2026 Federal Estate Tax Exemption

Keith just received a notice from his accountant – the IRS is auditing his father’s estate return, specifically questioning the valuation of a privately held business. His father passed away last year, believing his estate was well under the federal exemption, but this audit could wipe out a significant portion of what Keith expected to inherit. The cost of defending this audit, even if successful, could easily reach $50,000.

As an Estate Planning Attorney and CPA with over 35 years of experience, I’ve seen countless families blindsided by unexpected tax liabilities. The fear surrounding the 2026 “sunset” of the increased federal estate tax exemption has been pervasive, but the landscape shifted with the passage of the One Big Beautiful Bill Act (OBBBA). Let’s clarify the current situation and what you need to know for proper planning.

The OBBBA permanently established the Federal Estate Tax Exemption at $15 million per person ($30 million for couples) effective Jan 1, 2026. This eliminates the “2026 Sunset” fear, though the top tax rate remains at 40% for assets exceeding this permanent threshold, which is now indexed annually for inflation. For 2026, that means an estate must exceed $15 million plus the inflation adjustment to trigger federal estate tax. While this is a substantial amount, it doesn’t mean everyone is safe. Complex estates – those with closely held businesses, real estate holdings, or significant life insurance – require careful analysis.

My CPA background is crucial here. A significant part of estate tax planning involves maximizing the “step-up in basis” for assets. When an asset is inherited, its cost basis is adjusted to its fair market value on the date of death. This can drastically reduce capital gains taxes when the heir eventually sells the asset. Properly valuing these assets, and documenting that valuation, is vital – as Keith is painfully discovering. We not only ensure compliance with IRS standards, but also utilize appropriate valuation methods to potentially minimize the estate tax impact. This requires a deep understanding of both tax law and accounting principles.

However, even with the higher exemption, Proposition 19 in California adds a layer of complexity, especially for real estate. Under Proposition 19, heirs only keep a parent’s low property tax base if they move into the home as their primary residence within one year. Critically, for 2026, the tax-free ‘basis boost’ is capped at $1,044,586 over the original taxable value; any value exceeding this adjusted cap results in a partial reassessment even if the child moves in.

Beyond federal estate tax and Proposition 19, don’t overlook the increasing importance of digital asset planning. Per the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), custodians like Apple or Google are legally prohibited from granting executors access to the content of emails or private messages without ‘explicit written direction’ in the will or trust. Metadata (the ‘catalog’) may be accessible, but the private content remains locked without this specific legal trigger. This can create significant hurdles for estate administrators attempting to fully account for a decedent’s assets.

Valuation Risks: Accurate asset valuation is paramount, particularly for business interests.
Proposition 19 Impact: Understand the limitations on property tax transfer under Prop 19.
Digital Asset Access: Ensure your estate plan addresses access to digital assets per RUFADAA.

What Happens If I Exceed the Exemption?

Even if your estate exceeds the $15 million+ exemption, several strategies can help mitigate the tax burden. Irrevocable trusts, properly structured, can remove assets from your taxable estate. Gifting strategies, within the annual gift tax exclusion ($18,000 per recipient in 2026), can also reduce the overall size of your estate. Life insurance, when held in an Irrevocable Life Insurance Trust (ILIT), can provide liquidity to pay estate taxes without increasing the taxable estate itself.

What About Business Owners?

Business owners face unique challenges. The value of a closely held business is often a significant portion of their estate. Accurate valuation is critical, and a buy-sell agreement can provide a framework for transferring ownership while minimizing estate tax implications. Furthermore, under the Corporate Transparency Act (CTA), all non-exempt small businesses must maintain active BOI Reports with FinCEN. Upon the death of a member, the estate or successor has exactly 30 days from the date the estate is settled to file an updated report; failure to meet this window triggers non-waivable fines of $500 per day.

Protecting Your Family from Unexpected Costs

Proper estate planning isn’t about avoiding taxes altogether; it’s about minimizing them legally and protecting your family from unnecessary financial hardship. It’s about ensuring your wishes are carried out efficiently and without costly court battles. Given the complexities of the tax laws and the evolving digital landscape, a proactive and comprehensive estate plan is more crucial than ever. And, of course, addressing incapacity concerns is equally vital. Under both federal HIPAA and the California Confidentiality of Medical Information Act (CMIA), medical providers are strictly barred from sharing details with family unless a HIPAA Release is integrated into the Advance Healthcare Directive. Without this, a spouse may be forced to obtain an emergency court-ordered conservatorship just to speak with a surgeon.

How do probate courts in California evaluate intent when a will is challenged?

In California, a last will and testament operates within a probate system that emphasizes intent, clarity, and procedural compliance. When properly drafted, a will does more than distribute property—it creates legally enforceable instructions that guide courts, fiduciaries, and beneficiaries through administration with fewer disputes and less uncertainty.

When a will is drafted with California probate review in mind, it becomes a stabilizing roadmap rather than a source of conflict. Clear intent, proper authority, and compliant execution protect both families and estates.

Controlling Legal Standards Governing California Estate and Asset Transfers

• Probate & Court Procedure:
  California Courts – Wills, Estates, and Probate
  The official judicial branch guide for navigating the probate process; it provides updated 2026 checklists for determining if an estate qualifies for “Summary Probate” under the $208,850 personal property limit or the $750,000 primary residence threshold (AB 2016).
• Property Tax Reassessment (Prop 19):
  California State Board of Equalization (Prop 19)
  The definitive resource for understanding the “Parent-to-Child” reassessment exclusion; it outlines the strict one-year deadline for heirs to move into an inherited home as their primary residence to maintain the parent’s low property tax base.
• Advance Healthcare Planning:
  California Attorney General – Advance Health Care Directive
  Provides the official California statutory form and legal guidelines for appointing a health care agent; this resource emphasizes the necessity of combining a medical power of attorney with a HIPAA release to ensure doctors can communicate with family during an emergency.
• Federal Estate & Gift Tax:
  IRS Estate Tax Guidelines
  The authoritative federal portal for estate and gift tax reporting; this page reflects the 2026 “OBBBA” permanent exemption of $15 million per person, effectively replacing the previously scheduled Tax Cuts and Jobs Act (TCJA) sunset.
• Digital Asset Access (RUFADAA):
  California RUFADAA Law (Probate Code §§ 870-884)
  Access the full statutory text of the Revised Uniform Fiduciary Access to Digital Assets Act; it explains why executors are legally barred from accessing encrypted accounts, email, or crypto-wallets unless the decedent provided explicit “prior consent” in their estate plan.