Estate Tax Exemptions to Fall 50+% in 2026

Estate tax exemptions have been high for years, but this may change soon. Current estate tax exemptions only last until the end of 2025, just a few years away. Beginning January 1st, 2026, the exemptions are scheduled to fall to just $5 million per person, with adjustments for inflation. It is currently predicted that the actual exemption will be approximately $6.08 million per person and $12.16 million per couple at current inflation rates. 

That cuts the exemption amount by more than half, potentially exposing millions of dollars of your assets to the 40% gift and estate tax rate. While the current exemption has been extended before, there is no way to tell whether it will happen again. If your property exceeds the $5 million mark, it’s crucial to prepare for the possible change to tax law now. 

What Are the Current Estate Tax Exemptions?

Currently, a robust exemption exists for both individuals and couples. Individuals’ assets up to $12.92 million are sheltered, while couples benefit from a joint limit of up to $25.84 million. This includes all property in estates, including real property, liquid assets, collections, investment funds, and other things you directly own. 

It is important to note two things about these tax protections. First, this limit is combined with the gift tax limit. Gifts over the annual exclusion per donee are counted against the gift and estate tax limit. In 2023, the annual exclusion is $17,000 per recipient. For example, giving your favorite charity $500,000 or your child a house worth $500,000 counts against the $12.92 million estate limit, reducing it to $12.42 million. However, fifty $10,000 donations to individual charities will not count against that limit.

Second, only property you own is considered subject to an estate tax. If you have already given or sold it to someone else, it is no longer part of your estate. Similarly, if the asset is in a trust, it is not considered your property. Instead, it is the trust’s property, subject to significantly lower tax rates. This makes the careful use of trusts fundamental to protecting assets from taxes.

Preparing for Falling Exemptions in 2026

In California, it is not difficult for established individuals or couples to have estates exceeding the upcoming reduced exemptions. The average California home alone is worth more than $700,000, according to the Zillow Home Values Index. If you own a home and have a solid retirement fund, your assets likely approach or exceed the reduced limit coming in 2026. In that case, you should prepare your estate plan for the possibility of a much-reduced exemption with trusts to protect assets from taxes:

  • Special Power of Appointment Trusts (SPATs): Trusts that allow you access to trust assets without being named a trustee or beneficiary. Instead, you are a “trusted person” to whom a party known as an Appointer can instruct the trustee to direct funds. 
  • Spousal Lifetime Access Trusts (SLATs): Trusts intended to benefit your spouse and protect them from the taxes on your half of your marital assets should you pass away first. Both you and your spouse can create unique trusts to support each other under the guidance of an experienced estate planning attorney.
  • Domestic Asset Protection Trusts (DAPTs): Irrevocable self-settled trusts that name you as a beneficiary and allow you to access the assets within it. They offer unique flexibility among irrevocable trusts but must be carefully managed to follow California laws. Most DAPT trusts rely on professional trustees and estate planning attorneys to accomplish this. 

Do Not Let Changing Tax Regulations Hurt Your Plans

If you have significant assets, you likely want them to go to your family, friends, and preferred organizations rather than being used to pay the 40% estate tax rate. Despite the potential cuts to tax exemptions coming in 2026, you can still protect your assets from these taxes with the right guidance. At The Dayton Law Firm P.C., our skilled attorneys have spent decades helping clients draft plans accounting for tax changes of all kinds. We can advise you on the best strategies and solutions for your unique estate. Learn more about how we can assist you by scheduling a consultation with our California estate planning law firm now.