2025: The Sun Sets Over Estate Plans

By: Jack Rabuck.

All runs must come to an end. On December 31, 2025, there is an important sunset:the temporary increase to the gift & estate tax exemptions, put into place by the 2017 Tax Cuts and Jobs Act, goes away.

What Does That Mean?

Every person in the US may gift or leave assets to heirs. Most states do not have any estate or inheritance tax. The IRS does levy a tax on gifts & estates – 40% in most cases! But there is a big exemption to that tax. The first $12 million (and a little change) that each person leaves to others is exempted from the tax. A married couple can leave $24 million to their children without paying any estate tax whatsoever. 

This number increases a little bit each year for inflation, including a big jump for 2023 to almost $13 million per person. However, as the clock strikes midnight between December 31, 2025 and January 1, 2026, the number will be cut in half. Couples will go from being able to leave about $26 million estate-tax-free down to $13 million.

For a couple with assets worth $25 million, that’s a tax bill increase of nearly $5 million. 

Some Good News

The good news is that there is time to plan! For individuals with estates over $6.5 million or couples over $13 million, there are strategies you can use to take advantage of the current higher exemption amount.

Most estate planning strategies require significant research and due diligence to understand and decide upon, and many take a long time just to draft documents and execute. An early start is important to successful estate transfer planning.

Some Bad News

The bad news is that most types of planning to take advantage of the higher estate tax exemption must be 1) irrevocable and 2) very large.

What does it mean for planning to be irrevocable? As the word implies, it means the planning is very difficult or impossible to reverse. You must be very sure you are happy with the decision.

How large is very large? Any planning that involves amounts less than $6.5 million is likely not to make a difference. That’s because of the way the reduction in exemption amount will take place when the sunset occurs.

An Example

Imagine Bob and his daughter, Jane. Bob has $12 million and wishes to give it all to Jane, either now or at his passing. Let’s pretend Bob is a recent convert to asceticism and does not need any of the assets for himself.

In scenario 1, Bob gives the entire $12 million to Jane before the sunset. In this case, his exemption fully covers the gift and Bob owes no Federal gift or estate tax (and there is no Federal inheritance tax).

In scenario 2, Bob waits until after the sunset (e.g., on or after January 1, 2026) and either gifts or bequeaths the entire $12 million to Jane. Let’s assume his exemption is exactly $6.5 million at that time. In that case, the first $6.5 million passes gift and estate tax free, but the next $5.5 million is subject to the tax. It will be roughly $2 million in taxes due.

In scenario 3, Bob gifts Jane $6 million before the sunset occurs and then later, after the sunset, gifts her the other $6 million. 

Does Bob owe estate tax?

Yes, unfortunately for Bob, he does. That’s because of how the reduction will take place. If you have used some but not all of your exemption prior to the sunset, you do not get to keep the unused portion first. Rather, whatever you have already used up remains used up.

In other words, Bob from scenario 3 would be using $6 million of his exemption before the sunset, so the first transfer would be gift and estate tax-free, but after the sunset occurs, he has still used $6 million of his now $6.5 million exemption. The board is not wiped clean. Upon the second transfer he only has $500K of exemption to use, and the remaining $5.5 million is still taxable for a $2 million bill.

Is Bob from scenario 1 in the clear? Yes. Fortunately for planners everywhere, the IRS has issued guidance that “individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.”

Bob from scenario 1 will have used $12 million of his $13 million exemption, and then after the sunset, $12 million of his $6.5 million exemption, but the IRS will not retroactively penalize him for that planning.

Begin Planning Now

Especially for those with estates between $10-30 million, starting to consider estate planning options well before the deadline is paramount. You might not even be able to engage an attorney if you wait until the middle of 2025, they may all be booked up! 

There are many strategies for estate transfer planning and not all of them need to be so extreme as transferring $5-10 million outright. Talking to an expert and getting a plan in place could be worth 7 figures and peace of mind.