ARTICLE | January 28, 2026

Understanding the lifetime gift and estate tax exemption

The lifetime gift and estate tax exemption is the total amount you can transfer – either during your life or at death – without triggering federal estate or gift tax.

For 2026, that exemption is at a historically high level: $15 million per person. So if your estate is below that threshold, your heirs can generally receive your assets without owing federal estate tax.

But, if the value of your estate exceeds that exemption, the excess could be subject to estate tax at a rate of up to 40%.

Let’s say someone passes away in 2026 with a $17 million gross estate. If they’re single, their taxable estate is reduced by their $15 million lifetime exemption (assuming they never had reportable gifting during their lifetime). The remaining $2 million taxable estate could result in approximately $800,000 of estate tax.

While that exemption might seem more than generous today, it’s not set in stone. It has changed many times in the past, and it can, and likely will, change again.

So even if you’re well under the threshold now, that doesn’t guarantee you’ll stay there. You might live another 20 or 30 years, during which time your assets could grow, your life situation could change, or the exemption itself could be reduced by future legislation.

That’s why many families choose to plan ahead. Not because they know they’ll owe estate tax, but because none of us knows what the rules will look like when the time comes.

By planning proactively now, you give yourself more flexibility and control, regardless of how the tax laws evolve.

What the annual gift tax exclusion lets you do

So now that we’ve talked about the lifetime exemption – that larger umbrella for lifetime and posthumous transfers – let’s zoom in on something more immediate and practical: the annual gift tax exclusion.

This is one of the simplest and most underused tools in the tax code.

Each year, the IRS allows you to give a certain amount of money, currently $19,000 per recipient in 2026, to as many people as you’d like, without paying gift tax and without using up any of your lifetime exemption.

In other words, it’s a way to reduce the size of your estate a little bit each year with no tax consequences whatsoever.

So let’s say you have three children. You could give each of them $19,000 this year – that’s $57,000 out of your estate, completely tax-free. And if they’re married, you could give each of their spouses another $19,000, which brings the total to $114,000 gifted in a single year, all without touching your lifetime exemption.

These annual exclusion gifts might seem small compared to your overall estate, but they add up. And the longer you live, and the more recipients you include, the more meaningful the impact becomes. Think of it as a slow and steady way to transfer wealth on your own terms, without waiting until the end of your life to make a difference.

Tips to maximize annual gifting

Once you understand how the annual gift tax exclusion works, the next step is learning how to use it strategically. Because while it’s simple on the surface, there are smart ways to maximize its impact and build flexibility into your long-term planning.

Here are some practical tips to help you get the most from your annual gifting strategy.

Pitfalls to avoid

While annual gifting is relatively simple, there are a few traps that can undermine the benefits or create surprises you’d rather avoid.

First, be careful not to unintentionally exceed the annual exclusion. While going over the annual exclusion isn’t a problem in itself, you will be required to file a gift tax return for that year. And any amount gifted above the limit will use up a portion of your lifetime exemption.

Next, if you’re gifting appreciated assets, make sure to talk with both your tax advisor and the person receiving the gift. Remember, they inherit your cost basis – not a stepped-up one – so they may face capital gains tax when they eventually sell. It doesn’t make the gift a bad idea, but it’s something that should be part of the conversation.

Also, document your gifts carefully, especially large or non-cash transfers. Even when a gift tax return isn’t required, good records can be helpful for future planning or in the event of an audit or family dispute down the road.

And finally, make sure your gifting aligns with your overall estate plan. For example, if you have trusts in place, beneficiary designations, or provisions in your will, make sure your gifting strategy doesn’t create conflict or confusion – especially if you’re gifting unevenly among heirs or supporting one child more heavily during life.

A simple strategy with long-term impact

The annual gift tax exclusion isn’t flashy. But when used thoughtfully, it’s one of the most efficient tools we have for tax-free wealth transfer.

Whether you’re helping a child buy a home, funding a grandchild’s education, or simply reducing your estate one year at a time, annual gifting is a strategy that rewards consistency and planning.

If you’re considering annual gifts and want to make sure you’re using the exclusion effectively, we’re here to help. Our team is happy to discuss how annual gifting fits into your broader financial or estate plan – and how you can use it to create meaningful impact across generations.

