As the new year rolls in, we will see some changes to parameters that impact government benefits and taxation thresholds. From our perspective in the inheritance planning field, all eyes are on the estate tax exemption level that will be in place for the coming year.
Now that we are there, the 2026 estate tax exclusion has been established. It is building on the record high level that we had in 2025, and this is good news for people who have been able to accumulate significant wealth.
2026 Estate Tax Exclusion
The exclusion or exemption is a set dollar amount that can be transferred tax-free. Any portion of an estate that exceeds this exemption is potentially subject to the estate tax. It carries a maximum rate of 40 percent, so it can take a very significant bite out of your legacy.
When the Tax Cuts and Jobs Act was enacted at the end of 2017, it essentially doubled the exclusion for the following year. Throughout 2017, it was $5.49 million, and it went up to $11.18 million in 2018.
That figure has remained in place with ongoing adjustments to account for inflation. In 2025, the exclusion was $13.99 million, and in 2026, it is an even $15 million.
Each individual taxpayer has their own exclusion. So, if you are married, you and your spouse have a combined exclusion of $30 million. Additionally, the exclusion is portable, so a surviving spouse can use the exclusion that was allotted to their deceased spouse.
Marital Deduction
On the subject of spouses, there is an estate tax marital deduction. It can be used to transfer unlimited property to your spouse transfer tax-free. To use this deduction, your spouse must be a citizen of the United States.
Why is this stipulation in place?
Suppose an American citizen is married to a person who is a French citizen. If the American dies first, the surviving spouse could receive a tax-free inheritance and move back to France. The U.S. government would never see a penny going forward.
In the bigger picture, the marital deduction simply delays the imposition of the estate tax. After the passing of the second spouse, the tax will still be looming.
Lifetime Gift Giving
When you hear about the estate tax without knowing all the details, you may have no worries. You can simply give assets to your children while you are still living to avoid the tax, right?
After all, they would be inheriting the resources anyway, so can just make transfers at the right time. This window of opportunity existed about a century ago, but there has been a gift tax in place without interruption since 1932.
The gift and estate taxes are unified under the tax code. So, if you give $15 million in taxable gifts in 2026, the entirety of your estate would be subject to taxation at the time of your death.
Additional Gift Tax Exclusions
That’s the bad news, but here’s the good news: there are some additional gift tax exemptions. The most significant one is the annual gift tax exemption or exclusion. In 2026, you can give up to $19,000 to an unlimited number of people free of taxation.
To be clear, you would not be using any of your multimillion dollar unified gift and estate tax exclusion to give these $19,000 tax-free gifts. This is not a lot of money to someone with estate tax exposure, but it can add up considerably over time.
If you’re married, there is an estate tax efficiency strategy called “gift splitting.” You and your spouse can combine your respective exclusions. In this manner, you can give up to $38,000 in tax-free gifts annually to any number of recipients.
State-Level Estate Taxes
In addition to these federal taxes, some Americans have to be concerned about state-level estate taxes. We practice in the great state of South Carolina, and fortunately for us, there is no state estate tax here.
On the other side of the coin, there are a dozen states with estate taxes. If you own property in one of these states, the transfer could be subject to the estate tax in that state. Of course, the value of the property would have to exceed the exclusion in that state.
There are 12 states with estate taxes:
- New York
- Maryland
- Rhode Island
- Connecticut
- Vermont
- Maine
- Washington
- Oregon
- Massachusetts
- Minnesota
- Illinois
- Hawaii
It is important to understand that the state-level exclusions are lower than the federal exclusion in most cases. To provide a couple of examples, in Oregon, the exclusion is just $1 million, and it’s $2 million in Massachusetts.
Estate Tax Efficiency Strategies
Clearly, a very small percentage of people in the United States will owe estate taxes. This being stated, here in the Hilton Head area, there are many high net worth families. If you are one of them, the federal estate tax carries a 40 percent top rate, so it looms large.
Fortunately, there are estate tax efficiency strategies that can be implemented. This will involve the use of irrevocable trusts and other tools that facilitate tax efficient transfers. When you work with our firm, we can evaluate your situation and make the appropriate recommendations.
Take Action Today!
Whether you are exposed to estate taxes or not, professional guidance is invaluable when you are planning your estate. We can help you create a carefully crafted plan that will ensure the fruition of your legacy goals when the time comes.
To get started, call our Bluffton, SC estate planning office at 843-815-8580 or send us a message through our contact page.
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