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The Upcoming Estate Tax Exemption Sunset: What You Need to Know

The Upcoming Estate Tax Exemption Sunset: What You Need to Know

November 15, 2023

Estate planning is a dynamic field that requires adaptability, and with the 2025 estate tax "sunset" approaching, we must prepare estate plans for changes that may significantly impact your wealth transfer strategies.

In 2017, the Tax Cuts and Jobs Act (TCJA) temporarily increased the federal lifetime gift and estate tax exemption to a substantial $12.92 million per individual. However, on January 1, 2026, this exemption is set to decrease to approximately $7 million, indexed for inflation. This impending drop in the exemption threshold has raised concerns, particularly among high-net-worth and ultra-high-net-worth individuals with substantial assets.

The key takeaway is simple: Act now to leverage the more generous exemption amounts available today. We must take a proactive approach by revisiting your estate plan to seize this opportunity.

Here are some strategies to consider.

Lifetime Gifting. Utilize lifetime gifting to reduce potential estate tax exposure. This involves gifting assets to heirs now to take advantage of the current exemption thresholds. For instance, "annual exclusion" gifts of $17,000 per recipient can reduce the taxable estate. Additionally, married couples can combine their gifts, taking advantage of a higher annual exclusion of $34,000 per recipient.

Present and Future Interest Gifts. Present interest gifts, where the recipient can use, enjoy, or possess the property immediately, qualify for the annual exclusion from federal gift tax. On the other hand, future interest gifts start at a later date. To qualify for the annual exclusion, the IRS requires the trustee to provide a "Crummey Notice" to the beneficiary, allowing them to withdraw the gifted funds within a specified period.

Irrevocable Trusts. Those who are concerned about transferring assets to beneficiaries who may not be ready to manage them should consider irrevocable trusts. These trusts hold gifted assets according to your instructions, often for the benefit of children and grandchildren. Life insurance policies are commonly held in these trusts, offering tax benefits.

Education and Medical Gifts. You can also make tax-free payments to medical providers or educational institutions to cover expenses like medical bills or education costs without impacting gift exemptions.

Charitable Giving. The 2025 estate tax changes also affect charitable donations. The TCJA increased the annual deduction limit for cash contributions to public charities, but in 2026, it will revert to 50%. Consider establishing charitable foundations, donor-advised funds, or specialized trust funds, such as Charitable Remainder Trusts or Charitable Lead Trusts, to support charitable causes and reduce the assets subject to taxation.

As the 2025 estate tax sunset draws nearer, it's essential to stay informed about these changes and pursue effective estate planning strategies. Leveraging the current, more favorable exemption amounts is a critical "use it or lose it" opportunity. By partnering with experts and adopting these strategies, you can empower your estate planning discussions and help protect your wealth for generations to come.