Navigating the Sunset of Elevated Estate Tax Exemptions: Strategies for 2025 and Beyond
By: Randall A. Denha, J.D., LL.M.
The Tax Cuts and Jobs Act (TCJA) of 2018 significantly raised the bar for federal estate tax exemptions, marking an era of unprecedented high thresholds. However, the clock is ticking on these elevated exemptions, with a scheduled return to pre-TCJA levels on January 1, 2026, unless legislative action intervenes. The recent political shifts, granting the Republican Party control over both Congress and the Presidency, have sparked discussions on extending or even making permanent these tax benefits. Yet, in the unpredictable landscape of Washington, D.C., relying on political promises can be risky. The old wisdom of “better safe than sorry” rings particularly true in this context, urging individuals to consider contingency plans or take proactive measures in the face of potential legislative inertia.
Should there be no extension or modification, the exemption will roll back to the pre-2018 standard—around $7 million per person, with adjustments for inflation, starting from 2026. This reversion could significantly widen the net of estates liable for federal estate taxes, making 2025 a critical year for strategic estate planning to leverage the current advantageous exemption levels.
Deciphering the Sunset: Implications for Estate Planning
The federal estate tax exemption serves as a buffer, allowing individuals to pass on a certain amount of assets to heirs or beneficiaries either during their lifetime or at death, without triggering federal estate taxes. Presently, the exemption cap is poised at approximately $14 million per individual by 2025, enabling married couples to collectively shield close to $28 million from estate taxes.
A reversion to the pre-TCJA exemption amounts in 2026—unless altered by new legislation—necessitates a thorough review of estate plans for those with significant assets to mitigate future tax impacts.
Strategic Estate Planning Approaches for 2025
1. Lifetime Gifting: Capitalizing on Current Exemption Levels
The current high exemption threshold presents a prime opportunity for making significant lifetime gifts. These gifts, once made, are final and are protected from future reductions in the exemption limit.
For instance, gifting $12 million to beneficiaries in 2025 will secure the tax-exempt status of these funds, irrespective of the exemption level in 2026. This strategy is particularly effective for transferring cash, property, business interests, or other appreciable assets out of one’s taxable estate. An additional strategy to consider are fractional ownership transfers, such as gifting partial interests in real estate or businesses, which may allow for valuation discounts and maximize the use of exemptions.
2. Irrevocable Trusts: Securing Assets Beyond Your Taxable Estate
Irrevocable trusts offer a strategic option for asset transfer while retaining some degree of control over those assets. Popular trust structures include:
- Grantor Retained Annuity Trusts (GRATs) for transferring appreciating assets with minor gift tax impact.
- Dynasty Trusts for preserving wealth across generations without incurring estate taxes at each transfer.
By placing assets into an irrevocable trust in 2025, you can utilize the current exemption to safeguard those assets and their future appreciation from estate taxation.
3. Spousal Lifetime Access Trusts (SLATs): Balancing Flexibility with Tax Efficiency
SLATs permit one spouse to allocate assets to an irrevocable trust for the benefit of the other spouse and their descendants, though care must be taken to avoid the reciprocal trust doctrine if both spouses create SLATs, removing these assets from the taxable estate while allowing the non-donating spouse indirect access to the trust assets during their lifetime. This approach is particularly useful for couples aiming to maintain financial security without compromising their taxable estate’s size.
4. Charitable Giving: Merging Tax Planning with Philanthropy
Charitable contributions can achieve philanthropic objectives while also providing estate tax relief. Strategies include:
- Charitable Remainder Trusts (CRTs), which allow asset transfer to a trust that benefits you or your heirs for a period before the remainder goes to a charity.
- Direct donations to charities can reduce the taxable estate size and support cherished causes.
Forward Planning: Preparing for 2025 and Beyond
The impending sunset of the elevated estate tax exemption underscores the importance of proactive estate planning. As the threshold is set to reduce possibly within the next year, individuals and families with substantial assets should engage with estate planning experts to devise strategies that reflect their unique situations and look at some of the following strategies for wealth transfer:
Family Limited Liability Company (FLLCs)
Family Limited Liability Companies (FLLCs) offer a flexible structure for managing and transferring family wealth while leveraging valuation discounts. By placing assets such as real estate, investments, or business interests into an FLLC, families can maintain operational control while gradually transferring ownership to younger generations.
Example: A family owns a $20 million real estate portfolio. They transfer the properties into an FLLC and gift minority interests to their children. Due to valuation discounts for lack of control and marketability (subject to IRS scrutiny and requiring qualified appraisals), the gifts’ taxable value may be reduced, allowing the family to maximize the use of the estate tax exemption.
Additional Strategy: Combine FLLCs with irrevocable trusts, such as Dynasty Trusts, to amplify the tax and control benefits. The FLLC can generate income for trust beneficiaries while shielding assets from estate taxes and creditors.
QPRTs (Qualified Personal Residence Trusts)
A QPRT allows individuals to transfer a primary or secondary residence out of their taxable estate while retaining the right to live in the property for a specified term. If the grantor dies during the QPRT term, the entire value of the residence will be included in their taxable estate. This strategy can significantly reduce the taxable value of a home.
Example: A couple with a $5 million vacation home transfers it into a QPRT in 2025. They retain the right to use the home for 10 years. At the end of the term, ownership passes to their children or a trust for their benefit. By leveraging the current high exemption, the value of the home is removed from their estate, and any appreciation in value during the 10-year term escapes future estate taxation.
Additional Strategy: If the couple wishes to continue using the home after the QPRT term ends, they can rent it back at fair market value, further reducing the taxable estate by transferring rental payments to the next generation.
Pre-Paid Tax Strategies
One forward-thinking approach to estate planning involves pre-paying potential future gift taxes at today’s potentially lower rates. This strategy applies to gifts exceeding the current exemption level and anticipates that post-2026 tax rates may be higher due to the sunset of the Tax Cuts and Jobs Act (TCJA) provisions. By paying gift taxes now, individuals can lock in lower rates and shield future appreciation of the gifted assets from estate taxation. When a donor makes a taxable gift exceeding the exemption, the Internal Revenue Code allows them to pay gift taxes at the current rate (40% in 2025) rather than risking potentially higher rates in the future. Additionally, gift tax payments made within three years of death are pulled back into the taxable estate under IRC Section 2035(b), so timing of such payments should be carefully considered. The gifted assets and all future appreciation are removed from the donor’s taxable estate, maximizing wealth transfer efficiency.
Critical steps include reviewing current estate plans for potential tax exposures, deciding on assets for gifting or trust transfers to utilize the current exemption fully, and collaborating with advisors to ensure plans remain aligned with long-term goals, considering the possibility of legislative changes.
