Preparing for the Sunset of the Gift Tax Exemption in 2025

As we approach December 31, 2025, high-net-worth individuals and families face a critical deadline: the scheduled sunset of the current Lifetime Gift and Estate Tax Exemption. The exemption, part of the Tax Cuts and Jobs Act (TCJA) of 2017, is set to revert to pre-2018 levels unless Congress acts to extend or modify the law. For individuals and families who wish to transfer significant wealth without facing hefty tax liabilities , this presents both an opportunity and a call for strategic planning.

What’s Changing?

Under the TCJA, the Lifetime Gift and Estate Tax Exemption doubled, allowing individuals to gift or transfer up to $13.61  million (in 2024, adjusted for inflation) over their lifetime without incurring federal estate or gift taxes. However, this provision is temporary. On January 1, 2026, the exemption is expected to revert to approximately $7  million, unless Congress intervenes. The reduction has significant implications for estate planning, particularly for those whose wealth exceeds the lower exemption threshold.

Why Act Now?

The reduction in the exemption means that individuals who delay their gifting strategy beyond 2025 may face steep estate and gift tax liabilities. By acting now, families can take advantage of the higher exemption, transferring wealth more tax-efficiently while it's still possible.

Here are key considerations for those looking to maximize their planning before the sunset date:

1. Use the Full Exemption: The simplest and most direct approach is to take full advantage of the current $13.61 million exemption by making substantial gifts before the law changes. This can include outright gifts, transfers into irrevocable trusts, or contributions to family limited partnerships (FLPs).
2. Leveraging Grantor Retained Annuity Trusts (GRATs): GRATs remain a powerful vehicle for transferring appreciating assets at little or no gift tax cost. With market volatility and low interest rates, GRATs provide an opportunity to transfer future asset appreciation to beneficiaries with minimal gift tax exposure.
3. Dynasty Trusts: For families with generational wealth, dynasty trusts offer a way to transfer substantial assets while minimizing taxes for generations to come. Given the impending decrease in the exemption, establishing or funding dynasty trusts before the sunset is especially timely.
4. Consider Spousal Lifetime Access Trusts (SLATs): SLATs allow spouses to benefit from the income or assets within a trust while keeping the underlying principal out of the taxable estate. Given the upcoming exemption reduction, SLATs provide a flexible option for transferring assets while maintaining access to them.
5. Review Existing Plans: Even for those who have already executed their estate plans, now is the time to revisit and update strategies. Ensure that all aspects of your plan—trusts, gifting strategies, and valuation methodologies—align with the upcoming changes.

The Importance of Acting Early

The complexity of wealth transfer requires careful, forward-thinking strategies. By acting early, you can ensure that your wealth is transferred in the most tax-efficient manner while also providing flexibility to adapt to changing circumstances. Early planning allows for a greater range of options, such as maximizing the use of trusts, optimizing charitable giving, and securing favorable asset valuations. Additionally, starting sooner provides ample time to address any unforeseen challenges, such as market volatility or family dynamics, ensuring that your legacy is preserved for future generations.

What’s at Stake?

Failing to act before the exemption reverts could result in substantial estate and gift taxes for families transferring wealth in excess of the anticipated $7 million threshold. Estate tax rates can run as high as 40%, which can significantly reduce the assets passed onto future generations. By taking advantage of the current law, families can preserve a greater portion of their wealth, ensuring that it is distributed according to their wishes and not lost to taxes.

Next Steps

With just over a year until the sunset of the Lifetime Gift Tax Exemption, time is of the essence for individuals and families looking to maximize tax-efficient wealth transfers. The opportunity to transfer assets at the current exemption level won’t last long, and the potential tax savings for proactive planning are substantial.

Our team can help you assess your gifting capacity and ensure your plan is optimized ahead of the December 31, 2025, deadline. By taking proactive steps today, you can mitigate future tax liabilities and ensure a seamless, tax-efficient transfer of wealth to your loved ones. Click here to schedule a call with one of our experts today.

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