Estate and Gift Tax Exemption Expected to Drop in 2026: Why High-Net-Worth Families Should Plan Now

Overview

While many anticipated a significant “sunset” of estate tax benefits in 2026, the landscape has changed dramatically due to recent legislation. As of late 2025, the One Big Beautiful Bill (OBBB) has effectively replaced the expected drop with a permanent increase in federal estate and gift tax exemptions.

For high-net-worth (HNW) families, however, the urgency to plan has not disappeared, it has simply shifted toward locking in current values and planning under the new permanent framework.

1. The New Reality: 2026 Exemption Levels

Contrary to prior expectations that the exemption would fall to approximately $7 million, the new law establishes historically high, “permanent” exemption amounts.

Note: The top federal estate tax rate remains 40% on assets exceeding these thresholds.

2. Why “Permanent” Does Not Mean “Wait”

Even with higher exemption limits, delaying estate planning can still result in substantial unnecessary taxes for three key reasons:

Asset Appreciation

Gifting assets today removes all future appreciation from your taxable estate.

• Example:

  • Gift $15 million today

  • Assets grow to $25 million over 10 years

  • The $10 million in growth escapes estate tax

  • Waiting could expose that growth to a 40% tax

Political Volatility

Although the law is labeled “permanent,” future Congresses can always revise tax rules. Planning strategies implemented now are often grandfathered or protected under IRS anti-clawback regulations.

State-Level Estate Taxes

Many states—including New York, Massachusetts, and Washington—impose estate taxes with exemptions far below the federal level (often $1 million to $7 million). Federal law changes do not eliminate these state tax exposures.

3. High-Impact Planning Strategies

For families whose net worth exceeds—or is expected to exceed—the $15 million (individual) or $30 million (married) thresholds, the following tools remain essential.

4. Spousal Lifetime Access Trusts (SLATs)

A SLAT allows one spouse to transfer assets into an irrevocable trust for the benefit of the other spouse.

Key benefits:

• Locks in today’s high exemption

• Removes future appreciation from the taxable estate

• Preserves indirect household access to assets through the beneficiary spouse

5. Grantor Retained Annuity Trusts (GRATs)

A GRAT is particularly effective for rapidly appreciating assets, such as pre-IPO stock or high-growth real estate.

How it works:

• You transfer assets to the trust

• You receive an annuity for a fixed term

• If asset growth exceeds the IRS Section 7520 rate, the excess passes to heirs tax-free

6. Annual Exclusion Gifting

In 2026, you may gift:

• $19,000 per recipient

• $38,000 per recipient for married couples

These gifts do not use any of your $15 million lifetime exemption.

The Power of Scale:
A married couple with three children and six grandchildren can transfer $342,000 per year out of their estate completely tax-free.

7. The Step-Up in Basis Trade-Off

One of the most important planning decisions under the new regime is whether to gift assets during life or retain them until death.

Gifting Now

• Removes future appreciation from the estate

• Heirs receive a carryover basis (original cost basis)

Holding Until Death

• Assets remain in the estate

• Heirs receive a step-up in basis to fair market value, potentially eliminating capital gains taxes