Estate planning often feels complete once the will is signed, beneficiaries are named, and the assets seem accounted for. But the part many families overlook is what happens after death, when the estate becomes a taxable entity subject to a changing set of federal and state rules. With the current federal estate-tax exemption scheduled to shrink dramatically on January 1, 2026, the landscape is about to shift in ways that could expose millions of households — not just the ultra-wealthy.
This is why attorneys and tax experts have called the next year a “last window” for high-value estate planning. The exemption, which sits at a historic high today, is set to fall by half when key provisions of the Tax Cuts and Jobs Act sunset. Families who assume they are safe now may find themselves unexpectedly over the threshold when the rules change. The result could be surprise tax bills, forced sales of property, and stress placed on heirs at the worst possible moment.
This article explains what is changing, who is at risk, and why acting before 2026 may protect your assets — and your family — far more than waiting.
The 2026 Sunset: What Is Actually Changing?
A major federal shift is coming — and preparation matters.
Under current law, the federal estate, gift, and generation-skipping transfer (GST) tax exemptions will revert on January 1, 2026, to roughly half of today’s level. The current exemption—over $13 million per person and indexed for inflation—is projected to fall to somewhere in the $6.5–$7 million range per person, depending on inflation adjustments. For married couples, that essentially cuts planning room from more than $27 million to somewhere between $13 and $14 million.
The federal tax rate remains 40% on assets above the exemption.
Families often assume these numbers will not affect them. But several categories of assets are regularly underestimated when calculating estate value:
- Primary and secondary homes, especially in states with rising real-estate markets
- Life insurance proceeds, which count toward the taxable estate unless structured properly
- Small business ownership, farms, and rental properties
- Investments, retirement accounts, and cash equivalents
If Congress makes no changes, the exemption automatically drops. Analysts estimate that this shift will expose many more estates to taxation — even those that would never have approached the threshold five years ago.
State-level rules add more complexity. More than a dozen states impose their own estate or inheritance taxes, often with much lower exemption levels. A family may owe no federal estate tax yet face significant state tax liability.
Estate tax is often misunderstood as a “wealthy-person problem.” The shift in 2026 makes it a planning problem for many more families.
Who Will Be Affected When the Exemption Falls?
More families than you may expect — especially those who assume they’re safe.
Several groups may be pulled into taxable territory for the first time:
Homeowners in appreciating markets.
A home purchased decades ago may now be worth significantly more than when the current exemption was set. High-property-value markets such as California, Washington, Maryland, Massachusetts, and parts of Colorado could see many estates enter taxable territory.
Business owners and professionals.
Closely held businesses often represent the largest part of a family’s wealth, and professional valuations can be far higher than owners anticipate. Without planning, heirs may owe tax on business interests they cannot easily liquidate.
Surviving spouses.
A married couple often relies on the doubled exemption, but without proper elections or trust structures, the surviving spouse may inherit everything and unknowingly exceed the post-2026 limit.
Families holding large life-insurance policies.
Unless held in an Irrevocable Life Insurance Trust (ILIT), policy proceeds are counted in the taxable estate. A $2 million policy can easily push an otherwise modest estate into taxable status.
Anyone relying solely on a will.
Wills distribute assets; they do not manage tax exposure. This is a common and costly misconception.
Many families do not realize they are at risk until their estate is valued at death. By then, options have narrowed, and heirs must navigate the consequences.
The Hidden Costs of Waiting Too Long
Estate taxes operate on strict timelines — and families often pay the price.
When estate taxes apply, heirs generally have nine months to pay the bill. For families without liquidity planning, this can lead to painful outcomes:
- Forced sales of property, land, or business holdings to generate cash
- Reduced sale prices due to time pressure
- Borrowing against inheritance, adding cost and risk
- Family conflict, especially when decisions must be made quickly
Another overlooked risk is valuation. At death, the IRS assesses assets at fair market value, not the value the family believes the property “should be” worth. A business with strong revenue or a home in a growing neighborhood can be valued much higher than expected.
Legislative uncertainty adds another layer. The exemption may fall further, stay low, or change again depending on political shifts. Waiting assumes predictability that the current environment does not offer.
What Families Should Do Before 2026 Arrives
Smart planning now can preserve both assets and family harmony.
Several steps can help families prepare before the exemption drops:
- Get a current, accurate valuation of your estate
This includes real estate, business interests, life insurance, retirement accounts, and investments.
- Consider using your lifetime exemption now
Gifting strategies, spousal lifetime access trusts (SLATs), irrevocable trusts, and other tools can lock in today’s higher exemption.
- Review wills, trusts, and beneficiary designations
Outdated documents can trigger unnecessary tax exposure or create confusion for heirs.
- Evaluate how life insurance is held
An ILIT may remove the death benefit from your taxable estate and provide liquidity for heirs.
- Build a liquidity plan
Heirs need access to cash to avoid forced sales. Insurance, trusts, and coordinated planning can make this possible.
Waiting limits the tools available. Acting now maximizes them.
Conclusion
The scheduled reduction of the federal estate-tax exemption is one of the most significant estate-planning shifts in decades. Many families who have never worried about estate tax may find themselves exposed in 2026; not because they gained wealth, but because the rules changed.
Proactive planning protects not just assets, but relationships. The earlier you prepare, the more options you and your heirs will have.
To ensure your estate is ready for 2026, visit BascomLaw.com to schedule a consultation. Your legacy deserves a plan built for the laws of tomorrow, not the assumptions of yesterday.
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