Preparing for the End of the Doubled Gift and Estate Tax Exemption

 

 

 

 

 

 

The Tax Cuts and Jobs Act (TCJA), enacted in 2017, significantly increased the federal gift and estate tax lifetime exemption amount. As of 2024, the exemption stands at $13.61 million per individual (or $27.22 million for married couples), offering families an unprecedented opportunity to transfer substantial wealth without incurring federal estate or gift taxes. 

However, this provision is temporary and set to expire at the end of 2025. Unless Congress acts to extend the current limits, the exemption will revert to its pre-TCJA level, adjusted for inflation, which is expected to be approximately $6.8 million per individual in 2026. For many affluent families, this dramatic reduction underscores the urgency of taking advantage of the higher exemption in 2025.

Here are some methods for sheltering assets before the TCJA sunset:

1. Annual Gift Tax Exclusions — Individuals presently are allowed to transfer up to $18,000 per recipient ($36,000 for married couples) without using any of their lifetime exemption. This strategy enables families to distribute significant wealth tax-free over time. For instance, a couple with three children and three grandchildren could gift up to $216,000 annually without touching their lifetime exemption. Regular annual gifts reduce the taxable estate while benefiting recipients immediately.
2. Irrevocable Trusts — These trusts remove assets from an estate while allowing the creator to maintain some control over their distribution. Common examples include irrevocable life insurance trusts (ILITs) that keep life insurance proceeds out of the taxable estate or dynasty trusts that pass wealth to multiple generations. Assets transferred to these trusts during 2025 can lock into the higher exemption amount, potentially saving millions in future estate taxes.
3. Grantor Retained Annuity Trusts (GRATs) — A GRAT is a popular technique for transferring appreciating assets at a reduced gift tax cost. The grantor places assets into the trust and retains the right to receive annuity payments over a specified term. Any remaining assets in the trust at the end of the term pass to beneficiaries free of additional gift or estate tax, provided the grantor survives the term. GRATs are particularly advantageous in a low-interest-rate environment.
4. Spousal Lifetime Access Trusts (SLATs) — A SLAT enables one spouse to gift assets to an irrevocable trust while allowing the other spouse access to income or principal during their lifetime. This strategy leverages the high exemption while providing flexibility and financial security for the donor’s spouse.

With the exemption poised to drop by nearly 50 percent at the start of 2026, individuals with substantial estates would be wise to act promptly to optimize wealth transfer strategies. Crafting a tailored estate plan involves multiple considerations, including asset valuation, liquidity needs and family dynamics. A knowledgeable estate planning attorney or financial advisor can provide useful guidance to ensure compliance with tax laws and maximize available opportunities.

Jeffrey P. Hall, PLLC, an estate planning law firm with offices in Phoenix, Peoria, and Chandler, assists people across Arizona with creating wills, trusts, and other essential documents relating to their future. To schedule your free initial consultation, call me at 480-409-5174 or contact me online.