes every year. Because that amount is the same as the gift tax exemption, individuals can give away assets up to the exemption amount while they are alive or after they pass without any estate or gift taxes.
The estate tax rate has changed over time, reaching a high of 77% from 1954 to 1977. Today, estate taxes are scaled based on the taxable amount in the state, that is, the amount over the gift tax exemption. In 2023, if your estate is worth over $1 million over the exemption amount, then the tax will be $345,800 plus 40% on amounts over that $1 million. This tax is due nine months after your death. That can be problematic for estates composed mainly of assets like real property. Such property may have to be sold quickly to pay the estate tax.
Estate Tax Exemption
Like the estate tax rate, the estate tax exemption has changed over time. The exemption has increased since 1997, when it was only $600,000. The biggest increases took place under President Obama in 2011 and President Trump in 2018. Yes, these presidents do have something in common – they both significantly raised the state tax exemption. The amount has continued to go up each year because it is adjusted for inflation. In 2023, it is $12,920,000 per person. Together a married couple can give $25,840,000 to their loved ones without any federal estate tax.
Impending Reduction of Estate Tax Exemption
However, that amount will soon be reduced. On January 1, 2026, the estate tax exemption will be cut in half. Congress could change this, but few people today believe that Congress will do so. Although we do not yet know the precise figures, the estimated exemption amount in 2026 is $6.8 million per person or $13.6 million per married couple.
Gifting To Utilize the High Estate Tax Exemption Amount
Remember, the estate tax exemption is the same as the gift tax exemption. The key to taking advantage of today’s high exemption amount is gifting the maximum amount if possible now while you are alive. Today you can gift as an individual $12,920,000 estate or gift tax free. Starting January 1, 2026, an individual will be able to gift only about half of that amount gift or estate tax free. Until the end of 2025, advanced estate planning for many high net-worth families will focus on how best to use the exemption amount to reduce estate taxes and protect their inheritances.
Experienced attorneys in estate planning helping such families will get increasingly busy as 2026 approaches.