Watch the Sunset: Federal Estate Exclusion Set To Shrink in 2026; New Changes on the Horizon

The 2017 Tax Cuts and Jobs Act (TCJA) is set to end at the close of this year, resulting in a federal estate exclusion that is less than half of the current $13.99 million exclusion. Other changes to the tax structure are expected but remain uncertain for the time being, despite a long list of executive orders over the past few weeks. With no movement on the TCJA yet, and a potentially long wait before any updates are made post-sunset, it is important to implement planning strategies now.

What Do You Need To Understand About the TCJA?

The TCJA made several significant changes to tax law. Among those changes, it doubled the estate and gift tax basic exclusion amount from $5 million to $10 million, adjusted for inflation. Now, it has grown to $13.99 million. This number, the Applicable Exclusion Amount, dictates the amount of assets that individuals can transfer during their lives or at their deaths without incurring gift or estate taxes.

The TCJA expires on December 31, 2025, and if Congress does not act before that time, the Applicable Exclusion Amount will drop to an estimated and inflation-adjusted $7 million per individual.

In short, taxpayers who die after December 31, 2025, and who did not make gifts exceeding $7 million before the TCJA sunsets will have lost the benefit of the increased federal Applicable Exclusion Amount. Which taxpayers would lose out? Those with assets projected to be, or with the potential to grow above, the $7 million federal Applicable Exclusion Amount in 2026—or for couples, those with assets projected to be, or with the potential to grow, over $14 million. Taxpayers with estates of this size should consult with an attorney about gifting options to take advantage of this increased federal Applicable Exclusion Amount while it lasts.

What Other Planning Challenges Might 2025 and the Trump Administration's Future Hold?

Throughout his campaign, President Trump spoke about, among other tax issues, granting federal income tax relief and potentially making the TCJA permanent. With Republicans having a majority in the Senate and the House, it may increase the likelihood of extending provisions under the TCJA; however, it is uncertain when it may be set into law.

For example, it was not until January 2, 2013, that the American Taxpayer Relief Act of 2012 was signed into law, extending the increased estate tax Applicable Exclusion Amount set by the Bush administration that had expired on December 31, 2012, and the TCJA was not passed until December 20, 2017.

The cost to the U.S. government of keeping the TCJA would be significant—from around $1.5 trillion if only parts of the law are kept, to up to $4.6 trillion if it all stays in place. Keeping provisions of the TCJA will have to be balanced with other income tax issues being floated, such as no tax on tips, Social Security, and overtime, along with potential changes to the state and local tax deductions. To date, it is still unclear what tax legislation will be passed prior to January 1, 2026.

Looking forward, proactive and flexible estate planning is needed to maximize tax advantages while they last and craft strategies for new tax challenges down the road.