Plan Document and Design Considerations 

The mandatory Roth requirement also forces a closer examination of plan design and governing documents. Plans that do not currently offer a Roth feature will need to be amended or risk eliminating catch-up contributions entirely for higher-earning employees. While amendment deadlines generally extend to December 31, 2026, waiting until the last moment compresses decision-making around optional features such as a deemed Roth election, which would automatically classify certain contributions unless employees affirmatively change them. Plan sponsors must also ensure participants have a meaningful opportunity to adjust their elections, particularly in light of universal availability requirements and wage aggregation rules that apply when multiple employers are involved. These considerations elevate plan design from a technical exercise to a strategic governance decision with lasting employee impact.

Vendor Coordination Challenges

Vendor coordination will be one of the most persistent challenges in implementing the mandatory Roth catch-up rules. Payroll providers, recordkeepers, TPAs, and legal counsel each play a critical role, yet they operate on different timelines and respond to different incentives. In practice, misalignment among these parties is the most common source of errors, particularly when changes are introduced late or without coordinated testing. Early engagement across all vendors, paired with deliberate testing well ahead of go-live, is essential. Equally important is the development of clear, documented processes and procedures to ensure accountability and consistency as responsibilities move across systems and organizations.

Tax Reporting and Form W-2 Changes 

How Roth Catch-Ups Appear on Form W-2 

Box 1 wages: Not reduced by Roth catch-up contributions 

Box 12: Roth contributions reported with specific codes (AA/BB) 

Result: Higher reported taxable wages than previous years 

No change to actual tax liability—timing of benefit shifts

Impact on Employee Tax Returns 

Employer Reporting Obligations 

Employer reporting obligations will take on heightened importance under the mandatory Roth framework. Accurate payroll coding is essential, as errors can trigger the need for corrected W-2s, creating administrative burden and eroding employee confidence. In certain correction scenarios, Form 1099-R reporting may also come into play, adding another layer of complexity and scrutiny. These requirements reinforce the need for close coordination between payroll and benefits teams, ensuring that contribution treatment, reporting, and corrections are aligned from the outset rather than addressed after issues surface.

Employee Communications Strategy 

Common Questions and Misconceptions 

Can employees opt out of the Roth requirement? 

Answer: No—it’s mandatory for those meeting criteria 

• Option is to not make catch-up contributions at all 

• Cannot choose pre-tax treatment once threshold crossed 

Does this apply to regular (non-catch-up) contributions? 

Answer: No—only catch-up contributions affected 

• Base contributions remain employee’s choice (pre-tax or Roth) 

• Employer match treatment unchanged 

What if wages fluctuate near the threshold? 

• Testing done annually based on prior year only 

• Status can change year to year 

• No mid-year recalculation required 

• Employers should monitor and communicate changes 

Are employer matching contributions affected? 

Answer: No—match always pre-tax regardless 

• Even when employee catch-ups are Roth 

• No change to employer contribution rules 

Can this rule be repealed or delayed again? 

• SECURE 2.0 had bipartisan support 

• No current legislative proposals to repeal 

• Employers should plan for full implementation 

• Monitor IRS notices for any additional guidance 

Looking Ahead: What Comes After 2026 

Conclusion: Preparation Is Everything 

Key Takeaways 

The mandatory Roth catch-up requirement arriving in 2026 is both real and imminent, with meaningful consequences for employers and employees alike. It introduces operational complexity for plan sponsors while directly affecting the tax outcomes of higher-earning participants. Successful implementation will require tight coordination across payroll, recordkeeping, legal, and advisory stakeholders, with little margin for error. When mistakes occur, they are not abstract. They are visible, personal, and costly to the employees affected. Ultimately, early preparation is the defining factor that separates a controlled, orderly rollout from a reactive and disruptive compliance crisis.

The Bottom Line for Employers 

The bottom line for employers is clear. This is not a problem to be addressed at the time of implementation, but a early planning priority that demands attention well in advance. The compliance obligation rests squarely with the employer, regardless of how many vendors are involved in administration. At the same time, the quality of employee communication will largely determine how this change is experienced across the workforce. For organizations that approach it thoughtfully, the mandatory Roth requirement also presents an opportunity to demonstrate benefits leadership, operational competence, and a disciplined commitment to doing complex things well.

Final Thought 

The mandatory Roth catch-up rule represents more than a technical change—it’s a fundamental shift in how retirement savings and tax policy interact for high-earning, near-retirement workers. Employers who approach 2026 with clarity, preparation, and proactive communication will turn a compliance challenge into an opportunity to strengthen their benefits program and employee trust.