Changing policies and regulations periodically reshape the landscape of estate tax laws. In 2025, wealthy individuals must be aware of critical changes impacting their estate planning strategies. This article comprehensively explores the implications of the estate tax sunset at the end of 2025 and its effects on wealthy estates.
TCJA and estate taxes
The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, introducing significant amendments to the U.S. tax code. One of the key highlights of this law was the doubling of the federal estate and gift tax exemption, adjusted annually for inflation.
The 2025 estate tax exemption is as follows:
- Individuals $13.99 million
- Married couples $28 million
It is crucial to note that the estate tax exemption is not permanent; if not revised, it will sunset on December 31st, 2025.
The estate tax sunset
Barring any legislative action, starting January 1, 2026, the estate and gift tax exemptions will default back to the levels before the enactment of TCJA. Those with larger estates will most likely be affected by this ‘snapback’ exposing them to more significant federal estate tax.
It is also essential to note that the sunset provision does not directly impact the federal estate tax rate, currently at 40%. The changes, therefore, may primarily affect the volume of assets that can be transferred tax-free, either during one’s lifetime or death.
Implications for estates
The potential implications of the estate tax sunset are far-reaching and may substantially affect estate planning strategies in numerous ways.
Increased estate tax liability
The most tangible impact is the potential for increased tax liability. Lower exemptions translate to higher estate tax and fewer assets transferred.
Gifting strategies
Taking advantage of the current tax exemptions may be prudent for some. Gifting assets outright or in trusts may be an appropriate strategy to utilize the higher exemption amounts. Gifting before death potentially manages future estate tax exposure.
Wealthy individuals should seek guidance from financial, legal, and tax professionals to evaluate their wealth transfer strategies and determine others that may be appropriate for their situation. Some examples include:
- 529 plans
- Roth IRA conversions
- Trusts
- Family Limited Partnership (FLP)
Understanding generation-skipping transfer tax (GSTT)
GSTT enables individuals to gift to a family member at least 37 ½ years younger, such as grandchildren or great-grandchildren. The person receiving the gift is called the ‘skip-person’ and must be two or more generations younger than the individual making the gift. A GSTT strategy provides a method of giving, helping pass wealth across generations.
The IRS 2025 lifetime exemption for a GSST strategy remains the same:
- Individuals- $13.99 million
- Married couples- $28 million
The annual gift tax exclusion is $19,000 per individual.
Estate tax clawback
Another significant factor is the possibility of estate tax “clawback” arising if the sunset provision takes effect. The IRS has issued final regulations providing that no clawback can apply to gifts made under the heightened TCJA exemption limits.
However, the sunset may revive estate tax clawback. For this reason, gifting before the end of 2025 may help relieve concerns and increased estate taxes later.
Legislation and estate tax
While considerable focus is on the sunset provision in 2025, it is vital to be mindful of potential legislative revisions that could occur before then. Given the inherent uncertainty of political and legislative landscapes, estate tax laws could be modified anytime, emphasizing the need for regular review and adjustment of one’s estate plan.
Some legislators suggest reducing the exemption amount before the end of 2025 or increasing the estate tax rate beyond 40%. Therefore, it is essential to work with financial, legal, and tax professionals to reassess and revise one’s estate plans accordingly.
A need for comprehensive estate tax planning
Navigating the ever-changing landscape of estate tax laws demands understanding TCJA’s sunset implications and preparing the necessary strategic responses. The sunset significantly impacts wealthy individuals and their estate planning strategies. These individuals must seek professional guidance and actively implement measures that address the benefits of current exemptions while preparing for future estate tax scenarios.
With estate tax changes likely on the horizon, it is more crucial than ever to review your estate plan regularly, adapt to changes in tax law, and work with a financial professional to safeguard your wealth for future generations.
Important Disclosures:
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
LPL Tracking #698127
Sources:
https://www.nytimes.com/2024/03/02/business/irs-tax-code.html
https://bipartisanpolicy.org/explainer/the-2025-tax-debate-individual-estate-and-gift-taxes-in-tcja/
https://deloitte.wsj.com/riskandcompliance/what-to-know-about-the-coming-2025-tax-cliff-e65869ad
https://www.investopedia.com/tax-savings-strategies-for-wealth-transfer-8417034