Don’t Sleep on the Estate and Gift Tax Sunset

Although the federal estate and gift tax exemption is at an all-time high of $13,610,000 per person, that exemption is set to decrease on January 1, 2026 to $5,000,000, indexed for inflation. Clients should not delay in having a conversation with estate planning counsel about the best way to take advantage of the exemption before its reduction.

People often do not appreciate the complexities that go into an estate plan and wait until it is too late for their attorney to help. For example, those considering gifting a family business with real estate would need to get appraisals of both the underlying real estate and the company itself. The appraisals can take months and need to be started as soon as possible so that an attorney has sufficient time to guide the clients on the best ways to make the gift. In addition to providing a value for the property being gifted, an appraisal might lead an attorney to suggest a change in the gift structure. For example, if the values are coming in higher than expected, an attorney might suggest a recapitalization of the company so that the donor could better leverage the gift using discounts for lack of marketability and lack of control.

Another way in which planning ahead helps is in the avoidance of the step transaction doctrine. Spouses can run into timing issues where spouse 1 wishes to utilize gift exemption but does not have sufficient assets in his or her name to do so. Instead, spouse 2 must first transfer assets to spouse 1 before spouse 1 can make a gift. If there is insufficient time between the two transfers (from spouse 2 to spouse 1, and then from spouse 1 to the intended beneficiary), the IRS could view the transfers as a step transaction – in effect, treating it as one transfer directly from spouse 2 to the beneficiary. The application of the step-transaction doctrine could have adverse tax consequences for the donor and should be avoided by allowing time to pass between the first transfer between spouses and the gift.

The two situations discussed above are just two examples of why waiting until the last minute can be detrimental for planning. Although there is always the possibility that Congress will act before 2026 to maintain the estate tax exemption at higher levels, clients should consider discussing gifting with counsel sooner than later.