How to Leverage Your Estate and Gift Taxes Before the 2025 Sunset
As we approach 2025, significant changes are on the horizon for estate tax exemptions. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced elevated estate and gift tax exemptions (currently set at $13.61 million per individual and $27.22 million for married couples in 2024). This enactment was the largest overhaul to the U.S. tax code in decades and allowed many Americans to transfer substantial wealth to future generations with minimal tax implications.
However, these elevated exemptions are scheduled to “sunset” or expire on December 31, 2025. This impending change could result in a substantial increase in estate tax liability for many individuals and families.
To prepare yourself and your estate before the sunset, let’s explore the tax implications, why early planning matters and key considerations you can implement before time runs out.
How Estate & Gift Taxes Work
The federal government imposes three types of taxes when transferring wealth: the Estate Tax, the Gift Tax and the Generation-Skipping Transfer (GST) Tax. Understanding these taxes is crucial for effective estate planning.
Estate Tax (“Death Tax”): Applies to wealth transferred at death. It’s levied on the total value of a deceased person’s assets before they’re distributed to heirs. As of 2024, the exemption amount is $13.61 million per individual ($27.22 million for married couples). Only the portion of the estate which exceeds this exemption is taxable.
For example, if an individual’s estate is worth $15 million in 2024, only $1.39 million would be subject to the estate tax ($15 million – $13.61 million exemption).
Gift Tax: Applies to wealth transferred during a person’s lifetime. It shares the same exemption amount as the estate tax ($13.61 million in 2024). There’s an additional annual gift exclusion, which is $18,000 per recipient in 2024. Gifts exceeding the annual exclusion reduce the lifetime exemption.
For instance, if you gift $100,000 to a child in 2024, $82,000 ($100,000 – $18,000 annual exclusion) would count against your lifetime exemption.
Generation-Skipping Transfer (GST) Tax: An additional layer of taxation on transfers to grandchildren or more remote descendants. It’s imposed on top of either the estate or gift tax. This tax aims to prevent wealthy families from avoiding estate taxes by skipping generations.
For example, if you leave $15 million directly to a grandchild, not only would $1.39 million be subject to estate tax, but the same $1.39 million would also be subject to the GST tax.
| Federal Estate Tax | Gift Tax | GST Tax | ||||
| Year | Rate | Exemption | Rate | Exemption | Rate | Exemption |
| 2017 | 40% | $5.49M | 40% | $5.49M | 40% | $5.49M |
| 2018 | 40% | $11.18M | 40% | $11.18M | 40% | $11.18M |
| 2019 | 40% | $11.40M | 40% | $11.40M | 40% | $11.40M |
| 2020 | 40% | $11.58M | 40% | $11.58M | 40% | $11.58M |
| 2021 | 40% | $11.70M | 40% | $11.70M | 40% | $11.70M |
| 2022 | 40% | $12.06M | 40% | $12.06M | 40% | $12.06M |
| 2023 | 40% | $12.92M | 40% | $12.92M | 40% | $12.92M |
| 2024 | 40% | $12.61M | 40% | $12.61M | 40% | $12.61M |
| 2025* | To be announced, likely around $14 million per person | |||||
The Federal Estate exemption and the Gift Tax exemption are a combined amount
The estate, gift and GST taxes are interconnected, with lifetime gifts reducing the available estate tax exemption at death. While spouses can transfer unlimited assets to each other tax-free through the marital deduction, the current high exemption amounts ($13.61 million per individual in 2024) are set to expire after 2025, potentially reverting to pre-2018 levels, adjusted for inflation around $7 million per individual or $14 million for married couples.
Why Early Planning Matters
Estate planning is a complex process which often requires careful consideration and potentially complex legal arrangements. By starting your planning now, you give yourself ample time to:
- Fully understand your options
- Implement strategies gradually
- Take advantage of the current higher exemptions before they expire
- Coordinate with legal and financial professionals to optimize your plan
Remember, once the exemption drops, you can’t retroactively take advantage of the higher limits. Acting now could potentially save your heirs millions in estate taxes.
Key Strategies to Consider
With the impending sunset of the current estate tax exemptions at the end of 2025, there are several strategic planning tools and techniques which can help minimize estate tax liability and maximize the benefits for your heirs.
- Lifetime Gifting: One of the most straightforward ways to take advantage of the current high exemption is through lifetime gifting. By gifting assets now, you can remove them from your taxable estate while using the current high exemption.
- Trust Structures: Irrevocable trusts can be powerful tools for estate planning. By transferring assets to an irrevocable trust, you can remove them from your taxable estate while potentially maintaining some control over how they’re used.
- Spousal Lifetime Access Trusts (SLATs): These allow one spouse to make a large gift to a trust, removing the assets from the estate, while still providing potential access to the funds for the other spouse.
- Dynasty Trusts: For those looking to benefit multiple generations, dynasty trusts can be an excellent option. These trusts can theoretically last forever, benefiting multiple generations without incurring estate tax at each generational transfer.
- Annual Gifting: Don’t forget about the annual gift tax exclusion. In 2024, you can give up to $18,000 per person without reducing your lifetime exemption.
See the below table for more strategies with a brief outline to help explain the benefits and real-life examples.
| Strategy | Description | Benefits | Example |
| Gifting Assets | Transfer assets before the exemption decreases | Reduces taxable estate, allows appreciation outside the estate | Gift $10M before 2026 to avoid $3M being subject to estate tax |
| SLAT (Spousal Lifetime Access Trust) | Trust created by each spouse for the benefit of the other | Excludes trust assets from estates, and provides financial security for beneficiary spouse | Both spouses create SLATs, each funding the trust with $12.92M |
| ILIT (Irrevocable Life Insurance Trust) | Life insurance proceeds kept outside of the taxable estate | Keeps insurance proceeds out of estate, provides liquidity for estate taxes | Transfer life insurance policy to ILIT to remove death benefit from the estate |
| FLP (Family Limited Partnership) | Transfer business interests at discounted value while retaining control | Valuation discounts reduce taxable value, maintains control while transferring ownership | Transfer 49% limited partnership interests to children, maintaining 1% control each |
| Gifting Interests in FLPs to Grantor Trusts | Combines benefits of FLPs with grantor trusts | Reduces taxable estate, allows for greater control and management of transferred assets | Transfer FLP interests to grantor trust, with grantor paying income taxes on trust income |
| Use of One Spouse’s Full Exemption | One spouse uses full exemption while preserving the other’s exemption for future planning | Significantly reduces taxable estate while preserving flexibility for future planning | Transfer $12.92M to an irrevocable trust for children, preserving the other spouse’s exemption |
Act Now
As we approach the 2025 sunset, it’s crucial to start planning now. The potential reduction in estate tax exemptions could significantly impact your estate’s tax liability. By implementing these strategies and working with experienced professionals, you can maximize the benefits of the current high exemptions and ensure a more efficient transfer of wealth to your heirs.
Remember, estate planning is not a one-time event but an ongoing process. Regular reviews and updates to your plan are essential to ensure it remains aligned with your goals and the changing tax landscape.
If you would like to discuss your estate planning goals with our seasoned tax professionals, connect with us today to begin planning.
