Planning for 2026 Sunset of Lifetime Giving Levels

Effective January 1, 2024, the Lifetime Exemption from Federal Estate and Gift Tax (which we’ll call the “Lifetime Exemption” throughout this piece) increased from $12.92 million per person (and $25.84 million per married couple) to $13.61 million per person (and $27.22 million per married couple). This represents an approximate 5.34% increase. The increase will enable individuals who had gifted away their full Lifetime Exemption amount as of year-end 2023 to give away an additional $690,000 ($1.38 million for married couples) in 2024.

Correspondingly, the Annual Exclusion from Federal Gift Tax (which we’ll call the “Annual Exclusion” throughout this piece) increased from $17,000 to $18,000 for calendar year 2024. The Annual Exclusion allows an individual to gift up to $18,000 (or a married couple to gift up to $36,000) per recipient in 2024 without utilizing their Lifetime Exemption.

Despite recent increases to the Lifetime Exemption over the last several years, taxpayers should anticipate the swiftly approaching “sunset.”

What is the Lifetime Exemption Sunset?

The 2017 Tax Cuts and Jobs Act increased the Lifetime Exemption from $5.49 million to $11.18 million per person. In order to adjust for inflation, the Lifetime Exemption has continued to increase annually, resulting in our historically high 2024 Lifetime Exemption amount of $13.61 million per person. If Congress does not take affirmative action, the Tax Cuts and Jobs Act of 2017 will “sunset” by its own terms on December 31, 2025. In that scenario, on January 1, 2026, the Lifetime Exemption will revert to its previous level of $5.49 million, adjusted for inflation.

The pre-sunset Lifetime Exemption is offered on a “use it or lose it” basis. If an individual does not use his or her entire Lifetime Exemption before the sunset, that individual will lose the opportunity to do so. He or she will be limited to the Lifetime Exemption amount that is in place after the sunset, to the extent that his or her total lifetime gifts have not already reached or exceeded that amount. To the extent that the individual did make lifetime gifts before the sunset, and the value of those lifetime gifts exceed the Lifetime Exemption that is in place at the individual’s death, the gifts will be honored or “grandfathered in” and will not be clawed back into that individual’s taxable estate.

Planning before the Sunset

Due to the expected drop in the Lifetime Exemption, it is important for individuals and families with significant wealth to revisit their estate plans before 2026. If you are reading this and thinking “I’ve already used all of my Lifetime Exemption”, there are still gifting opportunities available, due to annual inflationary increases.

By taking advantage of the gifting opportunities offered by the current, pre-sunset exemption levels, high net worth individuals can minimize future estate tax liabilities for their heirs.

If you are interested in utilizing the gifting opportunities offered by pre-sunset exemption levels, it is important you do not wait until the last minute. Leading up to the sunset, estate attorneys and valuation firms will likely become increasingly busy.

Additional 2024 Tax Inflation Adjustments

In addition to the increases in the Lifetime Exemption and Annual Exclusion amounts, the IRS has provided Federal income tax inflation adjustments for the tax year 2024. The highest marginal tax rate remains at 37% for individual single taxpayers with incomes greater than $609,350 ($731,200 for married couples filing jointly). The lowest rate is 10% for single individuals with incomes of $11,600 or less ($23,200 for married couples filing jointly). Alternative rates are shown in the table below.

Source: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024

Conclusion

It is important to stay informed about changes in US tax law. Unless Congress takes action, as of January 1, 2026, the Lifetime Exemption will be roughly cut in half. We encourage high net worth families and individuals to revisit and adapt their estate planning strategies ahead of the anticipated sunset to help minimize future Federal Estate Tax.

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