The estate tax exemption, which determines how uch wealth can be passed on without federal estate taxes, is set to change in 2026.
Under the current law, individuals can leave up to $13.61 million (or $27.22 million for married couples) tax-free. However, unless Congress extends the current exemption levels, the limit will be cut roughly in half starting January 1, 2026.
For high-net-worth individuals, this reduction could result in significantly higher estate tax liabilities, potentially impacting generational wealth and estate planning strategies. Taking proactive steps before the exemption decreases is crucial for minimizing taxes and protecting assets.
This guide explains what the estate tax exemption is, the upcoming estate tax exemption 2026 rule, and the best strategies to reduce estate taxes before the exemption is lowered.
What the Estate Tax Exemption 2026 Rule Is
The estate tax exemption is the amount of wealth an individual can pass on to heirs without triggering federal estate taxes. If the total value of an estate exceeds this exemption, the excess amount is taxed at a federal rate of 40%.
Currently, the estate tax exemption is historically high due to the Tax Cuts and Jobs Act (TCJA) of 2017, which doubled the previous exemption levels. This means fewer estates are subject to federal estate taxes, benefiting wealthy individuals looking to pass down assets tax-free.
However, the estate tax exemption is temporary and will “sunset” in 2026, reverting to pre-2018 levels unless new legislation extends the higher exemption. This change could expose significantly more estates to federal estate taxes, making proactive planning essential.
Estate Tax Exemption 2026: What to Expect
On January 1, 2026, the estate tax exemption is expected to drop to approximately $6 million per individual (or $12 million for married couples), adjusted for inflation. This change will dramatically increase the number of estates subject to federal taxation.
For high-net-worth families, this reduction means that estates valued above the new exemption limit will face a 40% estate tax on the excess amount. This could result in millions of dollars in taxes if no planning measures are taken.
While Congress could act to extend the current exemption levels, there is no guarantee of legislative action. Given the uncertainty, estate planning should be done now to take full advantage of the current, higher exemption before it is reduced.
Planning Strategies Before the Sunset
With one year before the exemption is reduced, individuals should consider several strategies to protect their wealth from estate taxes.
Utilize the Current Gift Tax Exemption
The gift tax exemption allows individuals to give away up to $13.61 million during their lifetime without incurring gift taxes. Since the estate tax exemption and gift tax exemption are linked, gifts made before 2026 take full advantage of today’s higher limits. Transferring assets now locks in the current exemption before it decreases.
Establish Irrevocable Trusts
Setting up an irrevocable trust can help reduce the taxable value of an estate. Trusts such as grantor-retained annuity trusts (GRATs) and intentionally defective grantor trusts (IDGTs) allow individuals to transfer assets out of their estate while maintaining control over distributions. These trusts can shield assets from estate taxes and ensure long-term financial security for beneficiaries.
Consider Spousal Lifetime Access Trusts (SLATs)
A SLAT allows one spouse to transfer assets into a trust for the benefit of the other spouse while taking advantage of the current estate tax exemption. This strategy helps lock in today’s high exemption amount while ensuring the surviving spouse has access to the assets if needed.
Make Annual Exclusion Gifts
In addition to the lifetime gift tax exemption, individuals can give $18,000 per recipient per year (or $36,000 for married couples) without triggering gift taxes. Making annual gifts to family members can gradually reduce the taxable estate while benefiting heirs immediately.
Transfer Business Interests
For business owners, transferring ownership interests to heirs or placing them in trusts before 2026 can help minimize estate tax exposure. Techniques like family limited partnerships (FLPs) or discounted valuations allow business owners to transfer assets at a reduced taxable value.
Convert Traditional IRAs to Roth IRAs
Estate taxes can apply to retirement accounts, and non-spouse beneficiaries must withdraw inherited IRA funds within ten years, often creating significant tax burdens. Converting traditional IRAs to Roth IRAs before death can reduce future tax liabilities since Roth IRA withdrawals are tax-free for heirs.
By implementing these strategies before the exemption drops, families can maximize their wealth transfer and avoid unnecessary estate tax burdens.
State Estate Taxes: An Additional Concern
While the federal estate tax exemption is a primary concern, many states impose their own estate taxes with lower exemption thresholds. Currently, 12 states and Washington, D.C. have an estate tax, with exemption limits ranging from $1 million to $9.1 million.
For individuals living in states such as Massachusetts, Oregon, Minnesota, or New York, the lower state exemption can lead to additional estate tax liability, even if the federal estate tax is not triggered. Some states also have inheritance taxes, which require heirs—not just the estate—to pay taxes on inherited assets.
Strategies to minimize state estate taxes include relocating to tax-friendly states, structuring gifts and trusts to reduce state-level exposure, and using estate planning tools that consider both federal and state laws.
High-net-worth individuals should review their state’s estate tax laws and adjust their estate planning strategy accordingly.
How the Estate Tax Exemption Change Affects Business Owners
For business owners, the reduction in the estate tax exemption presents unique challenges. Many business assets, including real estate, equipment, and ownership stakes, contribute significantly to the overall value of an estate. With the exemption decreasing in 2026, more family-owned businesses may become subject to estate taxes, potentially forcing heirs to sell assets or take on debt to cover tax liabilities.
One major concern is liquidity. Unlike stocks or cash, business interests are often illiquid, meaning they cannot be easily converted into cash to pay estate taxes. If a business is valued above the reduced exemption threshold, heirs may be forced to sell part of the business or take out loans to cover the tax bill.
To prevent this, business owners should consider strategies such as:
- Gifting Ownership Shares – Transferring portions of a business to heirs before 2026 can reduce the taxable estate while allowing the owner to maintain control through structured agreements.
- Family Limited Partnerships (FLPs) – Establishing an FLP allows business owners to gradually transfer ownership interests to family members while applying valuation discounts that reduce taxable estate value.
- Irrevocable Life Insurance Trusts (ILITs) – A life insurance policy held within an ILIT can provide heirs with tax-free funds to cover estate taxes, ensuring that the business remains intact.
- Grantor Retained Annuity Trusts (GRATs) – A GRAT allows business owners to transfer appreciating business assets to heirs while retaining an income stream, reducing estate tax exposure.
Failing to plan for the exemption change could result in forced business sales or disruptions to family legacy planning. Business owners should review their estate plan now to ensure continuity and tax efficiency.
Prepare for Estate Tax Exemption 2026 with Dimov Tax
The upcoming reduction in the estate tax exemption means that more families will face federal estate taxes starting in 2026. Without proper planning, estates exceeding the new exemption threshold could be subject to significant tax liabilities, reducing the amount heirs ultimately receive.
Taking proactive steps now—such as making tax-free gifts, setting up trusts, and transferring assets strategically—can help individuals maximize their wealth transfer while minimizing tax burdens. Since estate planning is complex and highly personalized, working with an experienced tax professional is essential.
Dimov Tax specializes in estate tax planning and wealth transfer strategies. Our team can help you develop a customized plan to take full advantage of the current exemption before the 2026 changes take effect.
Contact us today to secure your financial legacy.