For years, advisors warned clients about the "estate tax cliff" — the looming sunset of the Tax Cuts and Jobs Act provisions that would have cut the federal estate and gift tax exemption roughly in half at the end of 2025. That cliff is gone. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently raised the exemption rather than letting it expire.
For retirement savers approaching the wealth-transfer phase of planning, the new rules change the math.
The New Numbers for 2026
Beginning January 1, 2026, the federal estate and gift tax exemption is set at $15 million per individual, up from $13.99 million in 2025. Married couples can shield up to $30 million combined from federal estate and gift tax. Starting in 2027, the $15 million baseline will be indexed for inflation each year.
The annual gift tax exclusion — the amount you can give any individual recipient each year without using any lifetime exemption — rose to $19,000 for 2026 (up from $18,000 in 2025). A married couple electing gift-splitting can transfer $38,000 per recipient per year.
Portability remains in effect. A surviving spouse can still file a federal estate tax return to claim the deceased spouse's unused exclusion amount (DSUE), effectively preserving the full combined exemption even if assets were not balanced between spouses during life.
Why This Matters for Retirement Planning
The "use it or lose it" pressure that drove many large lifetime gifts in 2024 and early 2025 has eased. Households that were considering aggressive gifting purely to lock in the higher TCJA-era exemption before sunset can now plan on a longer time horizon.
That said, the federal exemption is only one piece of the picture:
- State estate and inheritance taxes still apply in roughly a dozen states, often at thresholds far below the federal level — some as low as $1 million.
- Retirement accounts pass with embedded income tax. A $2 million traditional IRA is not the same as $2 million of cash to heirs; non-spouse beneficiaries must drain inherited IRAs within 10 years under the SECURE Act, generally as ordinary income.
- Step-up in basis still applies to most non-retirement assets at death, which often makes holding appreciated taxable accounts until death more efficient than gifting them during life.
Practical Takeaways
- Reassess prior gifting plans. If you accelerated gifts solely to beat the 2025 sunset, the urgency has passed. Future gifting decisions can focus on family needs and income-tax positioning rather than a deadline.
- Use the annual exclusion strategically. At $19,000 per recipient ($38,000 for couples), regular annual gifts to children and grandchildren still move meaningful wealth out of an estate without touching the lifetime exemption.
- File for portability. Even if no estate tax appears due at the first spouse's death, filing Form 706 to elect portability preserves the DSUE — a safety net worth more than the filing cost in most estates above $3–5 million.
- Coordinate retirement accounts with the estate plan. Beneficiary designations on IRAs and 401(k)s override wills. Review them after any major life event and after legislative changes like OBBBA.
- Don't ignore state rules. A federal exemption of $15 million offers no protection against a state estate tax with a $2 million threshold.
The permanent exemption is welcome news for retirees focused on legacy planning, but it does not eliminate the need for an integrated plan that addresses income tax on inherited retirement accounts, state-level taxes, and beneficiary mechanics. Those layers determine what actually reaches heirs.
Sources: Morgan Lewis, Mercer Advisors, Internal Revenue Service, Citizens Private Bank, Lathrop GPM