Navigating Estate Tax Laws in 2025 and 2026: What You Need to Know
As we navigate 2025 and prepare for 2026, significant changes in federal estate tax laws are on the horizon. Understanding these changes is essential.
Current Federal Estate Tax Exemption (2025)
As of 2025, the federal estate tax exemption remains high due to the Tax Cuts and Jobs Act (TCJA) of 2017. The exemption amount for individuals in 2025 is approximately $13.99 million (or $27.98 million for married couples). Estates valued below this threshold are not subject to federal estate taxes. For estates exceeding the exemption, a 40% tax rate applies to the amount over the limit.
Major Change Coming in 2026
Unless Congress takes action, the TCJA’s estate tax provisions will expire at the end of 2025. This means that on January 1, 2026, the federal estate tax exemption will drop to approximately $6 million per individual (or $12 million for married couples, adjusted for inflation), which is expected to be around $7 million per individual (or $14 million for married couples). This significant reduction will subject many more estates to taxation.
Tennessee and Estate Taxes
Unlike some states, Tennessee does not impose a state-level estate tax or inheritance tax. This means that Tennessee residents only need to consider federal estate tax laws when planning their estates. However, the upcoming reduction in the federal exemption may still impact high-net-worth individuals in Tennessee.
Estate Planning Considerations
Given the expected reduction in the exemption amount, Tennesseans should consider the following estate planning strategies:
Gifting Before 2026: The IRS has confirmed that gifts made under the current exemption will not be retroactively taxed if the exemption decreases in 2026. Taking advantage of the higher exemption now can help reduce future estate tax liabilities.
Trusts and Other Strategies: Irrevocable trusts, charitable giving, and family business succession planning may help reduce estate tax exposure.
Portability Planning: Married couples should ensure they are prepared to utilize portability to maximize their exemptions effectively.
Potential Legislative Changes
Congress may extend or modify the estate tax exemption, but there is no certainty. Given the possibility of the exemption dropping significantly in 2026, estate planners recommend taking action now rather than waiting for potential legislative changes.
Final Thoughts
For Tennesseans with estates exceeding the anticipated 2026 exemption, now is the time to consult with estate planning professionals. Proactively managing your estate can help minimize tax burdens and ensure a smooth transfer of wealth to the next generation.
