October is Estate Planning Awareness Month, and the importance of revisiting your estate plan is taking front and center. With a significant change to the federal estate tax exclusion on the horizon, now is the time to assess your financial strategies.
The upcoming 2026 reduction could have a profound impact on your estate and the legacy you leave behind. Let’s take a look at the details.
Understanding the Current Estate Tax Exclusion
In 2024, the federal estate tax exclusion stands at $13.61 million per individual. This high threshold, established by the Tax Cuts and Jobs Act of 2017, has allowed most estates to avoid federal estate taxes entirely.
However, this favorable situation is temporary. On January 1, 2026, the exclusion is scheduled to revert to the pre-2018 level of $5.49 million, adjusted for inflation.
This reduction will potentially subject a greater number of estates to federal estate taxes. For individuals with estates exceeding the new exclusion amount, the difference could mean substantial tax liabilities for their heirs.
Estate Planning Awareness Month serves as a reminder to take proactive steps now, while the current exclusion remains in place.
Spousal Considerations
There are a couple of key details that apply to married couples. If you are legally married in the eyes of the law, you can use the unlimited marital deduction. This allows you to transfer any amount of property to your spouse free of taxation.
This is great at first, but if taxation is a source of concern, your spouse will be in possession of a taxable estate after your passing.
Secondly, the estate tax exclusion is portable between spouses. In this context, the term “portability” is used to describe the ability of a surviving spouse to use their deceased spouse’s exclusion.
Federal Gift Tax
To understand the next section, you have to absorb some added information. When the estate tax was initially enacted in 1916, there was no gift tax. At that time, people would simply give gifts with no limits at any time to avoid the estate tax.
You could sign your property over to your children when you were on your deathbed if you chose to do so. This loophole was closed when a gift tax was enacted in 1924, but it was repealed two years later.
The gift tax was reenacted in 1932 and has been a fact of life ever since. The gift tax and estate tax were unified under the tax code in 1976.
As a result of this unification, the $13.61 million exclusion we have explained is a unified exclusion. It applies to lifetime gifts along with your estate, but there is one caveat.
In addition to this unified exclusion, there is an additional annual exclusion. You can give up to $18,000 to an unlimited number of gift recipients each year free of taxation without using a portion of your unified exclusion.
Estate Tax Efficiency Strategies
Typically, you cannot give large gifts that exceed the annual exclusion as an estate tax efficiency strategy. However, at the present time, this is quite possible because of the current exclusion level.
You could give direct gifts between now and 2026, but there is a better option. The available exclusion can be utilized to fund certain types of tax efficiency trusts.
For example, you can convey your home into a qualified personal residence trust. You remain in the home as usual for a term that you determine. At the conclusion of the term, the home will be transferred to a beneficiary at a significant tax discount.
Additionally, a generation-skipping trust can be used to avoid one layer of taxation. There would be no imposition of the estate tax while your children are living, and your grandchildren would ultimately inherit the assets. These are couple of examples, but there are others.
State-Level Estate Taxes
While we’re on the subject of taxation, we should explain state-level estate taxes. There are a dozen states in the union that impose an estate tax. The District of Columbia also imposes a jurisdictional estate tax.
We practice in the great state of California, and we are not among this unfortunate dozen. However, you are not necessarily out of the woods as a resident of the Golden State
If you own property in a state that imposes an estate tax, that tax will apply to your estate. Of course, there are exclusions on the state level as well, but they are typically lower than the federal exclusion.
For example, our neighbors in Oregon impose an estate tax. The exclusion there is just $1 million, so this is something to take into consideration if you own out-of-state property.
Attend a Free Seminar!
We do everything possible to educate people about the importance of estate planning. As you can see from this post, timely action is sometimes required as things change. It is important to stay up to date, and we make an effort to keep people informed.
With this in mind, we host seminars on an ongoing basis. You will learn a lot of you join us, and you have an opportunity to connect with our firm for the first time.
To see the dates and obtain more information, head over to our seminar schedule page. If you decide to join us, follow the instructions to register so we can reserve your spot.
Need Help Now?
If you have already learned enough to know that you should work with a lawyer to put a plan in place, we can help. When you choose our firm, you will receive personalized attention. Your plan will be tailor-made to suit your needs, and we will be available to make revisions if and when things change.
To get started, call our Chico, California estate planning office at 530-343-3454 or send us a message through the contact form on this website.