Before the Estate Tax Exclusion Sunsets in 2026

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As 2026 approaches, families who have more than $10M or individuals with more than $5M may be served well from making more than $5M of completed gifts and utilizing the higher estate exclusions before they sunset.

As the IRS released on November 22, 2019, “The Treasury Department and the Internal Revenue Service today issued final regulations confirming that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.” The IRS summarizes this as:

To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the final regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

Giving a gift can be a taxable event if you give over the per-recipient annual limit. You can avoid paying the gift taxes now by reducing the amount of credit you can apply against your estate taxes.

This means that to use up your extra estate exemption before it sunsets, you could consider making gifts either directly to heirs, to an irrevocable trust, or to a 529 plan.

Once you have completed the gift, you can file Form 709 with your tax return to report your use of the estate exclusion and avoid gift tax on those gifts now. To read more about this process, you might benefit from our guide “Gifts, Taxes, and IRS Form 709.”

In the final regulation, they give four examples of how this new rule works. I will end with that quote so that those who want more information can gather it:

(2) Examples. All basic exclusion amounts include hypothetical inflation adjustments. Unless otherwise stated, in each example the decedent’s date of death is after 2025.

(i) Example 1. Individual A (never married) made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative total of $11.4 million in basic exclusion amount allowable on the dates of the gifts. The basic exclusion amount on A’s date of death is $6.8 million. A was not eligible for any restored exclusion amount pursuant to Notice 2017-15. Because the total of the amounts allowable as a credit in computing the gift tax payable on A’s post-1976 gifts (based on the $9 million of basic exclusion amount used to determine those credits) exceeds the credit based on the $6.8 million basic exclusion amount allowable on A’s date of death, this paragraph (c) applies, and the credit for purposes of computing A’s estate tax is based on a basic exclusion amount of $9 million, the amount used to determine the credits allowable in computing the gift tax payable on A’s post-1976 gifts.

(ii) Example 2. Assume that the facts are the same as in Example 1 of paragraph (c)(2)(i) of this section except that A made cumulative post-1976 taxable gifts of $4 million. Because the total of the amounts allowable as a credit in computing the gift tax payable on A’s post-1976 gifts is less than the credit based on the $6.8 million basic exclusion amount allowable on A’s date of death, this paragraph (c) does not apply. The credit to be applied for purposes of computing A’s estate tax is based on the $6.8 million basic exclusion amount as of A’s date of death, subject to the limitation of section 2010(d).

(iii) Example 3. Individual B’s predeceased spouse, C, died before 2026, at a time when the basic exclusion amount was $11.4 million. C had made no taxable gifts and had no taxable estate. C’s executor elected, pursuant to § 20.2010-2, to allow B to take into account C’s $11.4 million DSUE amount. B made no taxable gifts and did not remarry. The basic exclusion amount on B’s date of death is $6.8 million. Because the total of the amounts allowable as a credit in computing the gift tax payable on B’s post-1976 gifts attributable to the basic exclusion amount (zero) is less than the credit based on the basic exclusion amount allowable on B’s date of death, this paragraph (c) does not apply. The credit to be applied for purposes of computing B’s estate tax is based on B’s $18.2 million applicable exclusion amount, consisting of the $6.8 million basic exclusion amount on B’s date of death plus the $11.4 million DSUE amount, subject to the limitation of section 2010(d).

(iv) Example 4. Assume the facts are the same as in Example 3 of paragraph (c)(2)(iii) of this section except that, after C’s death and before 2026, B makes taxable gifts of $14 million in a year when the basic exclusion amount is $12 million. B is considered to apply the DSUE amount to the gifts before applying B’s basic exclusion amount. The amount allowable as a credit in computing the gift tax payable on B’s post-1976 gifts for that year ($5,545,800) is the tax on $14 million, consisting of $11.4 million in DSUE amount and $2.6 million in basic exclusion amount. This basic exclusion amount is 18.6 percent of the $14 million exclusion amount allocable to those gifts, with the result that $1,031,519 (0.186 × $5,545,800) of the amount allowable as a credit for that year in computing gift tax payable is based solely on the basic exclusion amount. The amount allowable as a credit based solely on the basic exclusion amount for purposes of computing B’s estate tax ($2,665,800) is the tax on the $6.8 million basic exclusion amount on B’s date of death. Because the portion of the credit allowable in computing the gift tax payable on B’s post-1976 gifts based solely on the basic exclusion amount ($1,031,519) is less than the credit based solely on the basic exclusion amount ($2,665,800) allowable on B’s date of death, this paragraph (c) does not apply. The credit to be applied for purposes of computing B’s estate tax is based on B’s $18.2 million applicable exclusion amount, consisting of the $6.8 million basic exclusion amount on B’s date of death plus the $11.4 million DSUE amount, subject to the limitation of section 2010(d).

These examples reveal how utilizing some of your estate tax exclusion via gifts before 2026 can save on estate taxes.

Photo by Bruno Kelzer on Unsplash

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Chief Operating Officer, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine