How to Prepare for the Potential Sunset of the Estate and Gift Tax Exemption in 2025

Tax Planning | Estate Planning

 Susan Jones By: Susan Jones
How to Prepare for the Potential Sunset of the Estate and Gift Tax Exemption in 2025
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In 2018, the federal estate and gift tax exemption amount increased substantially, allowing high-net-worth individuals to avoid paying estate taxes on a significant portion of the assets in their estates. 

However, the current exemption amount is scheduled to sunset at the end of 2025, leaving those with substantial wealth at risk of paying taxes of up to 40% of the value of their estate. 

While we can speculate about what’s going to happen in Congress in 2025, there’s no way to know for sure if the heightened exemption amount will be extended or not or for how long.  

As a firm specializing in comprehensive wealth management, which covers both tax strategy and estate planning, we are encouraging our clients to be aware of the potential sunset and take steps toward protecting their legacy, regardless of what happens in D.C. 

Proper planning can help you minimize your estate tax liability and retain more wealth for your heirs, but it’s crucial to act now to ensure you have enough time to put a plan in place by the end of 2025.  

Here’s what you need to know to prepare for a potential sunset. 

What is the Sunset Clause in 2025? 

In 2017, Congress passed and President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA), which reduced the corporate tax rate, increased the standard income tax deduction and increased the estate and lifetime gift tax exemption, among many changes. 

In 2018, exemption amounts increased from $5.5 million to $11.1 million for single filers and $22.8 million for married couples filing jointly. 

In 2025, this exemption increases to $13.99 million per taxpayer, meaning a married couple can almost $28 million from the estate tax.  

However, the higher exemption amount is set to expire on December 31, 2025. 

If Congress doesn’t act to extend the increased exemption amount, the current estate and gift tax exemption will reset to pre-2018 levels which, when adjusted for inflation, is expected to be around $7 million for per individual in 2026. 

Maximizing Benefits of the Higher Exemption Before 2025 

Although uncertainty remains about whether Congress will extend the higher exemption amount or allow it to expire, it’s important to be prepared if it does reset.  

That means taking action now to ensure you have a plan in place to protect future wealth—even if your assets don’t currently reach the threshold that would subject you to estate tax.   

Why? 

Although you may not have an estate tax problem now, your assets will likely continue growing—possibly for decades—creating a potential estate tax problem in the future, especially if the higher exemption sunsets. 

If your assets are invested, the growth they could see over years in the market could exceed the inflation-adjusted exemption increases. This means that someone with assets even well below the estate tax exemption should talk with their financial advisor about estate tax planning to develop a strategy for minimizing their tax burden.

Common strategies for leveraging the lifetime exemption include making gifts to irrevocable trusts to take advantage of today’s increased exemption amount and shielding future growth from the estate tax. Thanks to IRS Regulations, the benefits of making sizeable gifts now and taking advantage of today’s increased exemption amount won’t be lost if it’s eventually reduced.  

However, it’s crucial that your non-tax goals are met before you start removing assets from your estate because you don’t want to give away assets you may need to live on in retirement. 

Using Trusts to Maximize the Estate Tax Exemption 

Trusts are one way to remove assets from your taxable estate to minimize your tax liability. 

However, because to be effective for estate tax planning they must generally be  irrevocable, it’s important to consider your options carefully before transferring assets into one. 

Spousal Lifetime Access Trusts (SLATs) are a popular option for married couples because they allow the donor spouse to use up as much of the lifetime exemption as they’re comfortable with while retaining access to assets through their spouse or a provision that allows them to borrow from the trust. 

Investors with children and grandchildren may consider setting up family gift trusts and making their family members the beneficiaries. The benefit of this type of trust is that future appreciation occurs outside of the estate, but the downside is that you have to give up control of and access to the funds you transfer.  

Other types of trusts are also available, and a financial advisor can help you decide which—if any—is suitable for you.  

Leveraging Gift Tax Exemption for Wealth Transfer 

Another way to use the higher exemption amount is by making large outright gifts. 

This method transfers gifted assets to others, such as your children or grandchildren, directly without additional restrictions.  

However, unless there’s a specific purpose for making the gift, like buying a house for your children or paying for your grandkids’ education, putting the money into a trust to take advantage of enhanced management and creditor protection is often advisable. 

Both outright gifts and trusts can be an important part of a comprehensive wealth management plan when used appropriately, but you need to understand the pros and cons of each before you begin removing assets from your estate. 

A financial advisor can help you understand the implications of different estate tax planning strategies and implement the ones that are right for you. 

Adjusting Estate Plans, Trust and Gifting Strategies to Accommodate Lower Exemptions 

If the higher exemption sunsets, investors may need to adjust their estate plan, trust and gifting strategies to accommodate lower exemption amounts. However, the approach you should take varies based on the value of your estate and whether you would be subject to estate taxes. 

If your estate wouldn’t be taxed, taking steps to maximize your estate tax exemption may not be your best option.  

In fact, it could increase the amount you have to pay in income taxes because when you use the estate tax exemption, you don’t get a step up in basis on your income taxes. 

Usually, deciding whether to take advantage of the estate tax exemption or step up in basis on your income taxes is an easy decision, but for some people, the answer isn’t as obvious. 

In those situations, building flexibility into your estate plan allows you to decide where to direct assets to achieve maximum tax benefit by either minimizing estate taxes or minimizing income taxes. 

Conclusion 

Investors with significant estates should be engaged in proactive estate planning strategies in anticipation of the 2025 sunset of the increased estate and gift tax exemption amount. 

However, it’s important to remember that tax planning is just one piece of a comprehensive wealth management puzzle. 

A financial advisor can help you make estate and tax planning decisions that minimize your tax burden without losing sight of your long-term financial goals.  

Take our money match quiz today to find out if you could benefit from comprehensive wealth management planning. 

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For over twenty years, Susan has passionately provided wealth management services to individuals, families, fiduciaries, private foundations and their related entities with a focus on sophisticated income, gift and estate tax consulting and compliance, proactive executive compensation planning and succession planning. Susan understands the many facets involved in creating a successful multi-generational family legacy and uses a forward-looking approach to help clients grow and preserve assets, reduce taxes and realize both their financial and non-financial goals. Susan’s experience includes practicing law in the tax and estate planning. More »

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