Estate and Gift Tax Uncertainty in 2025

At the end of 2025, the tax exemption for federal estate and gift taxes is scheduled to revert to what it was in 2012 with cost-of-living increases.  Currently, the exemption is $13,990,000 per person.  Given the size of the exemption, the vast majority of people do not need to be concerned about the estate tax (or “death tax” as some politicians call it).  However, the law that doubled the exemption in 2017 from $5 million per person to $10 million with annual cost of living increases did not have enough votes in the Senate to make the law permanent.  As a result, that increase only lasts for ten years and it expires or “sunsets” at the end of 2025.  This means that on January 1, 2026, absent Congressional action to extend the larger exemption, the exemption will revert to its original $5 million plus cost-of-living increases. This will leave each of us with an exemption of around $7 million.  Even at that level, the estate tax will not affect most Americans.  However, if you have a total estate that exceeds that amount, then your heirs may incur federal estate tax upon your death.

For married couples, each spouse has that exemption.  If the total combined estate of both spouses is below approximately $14 million, then their heirs may not end up paying estate tax.  But for the very wealthy who have estates larger than their available exemptions, they need to consider whether they need to do additional planning to use up the extra exemption they currently have before they lose it in 2026.

The Political Landscape

After the recent election, much is now uncertain.  As mentioned above, under current law the estate and gift tax exemption will automatically (without further legislation) be reduced by half at the beginning of 2026.  However, there is a chance the law will be changed to extend the larger exemption at least for a period of years.  Nevertheless, given the rather thin margin of Republican control in Congress, it is hard to predict what will happen.

Use It Before You Lose It

What does this all mean?  If the higher tax exemption is not extended before the end of this year and you need to do some planning to use the exemption before it is reduced by making some estate planning moves, you should do it sooner rather than later.  Estate planning attorneys, accountants, and appraisers will be very busy in 2025 dealing with these issues.  You should not wait until Fall of 2025 thinking that you will be able to push through estate planning changes before the end of the year, particularly if the assets to be given are business interests or real estate that require appraisals.

So, for the very wealthy, the way to use up the extra exemption before it is lost involves making large gifts of assets now.  The gifts can be direct gifts to children or grandchildren, for example.  They can also be gifts to irrevocable trusts for the benefit of your family.  Let me use an example of a married couple that has amassed an estate of $35 million and has children and grandchildren.  They could make gifts of assets directly to their children and grandchildren that total as much as $27,980,000 and use up their combined exemptions to cover the gift tax due.  That would leave the couple with a remaining estate of a little under $8 million to live on.  If the assets given are real estate or business interests, those assets will need to be appraised and the appraisals must be attached to the gift tax return.  The potential downside to this is that the direct gifts of those assets mean that the investment income from them is no longer available to the couple.

The Spousal Lifetime Access Trust Option

Another option for a married couple that may be more appealing to them is for each spouse to establish a Spousal Lifetime Access Trust or “SLAT.”  A SLAT is an irrevocable trust and the gift of assets to it results in the assets being excluded from the couple’s estates for federal estate tax purposes.  For example, the husband could create a SLAT with $13,990,000 of assets and appoint his wife as the trustee.  The wife could be the beneficiary for her lifetime with distributions available to her as needed for her “health, education, maintenance, and support.”  This “ascertainable standard” language for distributions causes the trust assets to be excluded from her estate for estate tax purposes.  At the wife’s death, the trust can continue for the benefit of their children and even further generations free of estate tax.  The advantage of using SLATs to move assets out of the couple’s estates for tax purposes is that while both husband and wife are married and living, those trust assets and the income from them are still available to them if needed to maintain their lifestyle.  To the extent that they don’t need to take distributions from the trust, the trust assets can appreciate and grow for the benefit of their children free of estate tax.  Similarly, the wife can create a SLAT for the benefit of her husband and fund it with her assets.  The two trusts need to be structured with some different terms to be valid.  The trusts cannot be identical. Otherwise, the IRS could include the assets in the couple’s estates under a “reciprocal trust” theory.

It is important to note that making large gifts either directly or through trusts will only work to take advantage of the extra exemption if those gifts are significantly more than the reduced exemption in 2026.  For example, creating a SLAT and funding it with $7 million will not allow you to use any of the extra exemption that will be lost in 2026. You would end up just using most of the $7 million exemption you would have in 2026.  The extra $6,990,000 of exemption is still lost.  As a result, these planning opportunities require you to use up most or all of your current exemption of $13,990,000.  That is why SLATs are a good vehicle for married couples with about $30 million or more of assets because they may be comfortable making such large gifts to irrevocable trusts and still feel comfortable retaining enough assets under their complete control.  While most of my clients don’t have that amount of wealth, for those who do, this is an important technique to consider implementing this year.

Steps to Take to Be Ready

For those clients that have over $7 million as an individual or $14 million as a married couple, the question is whether you will need to make these gifts in 2025 to take advantage of the extra exemption currently available that may be gone in 2026.  Since the elimination of half of the exemption will not likely be known until later in 2025, you could wait until later in the year if the assets you would give away to children or to trusts for their benefit are cash or marketable securities.  The value of those assets can be quickly determined for the gift tax return.  However, if the assets to be given consist of real estate and business interests, detailed qualified appraisals of the assets are required.  Those appraisals can take several weeks and most appraisers and estate planning attorneys may be very busy at the end of this year.  In that case, you may want to start the appraisal process earlier in the year so that you can make the gift in 2025, if needed.