Navigating the 2025 Estate Tax Sunset: Strategies to Protect Your Wealth
The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the federal estate and gift tax system. One of the most impactful modifications was the increase in the lifetime exemption amount from $5.6 million to $11.18 million per individual, adjusted for inflation. As of 2024, the exemption amount is $13.61 million per individual or $27.22 million for married couples. This allows individuals to transfer assets up to these limits to their heirs, either during their lifetime or at death, without incurring any federal gift or estate taxes. Transfers exceeding these exemption amounts are subject to a 40% transfer tax.
However, this increased exemption is temporary. It is set to expire, or “sunset,” on December 31, 2025, unless Congress decides to extend or make it permanent. If no action is taken, the exemption will revert to its pre-TCJA level of $5.6 million per individual, adjusted for inflation since 2017. While a new administration might change the estate tax exemption in January 2025, this is speculative. This article focuses on current laws.
The exact federal exemption in 2026 after the sunset is uncertain, but it is generally projected to fall in the range of $6-7 million per person or $12-14 million for married couples. This reduction would increase the number of estates subject to federal estate tax and raise the tax liability for estates already above the threshold. Note that some states also have their own estate or inheritance taxes; however, this article concentrates solely on federal estate tax.
Who This Affects & Potential Tax Strategies
Married couples worth $10-14 million or individuals worth $5-7 million:
If you fall into this category, you are currently well below the estate tax exemption and likely haven't been concerned about potential estate tax liabilities. However, if the exemption sunsets, your estate could quickly fall within the taxable range as it grows. It’s crucial to have a properly drafted revocable trust that takes estate taxes into account and to understand various advanced planning strategies.
Married couples worth $14-27 million or individuals worth $7-13 million:
In this range, you currently have enough exemption to avoid the estate tax in 2024, but you'll exceed the exemption limit in 2026 if it reverts. It's important to have a revocable trust, and additional strategies can be implemented to minimize estate taxes. By gifting to irrevocable trusts now, you can use the high exemption and remove assets from your taxable estate. This also allows future growth and appreciation of these assets to be excluded from your estate.
Married couples worth more than $27 million or individuals worth more than $13.6 million:
If your estate is within this range, you are already subject to estate taxes, with assets above the exemption amount taxed at 40% upon death. Along with a revocable trust, you may benefit from irrevocable gifting trusts and discounting strategies to reduce the taxable value of your estate. These strategies can lower the reported value of your assets, enabling you to transfer more into irrevocable trusts using the same exemption limits. “Freezing” techniques to exclude future growth and appreciation from your estate may also be necessary.
Generational Wealth Considerations
If you choose not to plan proactively for the estate tax or have an estate too large to fully avoid it, consider these options for paying the tax:
Let your estate pay the estate tax, passing a smaller legacy to future generations.
Choose to benefit charity at your death and receive a charitable deduction against the estate tax; or
Purchase life insurance to cover the potential estate tax. This option can be attractive if you wish to create liquidity to pay the tax while preserving assets for future generations.
Choosing a qualified trustee with specialized knowledge is crucial for managing generational wealth. A corporate trustee can protect your descendants' inheritances from creditors, ensure prudent decisions, and provide guidance on investments and planning strategies.
Where to Begin
The current estate and gift tax exemption provides a unique opportunity for estate planning, but it may not last. If you don’t use your exemption while it is at a historic high, you could lose a significant portion of it. The IRS has issued an “anti-claw-back” regulation, ensuring that any exemption used during your lifetime is final. Thus, if the exemption decreases later, the IRS will not tax prior gifts or reclaim assets into your estate.
If you have questions, contact us here at Wealth|KC and our Financial Planning team can discuss your estate plan and unique circumstances.
We can support you with:
Access to planning services with specialists to review your documents and provide a roadmap for the scheduled sunset.
Corporate trustee services to act as trustee, co-trustee, or agent if desired.
Advanced insurance planning to see if new life insurance strategies can help with tax free estate transfers.