Unless Congress acts, the federal estate/gift tax lifetime exemption will drop substantially at the end of 2025, causing a substantial increase in the number of estates with federal estate tax liability. In 2017, the Tax Cuts and Jobs Act (“TCJA”) essentially doubled the lifetime exemption that existed at the time. With adjustments for inflation, the lifetime exemption is $13.61 million in 2024 and is expected to increase slightly in 2025. However, the TCJA provision will “sunset” (end,) at the end of 2025 and, on January 1, 2026, the lifetime exemption will revert to pre-TCJA levels, adjusted for inflation. Current estimates of the resulting number range from 6 to 7 million dollars.
Whether Congress will act and what a new statute would look like are anyone’s guess. In addition to setting a new dollar amount for the exemption, Congress will need to decide what will happen to the unused portion of an individual’s lifetime exemption as of the end of 2025. The possible impact of losing such portion could be significant; leaving all or part of one’s current lifetime exemption “on the table” could result in a loss of a substantial amount of tax savings.
Concerned taxpayers can begin planning now; there are many ways to utilize the lifetime exemption. For example, outright gifts can be made to family members[1] or others prior to the end of 2025. Gifts can be structured through trusts, as well. In deciding which assets to gift, taxpayers may wish to favor assets that are expected to increase in value; this would ensure both that the lifetime exemption is used up now and that the donee will own the assets as they appreciate.
Planning is particularly important for residents of New York State, which imposes its own state level estate tax[2] (but not a gift tax). With an estate tax exemption of $6.94 million in 2024 (adjusted annually for inflation) and graduated rates that max out at 16%, the incentive to make lifetime gifts is high. Moreover, the state’s lifetime exemption phases out beginning with estates that are 5% over the exemption amount. As a consequence, there is no exemption for a taxable estate exceeding $7.287 million in 2024, and every dollar is subject to tax. New York State residents may be able to reduce their estates by making gifts during their lifetimes. Gifts that are made within three years of death, however, are generally included in one’s estate and could be subject to the state estate tax.
[1] Gifts to one’s spouse are not subject to estate or gift tax and therefore do not affect or reduce the lifetime exemption.
[2] Several other states levy estate taxes or inheritance taxes. Connecticut is the only state that imposes a gift tax.
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