The 2026 Tax Cliff and Its Impact on Estate Planning - Q&A

As many provisions of the Tax Cuts and Jobs Act (TCJA) approach their sunset at the end of 2025, significant changes to estate and gift tax rules are on the horizon.

These changes will affect high-net-worth individuals, business owners, and those planning to transfer substantial wealth to future generations. Don’t get caught unprepared – now is the time to start planning for these changes.

Q&As Regarding the 2026 Estate Tax Cliff

What is the "estate and gift tax cliff," and when will it occur?

The estate tax cliff refers to the reduction in the estate and gift lifetime tax exemption that will automatically take place on January 1, 2026. The exemption will decrease from approximately $14 million (projected for 2025) to around $7 million, impacting the amount of wealth that can be transferred tax-free.

Has the IRS enacted any special rules in anticipation of the estate and gift tax cliff?

Yes, the IRS has implemented special rules that provide relief by ensuring that any lifetime exemption used before January 1, 2026, will not be subject to clawback. This means that if you use the higher exemption available before 2026, it won’t be recaptured, even though the exemption will decrease after that date.

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What happens to unused exemption amounts after 2026?

If the full exemption amount is not used before 2026, any remaining portion of the bonus amount above $7 million will be lost. The base $7 million will remain, but anything above that is considered a bonus that will no longer be available after the estate and gift tax cliff.

How does the Deceased Spouse Unused Exemption (DSUE) rule apply after 2025?

The DSUE rules will remain in effect post-2025. This means that surviving spouses who have made a portability election before 2026 will retain the deceased spouse’s exemption amount, even after the exemption is reduced. For example, if a $12 million DSUE was elected before 2026, the surviving spouse will keep that amount, regardless of the new lower exemption.

What will the new gift and estate tax exemption levels be?

The current exemption levels will expire on January 1, 2026. After this date, exemptions are set to revert to pre-TCJA levels, adjusted for inflation. It is estimated that the new lifetime gift tax exemption will be around $7 million for individuals and $14 million for couples, which is significantly lower than the current limits of $13.61 (2024) million for individuals and up to $27.22 million for couples.

Why is it important for business owners to take advantage of the current exemption levels?

Transferring wealth through gifts while exemption levels are high allows you to reduce future tax exposure by removing future appreciation from the estate, as well as benefitting from the bonus exemption amount. Additionally, business owners can gift minority interests in their companies, likely benefiting from discounts for lack of control and marketability, which reduces the reportable value of the gift.

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What steps should business owners and high-net-worth individuals take as the exemption deadline approaches?

Business owners and high-net-worth individuals should review their estate plans and consider making significant gifts before the exemption limits decrease. Acting before the 2026 deadline offers the potential for considerable tax savings and allows for the transfer of more wealth to the next generation.

Changes Are Coming

These are but a few questions and answers regarding the 2026 Estate Tax Cliff. If you have any questions not listed above, please reach out to one of our professionals.