Are You Ready for the Sunset?

That is, the sunsetting of the Estate Tax Exemption in 2025

Key Takeaways

• At the end of 2025, the current Estate Tax Exemption will drop significantly, exposing wealthy families to substantial additional estate tax liability.
• Planning now with the guidance of your estate planning attorney is critical to taking advantage of current historically high exemptions.
• It is important to stay current with tax law changes and regularly review your estate plan to ensure you most effectively structure your assets to minimize the threat of burdensome estate taxes.

Tax Cuts and Jobs Act (TCJA) of 2017

The Tax Cuts and Jobs Act (TCJA) of 2017 was signed into law and took effect on January 1, 2018. This legislation was the most significant overhaul of the tax code since the 1980s and has provided benefits to both individual taxpayers and business owners. However, many of the benefits from this tax reform will expire at the end of 2025.

The Federal Estate Tax Exemption

One of the most impactful elements to expire at the end of 2025 is the Federal Estate Tax Exemption. This Exemption will revert to the levels that existed prior to the Tax Reform Act of 2017 indexed for inflation. For 2024, a single taxpayer can claim a federal estate and lifetime gift tax exemption of $13.61 million. Couples making joint gifts can double that amount or $27.22 million. This amount also applies to the exemption taxpayers’ estates will receive upon death. However, beginning in 2026, that Exemption is set to drop significantly to approximately $7.1 million or just over $14.2 million per couple. Estate values in excess of these levels will be taxed at death at the Federal estate tax rate which currently tops out at 40%. Also noteworthy is that about a dozen states also may assess a tax on an estate at death.

While these are still large amounts that can be excluded from estate tax, the significant drop post-2025 will require updated planning for some families. By way of example, the estate of a couple with a net worth of $27 million on December 31, 2025 would be responsible for $0 in estate taxes if the couple were to become deceased on or before that date, but on January 1, 2026 that same couple’s estate would be responsible for approximately $5.2 million dollars in estate taxes, quite a substantial amount.

Substantial Tax Savings Is Possible with Proper Planning

For the heirs of the estate, this represents a very meaningful tax to pay. However, with proper planning, this burden can be mitigated by taking advantage of the current higher Exemption of $27.22 million per couple. The most basic approach would be for the couple in our example to remove about $13 million ($27 million – $14 million = $13 million) from their estate by simply gifting it prior to the expiration of the legislation at end of 2025. This would save the couple’s heirs the $5.2 million note above.

Of course, this step as described is an oversimplification and could create other issues with future gifting or estate planning. A better course of action for taxpayers of significant wealth is to consult with their estate planning attorney to consider a variety of estate planning techniques to address the challenge. This may include utilizing structures like Spousal Lifetime Access Trusts (SLATs), Irrevocable Life Insurance Trusts (ILITs), myriad charitable trusts (e.g. CRATs, CRUTs, CLATs, CLUTs, etc.), Grantor Retained Annuity Trusts (GRATs), and other sophisticated estate planning techniques. While consultation with an estate planning attorney can be expensive, the cost likely pales in comparison to the potential tax savings for the heirs of the estate.

Managing Future Appreciation from the Estate Tax Perspective

There is additional value to this type of planning – removing future appreciation of assets in the estate. For individuals or couples with appreciating assets, removing those assets from their estate now will result in future appreciation occurring outside of the estate and instead in the hands of beneficiaries or heirs. This means that future appreciation will not create even higher estate taxes your heirs may otherwise have to pay.

This is especially applicable for business owners whose business may rapidly appreciate in value once the business is marketed for sale. By working with your estate planning attorney to consider and implement alternative ownership structures of the business, considerable estate tax savings can be secured. These alternatives may include unique trust structures, entities such as Family Limited Partnerships, and even outright gifts of a portion of the business.

It Is Critical to Keep Your Estate Plan Up to Date with Changes in Tax Law

One critical caveat is the potential for new legislative changes to tax laws. In November of 2024, once a new president is elected, there may also be changes to the current majority of the Senate and House of Representatives. These changes could impact the sunsetting of the benefits from the TCJA of 2017, as detailed above. In particular, the outcome of the election could result in changes to the actual Estate Tax Exemption by increasing it above the current level (if Republicans end up with majorities in Congress and the presidency) or decreasing it below the post 2025 levels (if Democrats end up with majorities in Congress and the presidency).  

The most important takeaway is to consult with your estate planning attorney now to properly structure your estate plan today to take advantage of the current high Estate Tax Exemption before it sunsets. Waiting until later in 2025 could result in too short of a timeframe for your estate planning attorney to counsel you on changes required to properly update your estate plan prior to the sunsetting of the tax laws discussed above. Once changes are implemented, it will be important to monitor ongoing developments in tax legislation with your attorney, so that modifications to your estate plan can be made to ensure continued efficient tax treatment of your estate.

Alpine Private Wealth does not offer legal counsel or tax advice. This information is not intended to be and should not be treated as legal advice or tax advice and is for informational purposes only. It is important to consult an attorney or tax professional who is familiar with your specific situation.