Estate Exemption Sunset Reminder

By Cooper Melvin, JD, CPA

In 2026, the increased estate tax exemption is expected to revert to its pre-2018 amount of $5 million adjusted for inflation. It is expected to be approximately $7 million ($14 million for married couples) after the inflation adjustment. Currently, the estate tax exemption is $13.61 million ($27.22 for married couples). Fortunately, the IRS previously announced that there will be no clawback of any exemption used before 2026 if that use exceeds the 2026 exemption. Therefore, it is vital to contact your estate planning consultant to ensure that you are getting the most out of the current exemption.

There are many effective strategies that you can access in order to max out your exemption while actually removing more than the exemption amount from your estate. One of the most effective strategies is gifting interests in a family or closely held business. Due to the familial nature of such businesses, the IRS respects that such businesses may be worth more to the family than a potential third-party buyer. As a result, the IRS allows a discount factor to be applied to the valuation of your gift. For example, if your closely held business interest is worth $17 million to you and the IRS allows a 20% discount, then your reportable gift amount is $13.6 million. This strategy effectively allows you to pass off more value without eating into your lifetime exclusion ($3.4 million more in the above example).

Furthermore, by using this gifting technique, you are able to remove appreciation from your estate. Imagine that $17 million business interest was projected to grow by 5% annually until you pass away in 10 years. In 10 years, that interest is worth around $27.5 million. By gifting that property 10 years before your death, you removed it from your estate at a reportable $13.6 million value and effectively removed $27.5 million from your estate. That is approximately $5 million worth of tax savings for the inheritors of your estate.

This is just one prime example of how BMSS may be able to assist you. If this strategy interests you or you want to hear more about other potential strategies, please contact your BMSS tax professional at (833) CPA-BMSS or visit our website for direct contact information.