Federal Estate and Gift Tax Exemption Will Sunset After 2025: How to Prepare Now
Upcoming Changes to Estate Planning Laws: Start Preparing Now
Elevated Gift Tax Exclusions Will Sunset after 2025
The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the lifetime estate and gift tax exemption from $5.6 million to $11.18 million for individuals, indexed for inflation after 2018. For 2023, the indexed exemption rose to $12.92 million ($25.84 million for married couples). Barring congressional action, the inflation-adjusted exemption is expected to return to approximately $7 million ($14 million for married couples) in 2026, effectively reducing the limit by half.
Given the impending changes, high-net-worth individuals and families should revisit their estate planning. They will need to determine whether it makes sense to top off their lifetime gifts above the expected post-2025 exemption amount of approximately $7 million before they “lose” the excess exemption between $7 million and $12.92 million. Any difference between the current higher exemption amounts and the post-2025 reduced amounts will be lost if not used.
It is important for potentially affected individuals to work with their estate planning advisor before making any substantial gifts to ensure that they have sufficient liquidity for future needs. A trusted advisor can assist with planning techniques, such as a Spousal Lifetime Access Trust (SLAT). A SLAT can be an effective tool for estate planning because the beneficiary spouse retains access to the trust assets during life. When one spouse enjoys continued access to gifted assets, married couples retain a measure of financial security and peace of mind that allows them to consider using more exemption than would otherwise be palatable.
Time is Running Out: Act now
Time is running out to begin planning. Thoughtful estate planning takes time to develop and implement. Attorneys, CPAs, appraisers, insurance advisors and other estate planning professionals are already busy, and they will become overloaded as the deadline approaches. If you believe you will have a taxable estate after 2025, act now; do not wait until closer to the deadline.