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Federal Estate & Gift Tax: What You Need to Know
The federal estate and gift tax is a unified transfer tax system that taxes the transfer of wealth from one generation to the next — whether through estates at death or gifts made during your lifetime. Understanding this system and its current exemption levels is essential for anyone with a meaningful estate to protect.
For tax year 2026, the federal estate tax basic exclusion is $15,000,000 per individual, up from $13,990,000 in 2025 (per IRS Rev. Proc. 2025-32). A married couple can effectively double this amount to approximately $30 million using the portability election, which allows a surviving spouse to use any unused portion of a deceased spouse's exemption. Estates below these thresholds owe no federal estate tax. For estates exceeding the exemption, the top federal estate tax rate is 40%.
For years, planning revolved around a scheduled "sunset": the elevated exemption created by the Tax Cuts and Jobs Act of 2017 was set to drop by roughly half after December 31, 2025. That sunset never arrived. The One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025) eliminated it — setting the basic exclusion at $15 million for 2026 and making it permanent, indexed for inflation going forward.
Permanence does not make planning optional. Lifetime gifting, trust funding, and valuation planning still determine how much of an estate passes tax-free. New York's separate estate tax — with a far lower threshold and a "cliff" — and the NJ inheritance tax below still demand attention for Tri-State families.
New Jersey Estate Tax & Inheritance Tax
New Jersey repealed its state estate tax effective January 1, 2018. Before the repeal, NJ imposed estate tax on estates exceeding just $675,000 — one of the lowest thresholds in the nation — and many middle-class NJ families faced state estate taxes that residents of most other states did not. The repeal eliminated this burden entirely.
However, New Jersey still imposes an inheritance tax, which is distinct from an estate tax. The NJ inheritance tax is assessed based on the relationship between the deceased person and the beneficiary:
Class A Beneficiaries (Exempt)
Spouse, civil union or domestic partner, child, grandchild, parent, grandparent, stepchild of the decedent. Class A beneficiaries pay no NJ inheritance tax.
Class C Beneficiaries (11%–16%)
Siblings, daughters-in-law, and sons-in-law. These beneficiaries face NJ inheritance tax rates of 11% to 16% on amounts above $25,000.
Class D Beneficiaries (15%–16%)
All other individuals — friends, non-family members, more distant relatives — face NJ inheritance tax rates of 15% to 16% on all taxable transfers. This rate applies with no exemption amount.
For NJ residents who wish to leave assets to siblings, friends, or more distant relatives, planning around the NJ inheritance tax can be just as important as federal estate tax planning. Careful beneficiary designations, trust structures, and lifetime gifting can reduce or eliminate NJ inheritance tax exposure.
Gift Tax & Lifetime Gifting Strategies
The federal gift tax and estate tax share a single lifetime exemption — the same $15 million (tax year 2026) that shields estates from tax also applies to taxable gifts made during your lifetime. However, the annual gift tax exclusion allows you to make gifts up to a certain amount per recipient each year without affecting your lifetime exemption at all.
For 2026, the annual exclusion is $19,000 per recipient. A married couple can combine their exclusions through gift splitting to give $38,000 per recipient annually. For a couple with three adult children, this means $114,000 per year in tax-free wealth transfer — over $1 million in nine years — without ever touching the lifetime exemption. When gifts also include grandchildren and other family members, the annual gifting capacity compounds further.
In addition to annual exclusion gifts, certain payments are excluded from gift tax entirely: direct payments of medical expenses and tuition paid directly to an educational institution or healthcare provider are excluded without limit and do not count against either the annual exclusion or lifetime exemption. These "super exclusion" opportunities are frequently underutilized by families with the means to make them.
Gifts exceeding the annual exclusion require the filing of IRS Form 709 (Gift Tax Return) and reduce the available lifetime exemption by the excess amount. While no gift tax is owed until the exemption is exhausted, reporting is required. ProAxis helps clients structure and document gifting programs to ensure compliance while maximizing the wealth transfer.
