Now is a good time to review your estate and gifting plans.
High-net-worth individuals and families who benefit from the historically high federal estate and gift tax exemption may soon see it reduced by half. Favorable increases in the estate and gift tax exemption created by the Tax Cuts and Jobs Act of 2017 (TCJA) are scheduled to sunset at the end of 2025 along with other changes the law made, including an increase in the standard deduction and the charitable giving deduction, as well as reductions in individual income tax rates.
With so many tax provisions scheduled to revert back to pre-TCJA levels in under two years, consider moves you might need to make to minimize your tax burden and support your financial goals.
The TCJA went into effect on January 1, 2018, and doubled the estate and gift tax exemption from $5 million to $10 million for individuals and $10 million to $20 million for joint filers. This exemption is indexed for inflation, so by 2023 it had risen to $12.92 million per person and $25.84 million per married couple.
The lifetime exemption amounts for estate and gift taxes are the same, which is why they’re discussed together. In addition to the estate and gift tax exemption amounts, you may make annual gifts up to $18,000 (per receiver) in 2024 without utilizing any of your gift tax exemption.
The estate tax exemption in 2024 is $13.61 million for individuals and $27.22 million for couples. But because the TCJA sunsets on December 31, 2025, the estate tax exemption in 2026 will fall back to $5 million for individuals and $10 million for couples, indexed for inflation, unless Congress acts to extend the provisions.
For example: A married couple with $25.84 million in assets in 2023 gifted their child $17,000 that year. Because the gift amount didn’t exceed the gift tax exemption for 2023, they didn’t have to pay gift taxes on that gift. But they also made a second gift that year to their child of $25,823,000 – the remaining amount of their lifetime estate and gift tax exemption (as of 2023).
Did the couple have to pay taxes on that generous second gift? No. Even though the second gift is taxable, the IRS applies a credit against the gift tax based on the total estate and gift tax exemption. In other words, the IRS in effect says to such a couple, “You don’t need to pay now for that taxable gift; we’ll settle up with you on all your lifetime gifts and estate taxes when you die.”
Now imagine that this couple passes away in 2024. The TCJA is still in effect, and the couple’s estate ends up paying nothing in gift or estate taxes for either the first or second gift because those two gifts equal $25.84 million, which is less than the 2024 lifetime gift and estate tax exemption of $27.22 million. If at the time of their death the couple’s remaining assets are worth $1.5 million, their estate also wouldn’t need to pay taxes on $1.38 million of those assets because they are covered under the remainder of the $27.22 million exemption.
But suppose this couple instead dies in February of 2026, after the TCJA has ended, and Congress hasn’t acted to extend the provisions. Let’s assume that the indexed gift and estate tax exemption for 2026 is $10.4 million.
Does the expiration of the TCJA mean the couple now has to pay taxes on the amount of their second gift that is above $10.4 million? No. The IRS issued a rule in 2019, clarifying that it won’t “claw back” gifts made during the period when the TCJA was in effect. So the estate in 2026 can calculate its gift and estate tax exemption using the exemption under the TCJA.
The nuances of which particular year of the exemption would apply (whether 2023 or 2025) would be best to discuss with your financial advisor. But the larger point is this: If you act before 2026, you can take advantage of the TCJA to lock in its higher lifetime gift and estate tax exemption even if you expect to live long past December 31, 2025.
Outright gifts directly to your loved ones are not your only option for taking advantage of the high lifetime gift and estate tax exemption under the TCJA. Based on your circumstances and goals, you might consider several other strategies.
Gifts to an irrevocable trust
You could create an irrevocable trust with designated beneficiaries and distributions based on the terms you choose. Any gifts to this trust can take advantage of the TCJA lifetime gift and estate tax exemption.
Gift to a spousal lifetime access trust (SLAT)
If you’re concerned that giving large gifts directly to others or to a trust might leave you too short on funds to support yourself while you’re alive, you might want to consider a spousal lifetime access trust (SLAT). A SLAT is created by one spouse for the benefit of the other spouse. Any gifts the SLAT creator puts into the trust will be distributed to the beneficiary spouse, who can then use those distributions for joint expenses. You can also configure a SLAT so that its assets pass to your descendants upon the death of both you and the beneficiary spouse.
Gifts the donor sponsor gives to the SLAT are exempt from tax up to the donor spouse’s available exemption amount. In 2024, a donor could gift $13.61 million without paying a gift tax.
While the donor won’t be taxed on contributions below the exemption amount, the beneficiary may well owe tax on distributions from the SLAT, as these are treated as taxable income. And assets distributed to the beneficiary spouse can increase their estate. That increase could be subject to the estate tax or its exemption.
Establishing other types of trusts
There are many other types of trusts that might serve your particular needs. These include dynasty trusts, irrevocable life insurance trusts, and a qualified personal residence trust. Your financial advisor can most effectively evaluate what option or combination of options will achieve your goals.
If your gifts to your SLAT will use up your gift and estate exemption, but you also have a significant life insurance policy, an irrevocable life insurance trust may be a way to prevent the life insurance policy from counting as part of your estate. That way, your beneficiaries benefit from the life insurance payout without being subject to high estate taxes.
Although there’s a chance that new tax legislation may take effect between now and 2026 that extends or builds upon the TCJA provisions, it’s still advisable for families to review their estate plan with their financial advisor as soon as possible. Waiting until the latter months of 2025 might limit the strategies available to you to take advantage of the TCJA estate tax exemption provision. Even if you’re confident that the TCJA sunset won’t affect your estate plan, it’s still important to check it regularly.
Raymond James does not provide tax or legal advice. Please discuss these matters with the appropriate professional.
