Keeping step with recent years since the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”), 2025 marks the highest estate and gift tax exemptions we've ever seen. The lifetime exemption from estate and gift taxes, as well the exemption from generation-skipping transfer (GST) tax has increased to $13.99 million per person. That means that someone who passes away in 2025 with less than $13.99 million in assets won't pay any federal tax on the transfer of that wealth. Married couples have the ability to double that exemption to $27.89 million (provided certain estate planning and administration actions explained below are taken to preserve the decease's spouse's exemption amount).
Transfer taxes on estates that exceed the exemption amount are applied at a rate of 40% per for every dollar in excess of the exemption amount. For example, if a person passes away in 2025 owning, say $15 million in assets, and transfers their assets to anyone other than a US citizen spouse, that person's estate will be taxed at a rate of 40% on their $1.01 million of wealth that exceeds the $13.99 million exemption amount, resulting in an estate tax of $404,000. That may sound like a large tax bill, however, note that twenty years ago the tax bill would have been nearly $4 million on that same amount of wealth, which underscores the significance of the increased exemption amount since the passage of the TJCA.
The 2026 Estate Tax Exemption Sunset
As of the date of this writing (February 7, 2025), the generous exemption amounts granted to us under the TJCAs are not permanent and are scheduled to decrease to $5 million per person adjusted for inflation (so approximately $7 million per person). That means the same $15 million estate described above would owe $3.2 million in tax as a result of dying in 2026 as opposed to 2025.
One of President Trump's tax priorities is to extend the expiring individual provisions of the TCJA sometime in 2025. Although there is still uncertainty as of the date of this writing (February 7, 2025), expect continued efforts to extend the current estate tax exemption, make it permanent, or even eliminate the tax altogether (even in the face of increasing national debt). If such efforts are successful, then it will impact the estate planning industry considerably, potentially rendering unnecessary many large gifts made in recent years by those who feared missing out on "locking in" the large exemption, and potentially leading to an aftermath of "gifters remorse." Or, if on the other hand the exemption is in fact lowered considerably next year, those large gifts may turn out to be a good bet.
We'll discuss several strategies below to plan for the reduced exemption amounts, include making lifetime gifts and, for married couples, making full use of their deceased spouse's unused exemption amounts.
Reducing the Size of the Estate with Lifetime Gifting
Annual Exclusion Gifts
One way to reduce the size of your taxable estate during your lifetime is by making gifts that qualify for the annual gift tax exclusion. Each year, the IRS allows a donor (person making a gift) to make gifts to people up to a certain dollar amount per donee (person receiving the gift) without incurring any gift tax. In 2025, you may give $19,000 to as many individuals as you would like without incurring gift tax and without affecting your at death estate tax exemption amount. Married couples can double the exemption and give away a combined $38,000 annually to as many individuals as they would like. Furthermore, in addition to the annual limits described above, certain gifts are not treated as taxable gifts and therefore circumvent the annual limits altogether. For example, if you pay medical bills for someone directly to a doctor, hospital or other medical provider, an unlimited amount is allowed with no gift tax. Similarly, gifts of educational expenses for someone made directly to the school aren't subject to the annual gift tax exclusion. Moreover, your gift tax exclusion is reset and available year after year and adjusted for inflation. That means that if you give away $19,000 to someone this year, you can do it again tax free next year and every year thereafter (and the exempt amount continues to increase due inflation adjustments).
Gifts Exceeding the Annual Exclusion Amount
Gifts that exceed the annual limits described above will use up a portion of the donor's lifetime exemption, and that actually may be a wise strategy for very wealthy individuals who don't need the assets anymore. Here's why: Because the current exemption is so high, those with sufficient assets may wish to take advantage of the large exemption and make larger gifts during their lifetime in anticipation of that exemption being lower at the time of their death. In general, individuals with estates in excess of $7.5 million and couples with estates in excess of $15 million may want to consider making a large lifetime transfer this year if they are concerned about the exemption being lowered in 2026. That said, the gifts will likely need to exceed $7 million for individuals and $14 million for couples in order for it to be beneficial based on how the anti-clawback rule works. This rule provides that a person’s estate tax exemption at the time of their death will be the greater of what they gifted during lifetime, or the current exemption amount in the year of their death. Put another way, if a person gives away less during life than the exemption amount in their year of death, it may not do them any good from an estate tax savings standpoint, because the previously gifted assets will be factored back in and then the exemption amount in the year of death will be applied.