Estate Planning Strategies We Support
Irrevocable Life Insurance Trusts (ILITs)
Life insurance proceeds are generally included in your taxable estate if you own the policy. An ILIT owns the policy instead, keeping the proceeds outside your estate while still making them available to your heirs. This is particularly valuable for NJ business owners who carry large life insurance policies for buy-sell purposes.
Spousal Lifetime Access Trusts (SLATs)
A SLAT allows one spouse to make a gift to an irrevocable trust for the other spouse's benefit, removing the gifted assets from both spouses' taxable estates while retaining indirect access through the beneficiary spouse. SLATs remain one of the most discussed strategies for moving future appreciation out of both estates while keeping practical access to the assets. On the income tax side, some sellers also review ING trusts for NJ residents before a business sale.
Family Limited Liability Companies (FLLCs) & Valuation Discounts
Transferring assets — particularly business interests, investment portfolios, or real estate — into a family LLC and then gifting or selling minority interests to family members can allow for valuation discounts (lack of marketability, lack of control) that reduce the value attributed to transferred interests for gift and estate tax purposes. A 20%–30% valuation discount effectively stretches the estate tax exemption further.
Grantor Retained Annuity Trusts (GRATs)
A GRAT allows you to transfer appreciating assets out of your estate at little to no gift tax cost. You receive annuity payments from the trust for a fixed term, and any growth in trust assets above a hurdle rate (the IRS §7520 rate) passes to beneficiaries free of estate and gift tax. GRATs work best for assets expected to appreciate significantly above the hurdle rate.
Charitable Giving Strategies
Charitable remainder trusts, charitable lead trusts, and donor-advised funds can help reduce estate and income taxes while supporting causes you care about. For NJ families with significant appreciated assets, charitable planning can be both philanthropically meaningful and financially strategic.
Frequently Asked Questions
Is there still a New Jersey estate tax?
New Jersey repealed its state estate tax effective January 1, 2018 — a significant relief for NJ families. However, NJ still has an inheritance tax based on the relationship between the decedent and the beneficiary. Class A beneficiaries (spouse, children, parents, grandchildren) are fully exempt from NJ inheritance tax. Class C beneficiaries (siblings, in-laws) face rates of 11%–16% on amounts above $25,000. Class D beneficiaries (unrelated individuals, more distant relatives) face 15%–16% rates on all transfers. Federal estate tax still applies to estates exceeding the federal exemption amount.
What is the current federal estate tax exemption?
For 2026, the federal estate tax exemption (basic exclusion amount) is $15,000,000 per individual — approximately $30 million for a married couple using portability. The top estate tax rate is 40% on amounts above the exemption. The One Big Beautiful Bill Act of 2025 set the exclusion at $15 million for 2026, indexed for inflation going forward, and eliminated the sunset that had been scheduled after 2025. The exemption was $13.99 million in 2025.
What is the annual gift tax exclusion?
The annual gift tax exclusion for 2026 is $19,000 per recipient (unchanged from 2025). Gifts within this amount per recipient per year do not require a gift tax return and do not reduce your lifetime exemption. A married couple can give $38,000 per recipient through gift splitting. Direct payments of medical expenses and tuition paid to providers are excluded from gift tax without limit and represent an often-underutilized wealth transfer opportunity for families with the means to use them.
When should I start estate planning?
Estate planning is not just for the wealthy or elderly — it is appropriate for anyone with assets, dependents, or a business interest. The right time to start is now. The most effective strategies work best when implemented over time rather than in a last-minute rush. Even with the federal exclusion now permanent at $15 million (tax year 2026), families with NJ inheritance tax exposure, New York estate tax exposure, or growing business interests benefit from reviewing their plans regularly. We coordinate with your estate planning attorney to ensure the tax strategy aligns with your legal documents.