How to Plan for Estate Tax Exemptions Expiring December 2025

Posted by Matthew Divis & Kayla Lieb

Some taxpayers may feel they don’t need to worry about estate planning, because they have less than $13,610,000 of net assets ($27,220,000 for a married couple), which are the current estate tax exemption amounts. The truth is, if you have roughly more than $7 million in net assets ($14 million for married couples), or if you anticipate growth in your estate above these amounts throughout your lifetime, it makes sense to start planning now in anticipation of looming changes from the Tax Cuts and Jobs Act (TCJA). 

How Will the Sunsetting of the Tax Cuts and Jobs Act Impact Estate Tax?

The TCJA provisions related to the estate tax exemption is set to sunset on December 31, 2025 — causing the exemption limits to revert to approximately $7 million (individuals) and $14 million (married couples). The lifetime annual exclusion, the amount that you can give away tax free during your lifetime, is equal to the estate exclusion and, therefore, will also revert to prior limits at the end of 2025.

How Can I Maximize the Estate Tax Exemption Before the Tax Cuts and Jobs Act Provisions Expire?

You can use your remaining lifetime annual exclusion in 2024 and 2025 to gift up to $13,610,000 tax-free, which will also reduce your taxable estate. Any gifts made through lifetime gifting will be shielded by the anti-clawback rule once the TCJA provisions sunset. This ensures your estate will not be taxed on gifts made during the increased exemption period (2018 to 2025) at death.

If you wait until 2026 to start gifting, you will only be able to give away approximately $7 million tax-free. The remaining $6,610,000 you could have given away before 2026 will be taxable on your gift tax or estate returns at a tax rate of 40% — that’s $2,644,000 of potential tax savings lost (per spouse).

To maximize the estate planning opportunity of the increased exemption, the gift(s) you make should use more of your exemption than will be available after sunset. The opportunity lies in making cumulative lifetime gifts between $7 million and $13,610,000 before the law reverts. For instance, a $3 million gift throughout your lifetime would not use any of the expanded exemptions, but a gift of $10 million would.

Other Considerations When Planning for Estate Tax in Light of the Tax Cuts and Jobs Act

The actions of Congress are uncertain; however, planning now with what we know about the scheduled tax law change is prudent. Below are a few essential reminders:

• Even if Congress extends the higher exemption limits, instead of allowing them to revert, planning will help ensure you remove assets from your estate, tax free, and that any future appreciation and growth on those assets are removed as well.  
• It’s essential to carefully consider how much you can afford to give away during your lifetime. Once you make the gift, you forfeit control over the assets and, often, any income they may produce once they are transferred to someone else. If you desire to retain an income stream during your lifetime, there are planning opportunities you and your advisers can explore to achieve this goal.
• Be cautious when selecting what types of assets are best for gifting. Removing assets that will appreciate will reduce the amount of your future taxable estate, while planning to keep appreciated assets over the current $13,610,000 amount in your taxable estate benefits the eventual beneficiaries. This gives beneficiaries a stepped-up basis, meaning the cost basis of the inherited assets are “stepped up” to the fair market value on the date of the decedent’s death.  
• Assets subject to valuation discounts are also ideal for gifting. For example, an asset valued at $12 million but discounted by 20% would only be assessed as a $9.6 million gift for tax purposes.
• Currently, 13 states have an estate and/or inheritance tax regime with varying annual exclusion amounts — all of them lower than the federal exclusion amount. Please consult with your tax adviser to discuss your situation. 

Estate and gift planning are complicated issues. One size does not fit all. Even if you already have an estate plan established, it is always a good idea to revisit it and ensure you have maximized all tax strategies available to you to reduce your estate as much as possible, tax-free, and achieve your wealth transfer goals. 

Reach out to your tax advisers, ideally in 2024, to determine if you would benefit from additional planning before the estate limits sunset. The next two years will be remarkably busy for estate tax professionals, as there are numerous provisions from the TCJA set to expire at the end of 2025. As such, you may be competing for their limited time with others who are also engaging them before the upcoming sunset. The earlier you reach out, the more likely you will be able to devise an estate plan specific to your needs and implement the proper gifting strategies. 

Contact Matthew Divis at mdivis@cohencpa.com, Kayla Lieb at klieb@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.