When Does the Federal Estate Tax Sunset?

The federal estate tax is a levy imposed by the U.S. government on the transfer of a deceased person’s property and assets to their heirs. This tax applies to the net value of an individual’s estate at the time of death, after accounting for certain deductions and exemptions. Its purpose is to tax the transfer of substantial wealth from one generation to the next. Understanding this tax is important for individuals and families engaged in financial planning.

The landscape of federal tax law frequently changes, with certain provisions designed with specific expiration dates. These “sunset provisions” mean parts of the tax code revert to previous forms unless Congress acts. This built-in expiration creates a dynamic environment for estate planning.

Current Federal Estate Tax Landscape

The federal estate tax applies to a deceased individual’s taxable estate, which is determined by subtracting allowable deductions from the gross estate. The gross estate includes all property owned at death, such as real estate, stocks, bonds, business interests, and other tangible and intangible assets. Deductions may include debts, funeral expenses, administration costs, and charitable contributions.

For 2024, the basic exclusion amount for federal estate tax is $13.61 million per individual, meaning estates below this threshold generally do not incur federal estate tax. This figure is adjusted annually for inflation. For married couples, this translates to a combined exclusion of $27.22 million, allowing a substantial amount of wealth to pass tax-free.

A surviving spouse can utilize any unused portion of their deceased spouse’s exclusion amount, a concept known as portability. This provision helps married couples maximize their combined exclusion, even if one spouse did not fully use their individual amount. For estates exceeding the exclusion, the top federal estate tax rate is 40%.

Many states also impose their own estate or inheritance taxes, which operate independently of the federal system. These state-level taxes often have different exemption thresholds and rates.

The Scheduled Sunset of Estate Tax Provisions

A significant change to the federal estate tax landscape occurred with the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. This legislation notably increased the estate tax exemption amount, effectively doubling it from previous levels. Prior to the TCJA, the basic exclusion amount was approximately $5 million, adjusted for inflation.

However, the increased exemption provided by the TCJA was not made permanent. These specific provisions are scheduled to sunset on December 31, 2025. This means that, unless new legislation is passed, the estate tax exemption amount will revert to its pre-TCJA level, adjusted for inflation, starting January 1, 2026.

The estate tax itself will not disappear, but the exemption is expected to fall to approximately $5 million, adjusted for inflation. This inflation-adjusted amount is currently estimated to be around $7 million per individual for 2026.

This scheduled reversion impacts not only the estate tax but also the unified gift tax exclusion, as these are linked. The current, higher exclusion amounts for lifetime gifts will also decrease at the end of 2025. The sunset date marks a substantial shift back to prior tax law, potentially affecting more estates.

Consequences of the Sunset for Estates

If the estate tax provisions sunset as scheduled, the most immediate consequence will be a significant reduction in the basic exclusion amount. As of January 1, 2026, the federal estate tax exemption is projected to decrease by approximately half, reverting to an inflation-adjusted amount estimated around $7 million per individual. This change means that many more estates that are currently exempt from federal estate tax could become subject to it.

Estates valued above the new, lower exemption threshold will face federal estate tax liability on the excess amount. For example, an estate valued at $10 million in 2026 would likely owe federal estate tax, whereas under current law, it would be entirely exempt. This shift could result in a substantial tax burden for families. The top tax rate of 40% would apply to taxable amounts above the reduced exclusion.

This impending change necessitates a thorough review of existing estate plans for individuals and families with significant net worth. Current plans may have been structured based on the higher exemption amounts, and a reduced exemption could render them less effective or even counterproductive. Estate documents and strategies might require adjustments to account for the altered tax landscape.

Portability, which allows a surviving spouse to use a deceased spouse’s unused exclusion, would still apply after the sunset. However, it would be based on the significantly lower post-sunset exemption amount. This means that while the mechanism remains, the overall available exclusion for a married couple would be considerably smaller, potentially impacting wealth transfer strategies.

Potential for Legislative Action

While the sunset of the increased estate tax exemption is currently scheduled for December 31, 2025, Congress retains the authority to alter this course. Lawmakers can pass new legislation to extend the current, higher exemption amounts, modify them, or even repeal the sunset provisions entirely. The future of the federal estate tax is not definitively set and remains subject to legislative decisions.

The legislative process involves numerous considerations, and the outcome is uncertain. Factors such as the prevailing political climate, budgetary priorities, and economic conditions can influence congressional action regarding tax law. There is historical precedent for tax provisions being extended or altered close to their expiration dates.

Planning should account for the scheduled sunset, but also recognize the possibility of legislative intervention. Taxpayers and their advisors must remain informed about ongoing discussions and potential legislative developments that could impact the federal estate tax.