Understanding the Estate Tax and the Impending Sunset of Current Exemptions
The estate tax, often referred to as the “death tax,” is a federal tax levied on the transfer of your assets to your heirs. It primarily affects high-net-worth individuals and their estates. One way to give your children up to 40% more from your estate is to take advantage of gift rules before they sunset. Currently, thanks to the Tax Cuts and Jobs Act (TCJA) enacted in 2017, the estate tax exemption is at a historic high. However, this exemption is set to sunset on December 31, 2025. Of course Congress may act to extend or modify the current law. Don’t take the risk of them extending it by waiting til the last minute! Understanding what this means and how it could affect estate planning is essential.
What Is the Estate Tax?
The estate tax applies to the total value of a deceased person’s estate, including real estate, investments, cash, and other valuable property, above a certain exemption amount. As of 2025, the estate tax rate remains steep, maxing out at 40%. However, most estates avoid paying the tax because of the generous exemption limits currently in place.
In 2024, an individual’s exemption amount is $13.61 million or $27.22 million for married couples using the portability rule. This high threshold means fewer than 0.1% of estates in the U.S. are subject to the tax.
What Will Happen After December 31, 2025?
The TCJA provisions are scheduled to sunset at the end of 2025. Beginning January 1, 2026, the estate tax exemption will revert to pre-TCJA levels, which are adjusted annually for inflation. Based on current projections, the exemption will likely fall to around $6–7 million per individual or $12–14 million for married couples.
This significant reduction in the exemption amount will bring more estates under the purview of the tax. Is your estate in excess of $14 million? Individuals and families who previously felt they were not at risk of estate tax liability may suddenly find themselves in need of advanced planning strategies. Protect your wealth and ensure a smooth transfer of assets to the next generation by taking advantage of planning tools this year.
What Should You Do to Prepare?
The impending sunset creates both challenges and opportunities for individuals with sizable estates. Now is the time to review your financial and estate plans to ensure they align with your long-term goals. Here are a few strategies to consider:
1. Maximize Gifting Opportunities:
The current exemption allows you to gift substantial amounts tax-free during your lifetime. Making use of the annual gift tax exclusion (currently $19,000 per recipient in 2025) or larger lifetime gifts can help reduce the taxable value of your estate.
2. Create or Update Trusts:
Irrevocable trusts, such as Grantor Retained Annuity Trusts (GRATs) or Spousal Lifetime Access Trusts (SLATs), can help shelter wealth from estate taxes while maintaining control over how assets are distributed. I can help you with these and other estate tax reduction strategies.
3. Leverage Portability:
If you’re married take full advantage of portability which allows the unused portion of one spouse’s exemption to transfer to the surviving spouse.
4. Consult a Financial and Legal Professional:
The complexity of the estate tax system and its potential impact on your legacy underscores the importance of working with experienced advisors. As a financial planner, I collaborate with estate attorneys who can help craft a plan that minimizes tax liability and protects your wealth.
Conclusion
The sunsetting of the current estate tax exemption on December 31, 2025, serves as a wake-up call for high-net-worth individuals and families. While 2026 may seem far away, proactive planning is essential to ensure you don’t leave your heirs with an unexpected tax burden. By taking action now, you can navigate these changes with confidence and secure your legacy for future generations.