Recent federal legislation has permanently extended the historically high unified exemption amount for federal estate and gift tax purposes. The current exemption of $13.99 million per individual remains in place through December 31, 2025. Beginning in 2026, the exemption will increase to $15 million per person, with annual inflation adjustments starting in 2027. Assets transferred in excess of the applicable exemption—either during life or at death—remain subject to a 40% federal estate and gift tax.
Key Features of the New Law:
- Applicable to U.S. Citizens and Residents: The increased federal exemption is available only to individuals who are U.S. citizens or lawful permanent residents. Nonresident aliens remain subject to a separate regime with a significantly lower exemption amount (currently $60,000 for estate tax purposes).
- Gift and Estate Tax Unification: The unified credit continues to apply to both lifetime gifts and testamentary transfers. Taxable gifts made during life reduce the remaining exemption available at death. In addition, taxpayers may still make annual exclusion gifts of up to $19,000 per recipient in 2025 without utilizing any portion of their lifetime exemption.
- Spousal Portability Preserved: If a married individual dies without fully utilizing their exemption amount, the unused portion can be transferred to the surviving spouse for later use (commonly referred to as "portability") via a timely filed election on the deceased spouse's federal estate tax return (Form 706). This allows a married couple to collectively transfer up to $30 million without incurring federal estate tax starting in 2026, assuming no prior use of either exemption.
Importance of Strategic Planning:
- Consider Gifting While Exemption Remains High: Although the enhanced exemption has now been codified, future legislative action could reduce the exemption or otherwise modify the current transfer tax regime. Clients with estates in excess of current or anticipated exemption levels should consider making lifetime transfers to lock in use of the historically high exemption amount.
- Benefits of Lifetime Gifting: Lifetime gifting not only removes the asset from the taxable estate but also excludes future appreciation and income generated by the gifted asset from estate taxation. This strategy is particularly effective for clients holding assets with strong growth potential.
- Weighing Income Tax Consequences: Assets transferred during life do not receive a step-up in basis at death. Accordingly, clients should carefully evaluate which assets to transfer during life. High-basis assets (those with little unrealized gain) are generally preferable for lifetime gifting, while low-basis assets may be better retained until death to take advantage of the step-up in basis under IRC § 1014.
Next Steps for Clients
Individuals who have a net worth approaching or exceeding the federal exemption amount should review their estate plans in light of these developments. To discuss how these changes may impact your planning, please contact our office to schedule a consultation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
