Are You Prepared for the 2025 Sunset of Estate Tax Exemption Limits?

As wealth managers, we see firsthand the importance of strategic financial planning, especially for high-net-worth families. Of particular importance is the ability to look ahead at variables that may impact investment strategies and make appropriate adjustments for our clients based on the potential outcomes.

One such event on the horizon that has caught our attention is the potential sunset of estate tax exemption limits established under the Tax Cuts and Jobs Act of 2017 (TCJA). Understanding the implications of this impending change and implementing proactive strategies can help high-net-worth families protect their wealth and legacy for future generations.

The TCJA and Estate Tax Exemption Limits

The Tax Cuts and Jobs Act, signed into law in December 2017, ushered in sweeping changes to the U.S. tax code, including substantial increases to the estate tax exemption limits. While the TCJA law provided benefits across the board, the changes to the estate tax exemption limits primarily provided relief for affluent families. The change allowed them to transfer larger amounts of wealth tax-free during their lifetimes or at death. Effectively, the TCJA allows up to $13.6 million of 2024 assets per person (or $27.2 million for a married couple) to be exempt from the punitive 40 percent estate tax (figures are adjusted each year for inflation).

However, these enhanced exemptions are temporary and will revert to pre-TCJA levels by the end of 2025 unless Congress intervenes. If Congress does not act, the 2026 lifetime exemption amounts will revert to approximately $6.8 million per person ($13.6 for married couples).

Implications for High-Net-Worth Families

The sunsetting of estate tax exemption limits has significant implications for high-net-worth families. As exemptions decrease, estates exceeding the revised thresholds could face higher estate tax liabilities. Since politicians entirely control the exemption limits and estate planning can be time-consuming, we’re encouraging families with substantial assets to assess their current estate plans and explore strategies to mitigate potential tax consequences.

Preparing for the Sunset

1. Maximize Use of Current Exemptions: High-net-worth families should take advantage of the current high exemption limits to transfer wealth tax-efficiently. Such actions may involve making gifts to heirs or funding irrevocable trusts before the sunset provision takes effect. Families can utilize the full extent of available exemptions to lock in tax savings and protect assets from future estate tax exposure.
2. Leverage Trusts and Gifting Strategies: Irrevocable trusts, such as grantor-retained annuity trusts (GRATs) and spousal lifetime access trusts (SLATs), offer effective means of transferring assets while minimizing tax implications. By strategically combining trusts with gifting strategies, families can optimize their estate plans and preserve wealth for future generations.
3. Consider Life Insurance Planning: Life insurance can be a valuable tool in estate planning, providing liquidity to cover estate taxes and other expenses. High-net-worth families should review their existing policies and assess whether additional coverage may be necessary to offset potential estate tax liabilities. Irrevocable life insurance trusts (ILITs) can be structured to ensure that policy proceeds are not included in the taxable estate, offering an efficient means of passing wealth to heirs.
4. Engage in Charitable Giving: Charitable planning offers not only tax benefits but also the opportunity to support meaningful causes. Establishing donor-advised funds, charitable remainder trusts (CRTs), or private foundations can help families achieve their philanthropic objectives while reducing estate tax exposure. Charitable giving can also be a powerful tool for instilling family values and leaving a lasting legacy.

Stay Informed and Adapt

Estate planning is a dynamic process that requires ongoing attention and adjustment. As legislative changes occur, it's essential for high-net-worth families to stay informed about developments in tax laws and adapt their strategies accordingly. Regular consultations with experienced legal and financial advisors can help ensure that estate plans remain current and effectively address changing circumstances.

Currently, these exemption limits are set to expire on December 31, 2025. The upcoming November elections will likely play a significant role in determining whether they are extended, adjusted, or allowed to expire. The TCJA was implemented under a Republican administration. Since then, it has been a regular target for Democrats during budget discussions.

While the election and the end of 2025 may seem far into the future, we encourage our clients to begin planning discussions soon. Many of the estate attorneys we’ve had discussions with regarding these exemptions have told us they expect a snowball of activity that will grow throughout 2025. As more people rush to make changes, there will be less availability for those attorneys to take on additional work. By taking proactive steps this year to understand the potential impact, utilize tax-efficient strategies, and stay informed on legislative changes, you can better protect your wealth and preserve your legacy for future generations.