The estate tax exemption is set to undergo a significant change at the end of 2025. This change, known as the estate tax exemption sunset, will impact the strategies employed by high-net-worth individuals and families to protect their wealth for future generations.
Under the current law, the Tax Cuts and Jobs Act of 2017, individuals can transfer up to $13.61 million to their heirs without triggering federal estate taxes, while married couples can shield up to $27.22 million.
But, this historically high exemption is slated to sunset on December 31, 2025, reverting to the pre-2018 level. This means that estates valued above the reduced exemption amount may face significant federal estate tax liabilities.
The Tax Cuts and Jobs Act (TCJA) of 2017 brought about substantial changes to the federal estate and gift tax system. One of the most significant was the dramatic increase in the lifetime exemption amount.
For 2024, this exemption stands at a historic high of $13.61 million per individual or $27.22 million per married couple. This means you can transfer assets up to this amount, either during your lifetime or at death, without incurring federal gift or estate taxes.
However, this generous exemption is set to expire, or “sunset,” on December 31, 2025, unless Congress takes action to extend or make it permanent.
If no legislative action is taken, the exemption amount will revert to its pre-TCJA level of $5.6 million per individual, adjusted for inflation from 2017. While the exact figure for 2026 is not yet known, most projections estimate it will fall somewhere between $6-7 million per person or $12-14 million per married couple.
This reduction will significantly increase the number of estates subject to federal estate tax and raise the tax liability for those already affected. With a current top rate of 40%, the financial impact could be substantial for unprepared estates.
The sunset of the estate tax exemption will affect different wealth levels in various ways:
As your estate planning attorney, I recommend considering the following strategies:
The IRS has issued an “anti-claw-back” regulation, which means any exemption used during your lifetime is considered final. Even if the exemption decreases in future years, the IRS won’t impose taxes on prior gifts or claw assets back into your estate. This creates a unique opportunity to lock in the current high exemption amount.
Gifting assets to irrevocable trusts can help you utilize your current high exemption and remove assets from your taxable estate. As a bonus, future growth and appreciation of these assets will also be outside your taxable estate.
For larger estates, we can employ various discounting techniques to reduce the reported value of your assets. This allows you to transfer more assets into irrevocable trusts within the same exemption limitations
These strategies aim to remove future growth and appreciation from your estate, which can be particularly beneficial for rapidly appreciating assets or businesses.
If eliminating the estate tax isn’t feasible, consider purchasing life insurance to provide liquidity for paying the tax. This can help preserve other assets for your beneficiaries.
Regardless of your wealth level, having a properly drafted revocable trust is crucial. This document should account for potential estate taxes and provide flexibility to adapt to changing tax laws.
For larger estates utilizing irrevocable trusts, selecting a qualified trustee is paramount. Many of my clients opt for a corporate trustee to ensure professional management and continuity across generations. A corporate trustee can help protect inheritances from creditors and predators while guiding future generations on financial decisions and meaningful societal contributions.
With the exemption sunset less than two years away, it’s crucial to start planning now. Complex estate planning strategies take time to implement properly, and we may see increased demand for these services as the deadline approaches.
If you haven’t reviewed your estate plan recently, now is the time to do so. Here’s what we recommend:
Our experienced estate planning attorneys at Johnson Legal, PLLC can guide you through this process and help you create a plan that aligns with your goals and values.
Remember, while tax considerations are important, they shouldn’t be the sole driver of your estate plan. Your plan should ultimately reflect your values and wishes for your legacy.
The estate tax exemption sunset presents both challenges and opportunities. By acting now, you can take advantage of the current high exemption and potentially save your heirs millions in future estate taxes. Don’t wait until it’s too late – the time to plan is now.
Shane T. Johnson is the CEO and Managing Partner of Johnson Legal, an estate planning and business law firm in Wilmington, NC. With years of experience in estate and business law, he has zealously represented clients in various legal matters, including small business formation and purchasing, estate planning, probate, domestic violence, and other legal cases.
Shane received his Juris Doctor from the University of Wyoming and is a member of the North Carolina Bar Association. He has received numerous accolades for her work, including being named among the Best Probate Lawyers in Wilmington by Expertise.com.
