Estate Tax Exemption
The federal estate tax exemption is the dollar amount of taxable estate (at death) or cumulative lifetime taxable gifts that passes free of federal estate or gift tax. The 2026 amount is $13.99M per individual (indexed annually). The TCJA's doubled exemption is scheduled to sunset on January 1, 2026, reverting to approximately $7M per individual (pre-TCJA $5M base, inflation-adjusted), absent legislative extension.
The federal exemption is a unified credit covering both lifetime taxable gifts (above the annual exclusion of $19,000 per donor per recipient for 2026) and the taxable estate at death. Use of exemption is cumulative: a $5M lifetime gift in 2024 reduces the available exemption at death by $5M. The lifetime gift route uses exemption at the present-day amount; an estate gift uses exemption at the date-of-death amount. With current scheduled sunset and likely growth between, the calculus often favors using exemption pre-sunset to lock in the higher amount.
The top federal estate tax rate is 40% above the exemption (after small bracket structure below). State-level estate taxes apply in 12+ states with widely varying exemptions and rates — Massachusetts and Oregon have $1M and $2M state-level exemptions respectively, far below the federal level, meaning a $5M estate in Boston owes $0 federal but ~$400k Massachusetts. Connecticut, Hawaii, Illinois, Maine, Maryland, Minnesota, New York, Rhode Island, Vermont, Washington, and DC also have separate state estate or inheritance taxes. State-level rates top out at 16% in most states.
The interaction between portability (DSUE), exemption growth, and pre-sunset planning makes 2025–2026 a particularly active year for estate planning. Couples with combined estates above the post-sunset $14M threshold (∼$28M with DSUE) face material additional tax if they don't use exemption before the sunset. Strategies include lifetime gifts to non-grantor trusts (locking in exemption at the higher pre-sunset amount), SLAT structures (preserving spouse access to assets while removing them from the estate), and selective IDGT installment sales.
- 2017 and priorPre-TCJA exemption ~$5M (indexed)Federal exemption based on $5M nominal base, inflation-adjusted to ~$5.49M by 2017.
- 2018TCJA doubles exemptionTCJA raises base to $10M nominal, indexed; immediate effect to ~$11.18M for 2018.
- 2026Current exemption ~$13.99MInflation-indexed continuation of the doubled base.
- 2026-01-01 (scheduled)Sunset reverts base to ~$5M (pre-TCJA)Absent extension, exemption returns to ~$7M (inflation-indexed pre-TCJA base). Pre-sunset gifts protected by IRS anti-clawback rule.
Synthetic UHNW households should carry exemption-usage ledgers tracking lifetime taxable gifts and remaining exemption. Engines projecting estate tax should model both pre-sunset and post-sunset exemption regimes, the state-level overlay where applicable, and the interaction with DSUE for widowed members.
Common pitfalls
- Computing federal estate tax without checking state-level exposure — Massachusetts and Oregon estates routinely owe state estate tax on amounts well below federal exemption.
- Using lifetime gift exemption at the pre-sunset rate without tracking the cumulative ledger — overshooting puts the gift into taxable territory at 40%.
- Treating the IRS's anti-clawback rule as universal — special elections (deferred-payment §6166, partial-interest valuation discounts) can change the available-exemption calculation.
- Ignoring the 'use-it-or-lose-it' character of the pre-sunset exemption — gifts above the post-sunset amount made before the sunset don't claw back the excess at death (under current IRS rules).
Examples
Couple with $25M combined estate, post-sunset exemption projected at $14M combined. Without action: ~$11M taxable × 40% = $4.4M federal estate tax at deaths. With pre-sunset gifting of $20M (using $14M of pre-sunset exemption + remaining annual exclusions): post-gift estate $5M, fully exempt at any post-sunset rate. Net federal-tax-savings: $4.4M, plus growth on the gifted assets outside the estate.