The existing federal estate and gift tax exemption stands at an impressive $13.61 million per individual ($27.22 million for couples), but this is set to decrease significantly on January 1, 2026. The exemption will automatically revert to $5 million, adjusted for inflation (estimated at $7 million), if there are no legislative changes. This cap includes all gifts made during a person’s life and the value of their estate transferred at death, excluding bequests to a spouse or charitable organizations. Any amount over the exemption is subject to a 40% federal tax.
Given the current legislative climate, it’s increasingly probable that the exemption will indeed decrease to approximately $7 million per individual. Fortunately, the IRS has confirmed that gifts made up to the current higher exemption limit before December 31, 2025, will not incur additional taxes even after the exemption is lowered in 2026.
Take the hypothetical scenario where an individual gifts $13 million in 2024, utilizing the $13.61 million exemption, and passes away in 2026 when the exemption is around $7 million. The portion of the gift exceeding the future reduced exemption won’t be taxed or considered part of the estate for tax purposes.
The clock is ticking for those pondering significant gifts. Effective gift planning, including restructuring, transferring assets, and obtaining valuations, necessitates time. Delaying could mean missing the opportunity to make these gifts under the more favorable exemption.
In addition to federal taxes, New York residents must navigate the state’s estate tax, which has a 2024 exemption of $6.94 million per person. Although New York doesn’t impose a state gift tax, gifts made within three years of death are added back into the estate, impacting the state estate tax calculation. Early gifting can help minimize your estate’s value for New York tax purposes.
Deciding to gift substantial assets, such as a business interest, involves balancing tax implications, business needs, and family dynamics. While the recipient inherits the donor’s income tax basis, making strategic gifts now can offer significant federal tax savings without impacting your transfer tax liability. Given the approaching deadline and potential for substantial tax benefits, acting sooner rather than later is advisable to maximize the current generous exemption limits.
