Many people decide to give assets to their friends and family before they pass in order to see the recipients enjoy the gifts. Giving funds to your beneficiaries early can also allow them to invest and grow their cash reserves.
If you decide this is something you want to do, you can give these gifts tax-free by using the lifetime gift and estate exemption. However, the current limits could change with the scheduled expiration of the Tax Cuts and Jobs Act (TCJA) of 2017 or the future administration’s efforts to extend the provisions.
What Is the Lifetime Estate Tax Exemption?
In the U.S., the lifetime estate and gift exemption is the dollar amount or value of assets you can give to others without having to pay federal taxes. This limit is adjusted annually for inflation but can also be affected by legislature.
Keep in mind, the lifetime amount is different from the annual limit, which is the dollar amount or value of assets you can gift in a single year without incurring tax — $19,000 per recipient for 2025. Instead, the lifetime limit is the combined amount of gifts or portions of your estate given over your individual lifetime.
What Is the Current Federal Estate Tax Exemption?
Currently, the federal estate tax exemption is set at $13.61 million per individual or $27.22 million for a married couple. This amount reflects the provisions set forth by the TCJA , which significantly increased the allowance from its previous base level. The TCJA temporarily raised the exemption from $5 million per person, adjusted for inflation, to a $10 million base, also adjusted for inflation.
For 2025, this exemption is scheduled to increase slightly to $13.99 million per individual or $27.98 million for a married couple.
The Future of the Lifetime Gift and Estate Exemption
The future of the federal estate tax exemption hinges on several factors, including political dynamics. While Republicans typically support extending the TCJA's provisions, Democrats may favor allowing them to expire and potentially reducing the exemption further.
With Republicans currently holding the White House and a majority in the Senate and the House of Representatives, there is a possibility of legislative action to extend these provisions in 2025. However, the large federal deficit could temper enthusiasm for a full extension, and the slim majorities necessitate negotiation and compromise.
Implications of the TCJA Expiration
Unless further legislative action is taken, the TCJA’s provisions are set to expire on December 31, 2025. If no changes are made, the exemption will revert to its pre-TCJA level, adjusted for inflation, which is estimated to be about $7 million per individual or $14 million for a married couple.
This reduction would mean that individuals with estates exceeding these thresholds could face significant estate tax liabilities, thereby increasing the taxable portion of their estates.
Impact of a Reduced Estate Tax Exemption
A reduction in the estate tax exemption would have broad implications. Many estates currently shielded from federal estate taxes would find themselves subject to these taxes, potentially altering the financial landscape for numerous families.
Given these potential changes, strategic estate planning becomes even more critical. By working with an estate trust and gift advisor, families can explore various strategies to mitigate the impact of reduced estate tax exemptions. This might include setting up trusts, making lifetime gifts or utilizing other estate planning methods designed to minimize tax liabilities. These proactive measures can help preserve wealth and ensure that more of the estate is passed on to future generations rather than being lost to taxes.
| 2024 Federal Estate Tax Exemption | 2025 Federal Estate Tax Exemption | Pre-TCJA Federal Estate Tax Exemption |
|
$13.61 Million Per Individual or $27.22 Million Per Married Couple |
$13.99 Million Per Individual or $27.98 Million Per Married Couple |
Estimated $7 Million Per Individual or $14 Million Per Married Couple |
For instance, if you planned on gifting a combined $10 million to family members in 2026 but the TCJA provisions expires before you do so, the amount over the reinstated $7 million threshold will be taxed at 40%. But if the TCJA exemption limit is extended, you could avoid that tax.
Planning for Uncertainty in Estate Taxes
Given the uncertainties surrounding estate taxes, proactive planning is crucial. By consulting with an estate planning attorney, you can develop flexible strategies that align with your long-term goals, ensuring your estate plan remains robust and adaptable regardless of potential changes in tax laws.
This forward-thinking approach not only safeguards your assets but also provides peace of mind, knowing your estate plan can withstand shifts in the tax environment. Whether it is through trusts, gifting strategies or other estate planning tools, having a well-devised plan in place is key to navigating the uncertainties of estate taxes effectively.
Your Guide Forward
Cherry Bekaert’s Estate, Trust and Gift practice is here to guide you through these complexities with industry-driven knowledge and personalized attention. Our professionals will thoroughly assess your current estate plan, identifying areas that may require adjustments due to potential tax law changes. We work with you to develop adaptable strategies so that your planning goals are met regardless of future tax scenarios.
Additionally, our team is committed to maximizing tax efficiency, exploring opportunities to minimize liabilities and optimize estate distribution. We keep you informed of the latest legislative developments, empowering you to make informed decisions. Contact Cherry Bekaert today to schedule a consultation and secure your future with confidence.
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- Article: Republican House Majority Sets Stage for 2025 Tax Policy
- Podcast: Federal Estate Tax Exemption Sunset: Plan for 2025
Disclaimer:
The content focuses on presidential tax proposal plans and is intended to provide general information about the potential tax legislation that may be implemented by the future government. The information provided in this content piece is not intended to serve as legal or tax advice and should not be relied upon as such. The prospective potential legislation mentioned in this content piece is subject to change, and there is no guarantee that any proposed legislation will be enacted into law. Any action taken based on the information provided in this content piece is at their own risk, and Cherry Bekaert shall not be held liable for any such action taken.
