The Tax Cuts and Jobs Act (TCJA) of 2017 expires on December 31, 2025. Estate attorneys refer to this as the “sunset” of the estate tax. Specifically, the estate tax exemption amount is set to revert to pre-2018 levels. If Congress does not take action to extend or modify the increased exemption, many more Americans could face the estate tax starting in 2026.
For anyone expecting to leave behind a significant estate, this sunset brings urgency. The time is right to discuss lifetime gifting with your estate attorney and advisor at Curi RMB Capital to reduce your potential tax burden and administer your legacy effectively.
As the law currently stands, all individuals can gift a maximum of $13.61 million throughout their lifetime, or up to $27.22 million for a married couple, without being subject to gift taxes. Current law says that amount will sunset to about $7.2 million per individual, or just over $14 million for a married couple.
Here’s a helpful example. A person could write a check on December 31, 2025, for $14 million to their kids or to a trust for their kids and pay no estate tax. The next day, the TCAJ expiration will have taken effect, and the same check would only pass $7 million of exemption; the remaining $7 million would be subject to a 40% gift tax.
There are steps you can take now to prepare for the estate tax sunset and still reap its benefits. Here are some ways to make lifetime gifts to achieve these goals:
- Utilize Annual Exclusion Gifts: Each year, you can gift a certain amount of money or property to an individual without triggering gift tax or using your lifetime gift tax exemption. As of 2024, the annual exclusion amount is $18,000 per recipient ($36,000 for married couples making a split gift), which means you can gift up to this amount to as many people as you like each year.
- Leverage Lifetime Gift Tax Exemption: In addition to annual exclusion gifts, every individual has a lifetime gift tax exemption, which allows you to gift a significant amount without incurring gift tax. As of 2024, this lifetime exemption is $13.61 million per person (and double that for married couples making a split gift). Gifts exceeding the annual exclusion amount count towards this lifetime exemption. It's important to keep track of these gifts because they reduce the amount that can pass estate-tax-free at your death.
- Direct Payments for Medical and Educational Expenses: Payments made directly to medical providers or educational institutions on behalf of another person for their medical expenses or tuition are not considered gifts for gift tax purposes. This means you can cover these expenses for family members without utilizing your annual exclusion or lifetime exemption.
- 529 Plans: Contributing to a 529 college savings plan offers a tax-efficient way to make large gifts over time. You can contribute up to the annual gift tax exclusion amount ($18,000 per year per recipient in 2024) without incurring gift tax consequences. Additionally, contributions to 529 plans qualify for five-year gift tax averaging, allowing you to front-load up to five years' worth of contributions at once (up to $90,000 per beneficiary or $180,000 for married couples).
- Irrevocable Trusts: Setting up irrevocable trusts allows you to gift assets while retaining some control over how they are managed and distributed. Assets transferred to irrevocable trusts are typically removed from your taxable estate, potentially reducing estate tax liability. Various types of irrevocable trusts, such as grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), or irrevocable life insurance trusts (ILITs), can offer specific tax advantages and estate planning benefits.
- Family Limited Partnerships or LLCs: These entities can be used to transfer ownership interests in family businesses or investment assets to heirs. By gifting minority interests in these entities, you can leverage valuation discounts, which can reduce the taxable value of the gifts.
- Seek Professional Advice: Estate planning and tax laws are complex and can vary significantly depending on your jurisdiction. It's crucial to work closely with experienced estate planning attorneys and tax advisors who can help you navigate the rules and create a customized gifting strategy that aligns with your financial goals and maximizes tax benefits.
Lifetime gifts can minimize potential estate taxes and ensure that your wealth is transferred according to your wishes while taking advantage of available tax benefits. If you have a total net worth over $7 million as a single individual or over $14 million as a married couple, developing a plan for the likely sunset of the estate tax is important.
Your advisor can help you forecast the potential value of your estate and the difference in estate taxes if you were to take advantage of the making a gift with the current exemption amount. The IRS has declared that any gifts taking advantage of the doubled exemption amount will not be clawed back into one’s estate if the exemption is reduced by half in 2026.
If you have questions about the TCAJ estate tax sunset, reach out to your Curi RMB capital advisor today. And remember, concurrent with the gifting process, it’s always a good idea to revisit your overall state plan and documents. Our team is here to help you consider your options and craft a plan with your estate planning attorney that works best for you.
