Does Sunset of the Current Federal Estate and Gift Tax Exemption Affect Your Estate Plan?

Concept image of gift tax exemption on the 2025 Sunset.

For 2024, the lifetime federal estate and gift tax exemption stands at $13.61 million per person. In the absence of Congressional action, the exemption will be roughly cut in half — to about $7 million per person — on January 1, 2026, due to sunset (expiration) of the provisions in the 2017 law that increased the exemption amount.

The potential change may have significant implications for the estate plans and gifting plans of individuals and married couples with substantial assets. If your plans may be affected, you should begin working with an experienced estate planning attorney now to prepare for the change.

What Is the Federal Estate and Gift Tax Exemption?

Set by federal legislation, the federal estate and gift tax exemption is the specified amount of money, property, or other assets that an individual can gift to others during their lifetime and to their beneficiaries or heirs at death without the transfers being subject to federal estate tax or federal gift tax. The federal tax rate for estates and gifts that exceed the lifetime exemption amount currently can be as high as 40 percent.

In 2017, prior to adoption of the Tax Cuts and Jobs Act, the basic lifetime exemption was $5.49 million for an individual and $10.98 million for a married couple. The tax reform law effectively doubled the exemption, beginning in 2018. With the amount adjusted annually for inflation, the current basic exemption for 2024 is $13.61 million for an individual and $27.22 for a married couple. This amount is the lifetime exemption for asset transfers both during an individual’s lifetime and on death.

Under the federal statute that increased the exemption in 2018, the increase provisions sunset (expire) at the end of 2025. If the United States Congress does not act to extend the increased exemption, reinstatement of the pre-2018 exemption amount means that the lifetime exemption will decrease on January 1, 2026.

The reinstated 2017 exemption amounts will be adjusted for annual inflation, but the decrease is still substantial: For an individual, the exemption will drop from $13.61 million in 2024 to about $7 million in 2026. For a married couple, the exemption will decrease from $27.22 million in 2024 to about $14 million in 2026. With the exemption roughly cut in half on January 1, 2026, some estates will be vulnerable to substantially more estate tax. The decrease will dramatically change the estate planning landscape for many people, just as the exemption increase did. The difference is that this time the change is unfavorable from the taxpayer’s standpoint, which is opposite to the effect of the 2017 increase.

The federal estate and gift tax exemption is separate from the federal annual gift tax exclusion, which is the amount of money (or assets) that you can transfer as a gift to one person in any given year without incurring potential gift tax liability. For 2024, the annual gift tax exclusion is $18,000. That annual exclusion amount (which is adjusted for inflation) is not changed by the sunset provisions that apply to the lifetime estate and gift tax exemption. However, since gifts in excess of the annual exclusion amount count toward the lifetime exemption, a decrease in the lifetime exemption may directly impact some gifting plans, in addition to affecting potential estate tax liability.

Preparing for Expiration of the Current Federal Tax Exemption

Currently, there is no indication whether the federal government will act to extend the current level of the federal estate and gift tax exemption. For that reason, individuals and married couples whose estates and gifting plans may be affected by the significant decrease in the exemption on January 1, 2026 need to start planning and taking action now. Waiting until the last minute may be too late. Adjusting estate and gifting plans to the exemption decrease requires sophisticated planning and actions that take time to implement.

There are two primary aspects of an individual’s estate and gift planning that should be evaluated in response to a potential federal estate and gift tax exemption decrease. The first is the strategy for gifting. The second is the use of special types of trusts for asset protection. Either or both of these aspects of your estate plan may provide opportunities to take advantage of the current higher exemption and prepare for the potential exemption decrease in 2026. As always, making changes in your estate plan or gifting plan should only be accomplished in consultation with a qualified estate planning attorney.

Strategic Gifting

The current higher exemption remains in effect until the end of 2025. Based on a decision by the IRS, gifts made during the temporary exemption increase period (2018 through 2025) will not be affected after 2025 if the exemption increase expires. Individuals and married couples can confidently make gifts before the end of 2025 without being concerned about losing the tax benefit if the exemption decreases.

If you are concerned about the impact of expiration of the exemption, you should discuss with your estate planning attorney whether adjustments to your gifting plan are advisable. Since a gift can be made directly to a recipient or through a carefully crafted trust, your attorney can help you decide not only whether you should make gifts before the end of 2025 but also determine what approach is best for accomplishing those transfers.

Utilization of Trusts

Individuals and married couples concerned about the asset protection effect of the potential exemption decrease may be able to take advantage of special types of trusts to mitigate the impact of the change. What type of trust may be appropriate depends entirely on your personal and financial circumstances. You should work with a knowledgeable estate planning attorney to evaluate your situation and determine if adding a trust to your estate plan would be beneficial if the federal estate and gift tax exemption decreases in 2026.

Talk With a Georgia Estate Planning Attorney

In our Cartersville estate planning practice at Asset Protection & Elder Law of Georgia, we help clients with all aspects of creating and maintaining an estate plan. We are fully prepared to work with clients in anticipation of the potential changes in the federal estate and gift tax due to sunset of the 2017 exemption increase provisions.

We provide legal services to clients throughout the communities northwest of Atlanta, including in Bartow County, Cobb County, Cherokee County, Gordon County, Floyd County, and Paulding County. Call us at (770) 382-0984 or contact us through our online form.

Categories: Estate Planning