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Increased estate tax exemption sunsets the end of 2025 | Baker Tilly
Article
Prepare estate plans for the sunset of the estate and gift tax exemption in late 2025
Nov. 8, 2023 · Updated April 2, 2025 · Authored by Jennifer Mosley
The estate and gift tax exemption for U.S.-domiciled individuals, which is $13.99 million per person for 2025, is scheduled to sunset at the end of 2025. As a result, the exemption will drop back to the prior Tax Cuts and Jobs Act (TCJA) level of $5 million, adjusted for inflation.
These changes create a unique planning opportunity for high-net-worth families and individuals whose estates are subject to transfer taxes. Although many practitioners believe these sunsetting provisions may be addressed by the Trump administration, proactive planning is still key and could help reduce future estate, gift, and generation-skipping transfer taxes.
It’s important to evaluate your planning options as soon as possible, given that the estate planning process can be complex and time consuming.
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The estate and lifetime gift-tax exemption is scheduled to revert to its previous $5 million amount in 2026, which affords a rare estate-planning opportunity for as long as the exemption remains elevated.
Effect of the TCJA on the estate tax exemption
When the TCJA went into effect, the estate tax exemption for U.S.-domiciled individuals doubled for the tax years between 2018 to 2025. The exemption increased from $5.49 million in 2017 to $11.8 million in 2018 and is annually adjusted for inflation.
For the year 2024, the exemption was $13.61 million per person and increased to $13.99 million per person for 2025. The TCJA didn’t change the exemption of $60,000 that’s available against the value of assets includable in the U.S. taxable estate of an individual who wasn’t U.S. domiciled.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
With the TCJA provisions expiring at the end of 2025, the inflation adjusted estate tax exemption is anticipated to land at around $6.8 million effective Jan. 1, 2026. With such a significant change on the horizon, it may be valuable to review your estate now and start planning.
Make effective estate plans
A combination of strategies can be implemented in an effective estate plan, including trust structures, generational planning, charitable planning, boosting tax advantaged accounts, and annual and lifetime gifting. The heightened exemption limits mean that certain lifetime gifting strategies implemented before 2025 may be more effective in reducing the value of your estate and overall estate tax owed at death.
If your estate crosses an international border either due to the assets in the estate or the beneficiary, it’s important to consider both U.S. and non-U.S. estate or inheritance tax as well as the tax basis of assets that will pass to the next generation, where they’re residents.
Lifetime planning options
As previously discussed, improving the use of the elevated estate tax exemption through lifetime gifting can be a key factor in reducing your estate and generation-skipping transfer tax liability. You can make gifts to beneficiaries outright or in a trust.
Using a trust is often preferred for several reasons. The most common reasons being that the assets can be protected from creditors and that you can control the ultimate disposition of those assets. Two common types of U.S. trusts used for gifting are:
Dynasty trusts
Spousal lifetime access trusts (SLAT)
Dynasty trusts
Dynasty trusts allow for the tax-free transfer of assets to your descendants and beneficiaries. Once you have created the trust, you would then fund assets into the trust applying your estate and generation-skipping transfer tax exemptions to those assets.
Assets in the trust will remain free of estate, gift, and generation-skipping transfer tax and continue to grow estate tax free. The trust will define the way each beneficiary receives distributions and what should happen upon a beneficiary’s death. Assets can be held in the trust for many generations.
SLAT
A married taxpayer might consider naming their spouse as the lifetime beneficiary of their dynasty trust. This type of trust is referred to as a SLAT.
In this strategy, the taxpayer would gift assets to a trust established for the benefit of their spouse and descendants. Their spouse can receive trust income and principal, giving the taxpayer indirect access to the trust assets for the duration of the marriage. The spouse can also serve as trustee if distributions are limited to an ascertainable standard.
If you have international assets, it’s important to evaluate whether those assets are subject to transfer tax in the country where they’re located before executing a transfer.
Gifting today versus doing nothing
After the TCJA went into effect and the exemption doubled, there was some question around whether there would be any clawback after the sunset on gifts made using the increased exemption amount. In 2019, the IRS issued final regulations creating a rule to address this issue which is known as the anti-clawback rule.
This rule clarifies that an individual or estate won’t be taxed on completed gifts that were tax free and made before 2026. Under the anti-clawback rule, after the sunset, a decedent’s exemption will be the greater of what they have previously gifted or the current amount.
The estate and lifetime gift-tax exemption is scheduled to revert to its previous $5 million amount — indexed for inflation — in 2026. This affords a rare estate-planning opportunity for as long as the exemption remains elevated.
The potential estate tax savings of utilizing the exemption now is demonstrated in the example below.
Estate tax savings example
Assuming an unmarried individual’s estate was valued at $15 million, they have used their full exemption to gift $13.99 million (2025 exemption amount), and there was no growth on the remaining assets, then their taxable estate in 2026 would be valued around $1.01 million.
When the elevated exemption sunsets in 2026, the potential estate tax liability would be $404,000. On the other hand, if no gifts were made, then at the sunset in 2026, the taxable estate would remain at $15 million. In that case, the potential estate tax liability would be $3.2 million.
Many states and foreign countries also have an estate tax, and their exemption levels are generally lower than the federal level, so lifetime gifting can provide additional opportunities as well as complexities in estate tax planning. It’s crucial to address the state, federal and international impact of estate and gift planning.
Steps to take for your estate plan
Keep in mind the following steps for your estate plan.
Develop a cohesive and comprehensive financial plan
Update estate planning documents
Act before 2025 deadline
Develop a cohesive and comprehensive financial plan
Understanding your entire financial picture is a critical first step to making informed decisions. Creating an effective estate plan begins with understanding your current wealth structure by modeling your balance sheet and expected growth to help predict when and if an estate will be taxable.
The next step is to determine projected lifetime consumption and spending, as well as the type of legacy you want to leave for your chosen beneficiaries. This can help you decide what assets and how much can be gifted outright, in trust, or in some other manner that helps achieve your goals.
Some additional questions to consider include:
How much liquidity will you need during your lifetime to pursue your goals and support your lifestyle?
Do you know what your assets are worth, now or in the future?
If you’re a business owner, do you know how much your company and stake are worth?
Which state or country do you and your beneficiaries plan to call home, today or in the future?
What actions can be taken now that can help reduce taxes in the future, even if you don’t currently have a taxable estate?
Are there assets that you want to avoid liquidating, and how does that change the composition of your balance sheet and estate?
Are there people or organizations that you want to financially help during your life via charitable donations — even if the purpose goes beyond tax savings?
Will a U.S. state or foreign country also tax a lifetime gift or your estate?
These questions, and many others, can be addressed during the financial planning process, and should be discussed with your financial advisor or tax professional.
Update estate planning documents
Review your estate planning documents as soon as possible, and make sure they’re still consistent with your goals and objectives. It’s helpful to periodically review or update your estate planning documents, especially when you or your family members experience major life events, to ensure that your wishes consistently align with your plan.
Act before end of 2025 deadline
Exemption limits are set to expire Dec. 31, 2025, unless Congress moves to makes changes. Proper financial and estate planning today can help save you unnecessary taxes in the future, and because the planning process can be lengthy, it’s important to begin as soon as possible.
