In 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”), which more than doubled the amount that a person can pass at death without incurring any estate tax, and that amount is indexed for inflation. But at the end of 2025, significant changes are scheduled to occur.
As a bit of background, everything that a person owns is included in their taxable estate, but there is a certain amount that can pass free of federal estate tax, often referred to as the “exclusion amount.” Anything in excess of that exclusion amount will be taxed at a rate of 40%. Currently, the amount that each person can pass at their death without incurring any estate tax is $13.61 million. For a married couple, over $27 million can be passed to their beneficiaries free of estate tax. (On the death of the first spouse, there is typically an unlimited marital deduction, which defers the payment of any estate tax that might be due to the death of the second spouse to die).
The TCJA was written in such a way that those increased exclusion amounts would go back down to the amounts in place before the law was passed (indexed for inflation). Consequently, in 2026, the exclusion amount is set to revert to approximately $7 million per person. (A married couple would have a total of approximately $14 million in exclusion available to them.)
Many of our clients are taking advantage of the federal gift tax law that is unified with the estate tax law. The exclusion amounts mentioned above are actually not just available at death, but can be utilized during life under the federal gift tax laws. So, what the combined estate and gift tax laws provide is that a person can currently pass $13.61 million at death or during their life without incurring either transfer tax. Because of this, some people are implementing planning now that takes advantage of the elevated exclusion amounts scheduled to be cut in half. For example, a married couple might establish a trust that gives one spouse lifetime access to a trust that can also benefit those who would have received the money at their death anyway. This moves assets out of their estate, as well as the growth of those assets, and allows them to take full advantage of the exclusion amount currently available. If the exclusion amount at their death is $7 million, then they no longer have any exclusion available to them at that time, but they would have moved twice that amount, plus any growth, out of their taxable estate. There are many other options for planning that can be considered in order to take advantage of the current exclusion amount.
Opinions differ as to whether the law will be changed before this scheduled adjustment. On the one hand, if the exclusion amount does go down, it will be the first time in the history of the estate tax that such a decrease would occur. (In 2010, there was a scheduled sunset of the estate tax entirely, but the law was changed that year that allowed some to opt out of the estate tax or to opt in. That was an unusual year that is unlikely to happen again.) On the other hand, if Congress does not pass new legislation, then the change happens according to the law.
Given that the law is set and that it is unclear what would happen regardless of who controls the administration or the Congress, prudence may dictate that you want to adjust your estate planning to take advantage of the increased exclusion amounts in 2025. Considering the great number of people implementing planning strategies in anticipation of the scheduled change, we strongly recommend that you contact your attorney if you wish to take advantage of the law as it currently stands. If you’d like to discuss these changes and whether planning needs to be done before 2026, we strongly encourage you to contact your portfolio manager.