Background

The federal estate and gift tax exemption is the total amount a person may give to beneficiaries during life or at death without incurring federal estate or gift tax. The 2017 Tax Cuts and Jobs Act (TCJA) more than doubled the federal estate and gift tax exemption from $5.49 million per person in 2017 to $11.18 million in 2018. This exemption, which is indexed annually for inflation, has continued to grow since then. The exemption is currently at a historically high level of $13.99 million per person ($27.98 million per married couple) for 2025. However, the TCJA states that the increase in the exemption amount is temporary, so that it is set to expire at the end of 2025. Accounting for inflation, experts estimate the exemption amount for 2026 will be around $7 million per person unless Congress acts.

Does a Federal Exemption Decrease Affect Washington State Estate Tax?

No, these federal changes do not affect Washington state estate tax. The Washington state estate tax exemption is not tied to the federal exemption, and remains $2,193,000. Washington state does not have a gift tax.

What is the Impact of the Decrease?

When an individual gives away more than the federal exemption during life or at death, federal gift or estate tax can become due. In 2025, with the exemption amount at a historic high of $13.99 million, an individual can gift up to $13.99 million without owing estate or gift tax. However, if the exemption falls to approximately $7 million, only $7 million can be transferred federal gift and estate tax-free during life or at death. The estate tax and the gift tax are both effectively imposed at a flat 40% rate.

For example, imagine a parent gives $13 million to a child, and has never made any prior taxable gifts. In 2025, no federal gift tax would be due on the gift because the gift amount is less than the current $13.99 million exemption. However, in 2026, federal gift tax of $2.4 million would be due on the gift (i.e., 40% of $6 million, which is the amount by which the $13 million gift exceeds the $7 million anticipated exemption for 2026).

Alternatively, imagine an unmarried person dies with a net worth of $10 million, and made no gifts during that person’s life. If the person died in 2025, no estate tax would be due because the value of the estate is less than the current $13.99 million exemption. However, if the person died in 2026, federal estate tax of $1.2 million would be due (i.e., 40% of $3 million, which is the amount by which the $10 million value of the estate exceeds the $7 million anticipated exemption for 2026).

As these examples demonstrate, the reduction in the exemption greatly increases tax exposure for large estates.

Is the Decrease Guaranteed to Occur?

No. Congress may act in the coming months to extend the higher exemption. However, such action is not guaranteed. Some lawmakers have also introduced proposed legislation that seeks to repeal the federal estate tax in its entirety, though some commentators do not believe such proposals have a high likelihood of success. If Congress acts, the substance and timing is uncertain. From an estate planning perspective, it is prudent to plan for the decrease taking effect as scheduled.

Who is Affected?

Anyone with an estate nearing or exceeding $7 million ($14 million for married couples) may wish to consider planning for the anticipated decrease in the federal exemption, if they have not already done so. For example, individuals who have not already used their entire federal exemption on lifetime gifts may wish to do so by year-end.

If you are interested in discussing the options available to you in anticipation of this scheduled change, please reach out to one of the estate planning attorneys at Montgomery Purdue.