The clock is ticking on the biggest tax gift in a generation. Honestly, most people haven't even looked at their calendars, but if you have any significant assets, the end of 2025 should be circled in bright red. That is when the current rules for the federal estate and gift tax are scheduled to vanish. Poof. Gone.
Right now, we are living in a temporary "golden era" for wealthy families. Thanks to the Tax Cuts and Jobs Act (TCJA) of 2017, the exemption amount—the total you can give away during your life or at death without paying a 40% federal tax—is at an all-time high. For 2026, the numbers are massive. But because of how the law was written, these levels aren't permanent. They are "sunset" provisions. Unless Washington acts, we are looking at a massive tax hike by default.
So, will congress extend the estate tax exemption? That is the multi-trillion-dollar question. It’s not just about billionaires. It’s about small business owners, farmers, and families who have seen their home values skyrocket over the last decade.
The Cliff We Are All Walking Toward
To understand where we’re going, we have to look at where we are. In 2024, the individual exemption is $13.61 million. For a married couple, that’s over $27 million they can pass on tax-free. If you die on December 31, 2025, those are your numbers. If you die on January 1, 2026, the exemption is expected to drop by roughly half, likely landing somewhere around $7 million per person after inflation adjustments.
Imagine losing $7 million worth of tax protection overnight. It’s a brutal reality for estate planners.
Congress basically kicked the can down the road back in 2017 to make the math work for budget reconciliation. They knew this day would come. Now, the political landscape is a mess. Whether or not that exemption gets extended depends almost entirely on who holds the keys to the White House and the Capitol after the next election cycles. Republicans generally want to make the TCJA permanent or even abolish the "Death Tax" entirely. Democrats often view the high exemption as an unfair loophole for the ultra-wealthy and would prefer to see it revert to lower levels—or even drop further to $3.5 million, a figure famously proposed by Senator Bernie Sanders in the "For the 99.8% Act."
Why This Isn't Just a "Rich Person" Problem
You might think, "I don't have $13 million, why do I care?"
Think again.
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Real estate has gone crazy. If you bought a house in California or New York thirty years ago for $200,000, it might be worth $3 million today. Add in a 401(k), some life insurance proceeds (which people often forget are included in the taxable estate), and maybe a small family business, and suddenly you’re knocking on the door of a $7 million valuation. Under the current rules, you’re safe. Under the 2026 rules? Your heirs might have to sell the family home or the business just to pay the IRS.
It’s a liquidity trap.
The IRS doesn't take IOUs. They want their 40% in cash, usually within nine months of the date of death. If your wealth is tied up in a warehouse, a fleet of trucks, or a farm in Iowa, you can't exactly just write a check. This is why the debate over whether will congress extend the estate tax exemption is so heated in the Midwest and among trade groups like the National Association of Manufacturers.
The Political Reality: Can They Actually Agree?
Politics is theater, but the tax code is where the real drama happens.
If we have a divided government, which is more likely than not given recent history, "gridlock" is the default setting. Here’s the catch: gridlock means the exemption drops. To keep things as they are, Congress has to proactively pass a law. They can't just sit on their hands. If they do nothing, the "sunset" happens automatically.
There are three likely scenarios.
First, the "Full Extension." This happens if one party sweeps the elections and decides to make the $13 million+ exemption permanent. It’s a high-cost move for the federal deficit, but it provides the most certainty for taxpayers.
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Second, the "Middle Ground." We might see a compromise where the exemption doesn't drop all the way to $7 million but doesn't stay at $13 million either. Maybe they land at $10 million? It’s a classic Washington "split the baby" move.
Third, the "Let it Burn" scenario. Congress stays stuck in partisan bickering, no bill reaches the President’s desk, and on January 1, 2026, the exemption resets to the inflation-adjusted 2011 levels. This is the nightmare scenario for planners because it creates a rush of "deathbed" gifting in late 2025.
What Real Experts Are Saying Right Now
I talked to several tax attorneys who are basically telling their clients to act as if the extension isn't coming. It’s the "hope for the best, plan for the worst" strategy.
The IRS actually gave us a gift a couple of years ago. They issued "anti-clawback" regulations. This is technical, but basically, it means that if you give away $13 million now while the law allows it, and then the law changes in 2026 to a $7 million limit, the IRS won’t come back and tax you on the difference later. You "lock in" the higher exemption by using it before it disappears.
However, you can't just give away money and keep control of it. That’s the rub. To get the tax benefit, you truly have to part with the assets.
"We are seeing a massive uptick in Spousal Lifetime Access Trusts (SLATs)," says one estate strategist. "It's the only way to move the money out of the taxable estate while still keeping a 'back door' to the funds through a spouse."
It's complicated stuff. It’s also expensive to set up. You can't just do this on a Saturday morning with a DIY legal website.
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Don't Forget the Step-Up in Basis
While everyone is obsessed with the question of will congress extend the estate tax exemption, there is another monster hiding in the closet: the "Step-Up in Basis."
Currently, when you die and leave an asset to an heir—say, a share of Nvidia stock you bought for $10—their "basis" becomes the value on the day you died. If it’s worth $130 when you die, they can sell it immediately for $130 and pay zero capital gains tax.
Some lawmakers want to kill this. They want to tax the "unrealized gains" at death. If Congress decides to trade a permanent high estate tax exemption for the elimination of the step-up in basis, it could actually result in a higher tax bill for the middle class than the estate tax ever would. It's a shell game. You have to watch both hands.
Strategy: What Should You Be Doing?
Waiting for Congress is a loser's game. They usually pass tax extenders at 11:59 PM on New Year's Eve. You can't plan a multi-million dollar estate transfer in five minutes.
- Get an Appraisal. You can't know if you have a problem until you know what you’re worth. Get real valuations for your business and your real estate.
- Use Your Annual Exclusion. Don't forget you can give $18,000 (in 2024) to as many people as you want without even touching your lifetime exemption. It’s a "use it or lose it" deal.
- Consider "Gifting" Now. If you are clearly over the $7 million mark, you should be talking to a professional about Irrevocable Life Insurance Trusts (ILITs) or SLATs.
- Review Your Will. Many people have "formula clauses" in their wills that say "leave an amount equal to the maximum exemption to my kids and the rest to my spouse." If the exemption drops from $13 million to $6 million, your kids might suddenly get way less than you intended, or vice versa.
The Bottom Line on the 2026 Sunset
The reality is that will congress extend the estate tax exemption is a question with a political answer, not a logical one. In an era of $34 trillion in national debt, some lawmakers see the estate tax as a low-hanging fruit to increase revenue without raising income taxes on the "average" voter. Others see it as a double-taxation scheme that destroys family legacies.
The safest bet? Assume the exemption is going down. If it doesn't, you’ve just organized your estate a bit early. If it does, you’ve saved your family millions of dollars in 40% tax hits.
Start the conversation with your CPA or estate attorney now. By the time 2025 hits, these professionals are going to be so slammed they might not even take your call. Don't be the person trying to move a mountain on December 30th.
Immediate Action Steps:
- Audit your "Gross Estate": Include death benefits from life insurance, which many mistakenly believe are tax-free (they are income tax-free, but often estate tax-included).
- Draft a "Wait and See" Trust: Talk to counsel about structures that allow you to decide at the last minute whether to fund them based on the political climate in late 2025.
- Check State Taxes: Remember that states like Oregon, Washington, and Massachusetts have their own estate taxes with much lower exemptions (some as low as $1 million). Congress can't help you there.