Example: suppose Susan has an estate of $10 million and decides to give away half of her wealth in 2025, giving $5 million to her child. Then suppose the estate tax exemption is lowered in 2026 down to $7 million, and then Susan dies that same year. The previously gifted $5 million will be brought back into the value of Susan’s estate for the purposes of determining her estate tax liability. From there, the higher of the amount she gifted ($ 5 million) and the current exemption amount in her year of death ($7 million) would be applied, leaving an excess of $3 million ($10 million estate after the gifted $5 million is brought back in, minus the $ 7 million exemption because it's higher than the amount gifted). The estate tax in this example would be $1,200,000. Note that is the exact same result as if Susan had never given the assets away in the first place.
Suppose on the other hand that Susan had given away $8 million instead, keeping just $2 million for herself. If she were to die in 2026 and the exemption was only $ 7 million, as before the amount previously gifted ($8 million) is brought back into her estate, and the higher of the amount she gave away ($8 million) and then then current exemption amount ($7 million) is applied, leaving an excess of $2 million. The estate tax would be $800,000 ($400,00 less than if she had gifted $5 million in the prior example). If Susan were willing to give away $9 million and keep a measly $1 million for herself, she would shave another $400,000 from her future estate tax bill.
Irrevocable Life Insurance Trusts
Estates that are potentially going to be taxable should also consider including in their estate plan an Irrevocable Life Insurance Trust, or “ILIT.” If an ILIT is used to purchase life insurance, the death benefits are kept out of the estate and therefore not subject to estate tax. Note however that the person who transfers an existing policy to the ILIT needs to live for three years after the policy is transferred to the trust in order for the proceeds to be excluded from the estate. That three year rule is avoided if the ILIT trustee applies for and owns a new policy from the beginning.
The ILIT pays policy premiums through gifts made to the trust. These gifts will qualify for the above referenced $19,000 annual gift tax exclusion so long as the the beneficiaries of the trust are given some very specific powers (known as “Crummey” powers based on a Federal Tax Court Case) that will allow them to withdraw the gift to the trust for a period of time. The trustee in this case must send “Crummey” notices to all the beneficiaries telling them about their withdrawal rights whenever there is a contribution to the trust.
Estate Tax Planning for Married Couples without Gifting During Lifetime
Although the lifetime gifting techniques described above can be highly effective for estate tax planning, they all require actually giving away assets now, and not everyone feels comfortable doing that that.
Fortunately, married couples have some unique estate tax planning tools available that do not require relinquishing control and giving assets away during their lifetime. These techniques, which are discussed below, include portability, and estate tax planning within the revocable living trust.
Portability
A surviving spouse may transfer their deceased spouse's unused federal estate tax exclusion (DSUE) amount to themselves by filing a federal estate tax return form 706 and electing “portability.” Making such an election following a spouse’s death is wise if there is any concern that the surviving spouse's estate might exceed the survivor’s available exclusion amount in the future.
Estate Tax Planning within the Revocable Living Trust
As an alternative to relying on portability, married couples who are concerned about the value of their estate as it relates to the exemption amount should consider including proactive tax planning provisions as part of their revocable living trust. These provisions include a bypass trust that can be funded either on a mandatory basis after the first death with the deceased spouse's exemption amount, or simply providing the surviving spouse with the ability to make a future election to disclaim those assets to a bypass trust. Both are popular techniques that allow the surviving spouse to use the disclaimed assets for their support throughout their lifetime while simultaneously avoiding estate taxation of those same assets upon their death. In addition, the appreciation on the bypass trust assets also avoids estate taxation.
Always important consult with legal or tax counsel when applying the above to your particular situation.
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