The current federal estate tax exemption levels, introduced by the Tax Cuts and Jobs Act (TCJA) in 2018, have provided historically high federal estate tax exemptions. But this period of increased exemption is expected to sunset on December 31, 2025. The recent federal election resulted in unified control of both the legislative and executive branches by the Republican Party, whose leadership has emphasized extending (or even making permanent) the TCJA tax cuts as a legislative priority. However, as well all know, anything can happen (or not) in Washington, D.C. Political unpredictability makes the old adage, “better safe than sorry,” especially relevant, so at least thinking through backup plans—or taking proactive steps—may be prudent if the expected does not happen.
If no legislative action occurs, the federal estate tax exemption will revert to pre-2018 levels—approximately $7 million per individual, adjusted for inflation—starting in 2026. This reduction would significantly increase the number of estates exposed to federal estate tax liability. As such, 2025 presents a strategic opportunity to act under the current elevated exemption levels to minimize future tax burdens. Below, I outline key strategies to consider considering the scheduled sunset and the uncertainty surrounding potential legislative changes.
Understanding the Sunset: What It Means for Your Estate
The federal estate tax exemption allows individuals to transfer a specified amount of wealth to heirs or beneficiaries during their lifetime or at death without incurring federal estate tax liability. Under the current rules, the exemption amount stands at about $14 million per individual in 2025. Married couples can combine their exemptions to shield nearly $28 million.
If the exemption sunsets as scheduled, it will return to pre-TCJA levels of approximately $7 million per individual, adjusted for inflation, in 2026. While these changes are automatic under current law, future legislative action could modify or extend the current exemption. Absent such action, individuals and families with substantial assets should evaluate their estate plans now to avoid unnecessary tax exposure.
Key Estate Planning Strategies for 2025
1. Lifetime Gifting: Leveraging the Current Exemption
The historically high exemption presents an ideal opportunity for substantial lifetime gifts. Gifts made before the sunset are irrevocable and will not be “clawed back” if the exemption amount decreases after 2025.
- Example: If you gift $12 million to your children or other beneficiaries in 2025, that amount will remain tax-free, even if the exemption drops to $7 million in 2026.
- Action: Consider gifting cash, real estate, business interests, or other assets that are likely to appreciate in value over time, thereby removing future growth from your taxable estate.
2. Irrevocable Trusts: Moving Wealth Outside Your Taxable Estate
Irrevocable trusts provide a powerful mechanism for transferring assets out of your taxable estate while still maintaining some control over their management. Common trust options include:
- Grantor Retained Annuity Trusts (GRATs): Allows you to transfer appreciating assets with minimal gift tax consequences.
- Dynasty Trusts: Preserve wealth for multiple generations while avoiding estate tax at each generational transfer.
By placing assets into an irrevocable trust in 2025, you can use your current exemption to protect those assets and their future appreciation from estate tax.
3. Spousal Lifetime Access Trusts (SLATs): Preserving Flexibility
Spousal Lifetime Access Trusts (SLATs) allow one spouse to gift assets to an irrevocable trust for the benefit of the other spouse and their descendants. These trusts provide a dual advantage:
- They remove assets from the taxable estate.
- They allow the non-donor spouse to retain indirect access to trust assets during their lifetime.
SLATs are particularly beneficial for couples concerned about depleting their own resources, as the donor spouse can ensure their partner maintains financial security while reducing the taxable estate.
4. Charitable Giving: Combining Philanthropy with Tax Savings
Charitable donations can play a dual role in achieving philanthropic goals while reducing estate tax liability. Consider the following strategies:
- Charitable Remainder Trusts (CRTs): Allow you to transfer assets to a trust that provides income to you or your beneficiaries for a set period, with the remainder passing to a charitable organization.
- Outright Donations: Gifts to qualified charities reduce the size of your taxable estate while supporting causes you care about.
Charitable planning strategies may offer significant tax savings while aligning with your values and priorities.
Next Steps: Planning for 2025 and Beyond
The scheduled sunset of the estate tax exemption underscores the need for proactive estate planning. With potentially only one year remaining before it reverts to lower levels, individuals and families with substantial assets should consult with experienced estate planning professionals to develop strategies tailored to their unique circumstances.
Key considerations include:
- Reviewing your existing estate plan to identify potential tax exposure.
- Evaluating which assets to gift or transfer to maximize the current exemption.
- Coordinating with your advisors to ensure your plan aligns with your long-term goals and provides flexibility in light of potential legislative changes.
By taking action before the end of 2025, you can mitigate future tax liability, preserve family wealth, and ensure your estate plan aligns with your personal and financial priorities.
If you have any questions about the sunset and its potential impact, contact KJK Estate Planning attorney Gregory Williams (GLW@kjk.com; 614.427.5746).