Individuals, families, and estate planners are preparing for a significant shift in U.S. estate tax law effective at the end of next year. The current estate and gift tax exemption, which was temporarily increased in 2017, and which is currently set at $13.61M per person, is set to expire—or "sunset"— on December 31, 2025.
Because the federal estate tax is exceptionally penal – with rates as high as 40 percent - the implications of this change are far-reaching, and affect a wide range of people, including high net worth individuals, families, and business owners. Accordingly, there is some urgency to proactively address estate planning strategies before the law reverts to its previous thresholds.
Here are four things to know:
1. Reversion to Prior Exemption Levels. When the current estate tax exemption sunsets at the end of 2025, the amount individuals can pass on tax-free to their heirs will drop significantly. The current exemption of $13.61M is scheduled to revert to pre-2018 levels and, adjusted for inflation, projected to be approximately $7M per individual. This significant reduction will expose many more estates to federal taxation at the rate of 40 percent for amounts greater than the exemption amount.
2. Higher Tax Liability. The decreased exemption means that many estates that currently do not have to worry about federal estate tax planning will be exposed to significant potential liability. For example, today, an estate worth $12M would have federal estate tax liability of $0. If the sunset occurs, then an estate worth $12M in 2026 may have federal estate tax liability of as much as $2M (going to the government rather than to your beneficiaries).
3. Impact on Gifting or other Lifetime Planning Strategies. The lifetime estate tax exemption is a unified exemption that applies in concert with the gift tax exemption. This means, at today’s exemption limit, individuals may either die with, or “gift”, up to $13.61M without any negative tax consequences. For our clients with federally taxable estates, we often advise on gifting or other lifetime planning strategies regarding the use of Irrevocable Trusts as mechanisms to remove assets from their estates and avoid unnecessary estate tax liabilities. Once the exemption sunsets, the lower unified exemption amount will significantly limit the opportunity to make tax-efficient wealth transfers via gifts or trusts during your lifetime. Accordingly, 2025 represents an opportunity to make tax-free gifts and asset transfers while the exemption is still high. As noted above, this could save your estate millions. In other words, if you were planning to make gifts to charities or for your grandchild’s college savings plan, now is the time to do it. And if you were not planning to do so, now would be a good time to consider it.
4. Potential for Legislative Changes. The 2025 sunset is based on current law. Of course, Congress could step in and alter the estate tax exemption or otherwise modify ancillary laws before or after the sunset occurs. However, given the uncertainty surrounding future legislation, we are advising clients to take a proactive approach and capitalize on the existing exemption while it is still in place. There really is no downside to acting between now and the end of 2025, especially for families that are planning to engage in lifetime planning strategies anyway.
Please reach out to us at jfournier@jeflegal.com or by calling 860-670-3535 if you have questions about the estate tax exemption, or any other legal issues related to your business or estate planning.