Navigating the 2025 Tax Exemption Sunset

The 2024 election outcome ushered in renewed confidence that the 2017 tax cuts will be extended before they sunset in December of 2025. The Republican Congress and President Trump campaigned on delivering an extension to their 2017 bill. However, with a packed list of priority legislation championed by the President and his party and challenging US fiscal dynamics, extension of the tax cuts is not a foregone conclusion.

The Tax Cuts and Jobs Act (TCJA) of 2017 brought sweeping changes to the tax landscape, including a substantial increase in the lifetime gift and estate tax exclusion. The TCJA doubled the previous gift and estate tax exclusion. For 2025, the exclusion amount is $13.99 million per individual and $27.98 million per married couple. Unless Congress acts, these provisions are set to sunset on December 31, 2025, reverting to pre-TCJA levels (estimated to be $7 million per individual in 2026, adjusted for inflation).

Estate Planning Implications of a Potential Sunset

The sunset of the TCJA provisions would have significant implicationsfor those with taxable estates (roughly $28 million for married couples under current law or roughly $14 million per couple in the event of a sunset). Here are key points for you to consider:

1. Reduced Exclusion Amount: Estates valued above the lower threshold amount will be subject to higher estate taxes, which could result in less of your estate benefiting your heirs and future generations.

2. Potential for Clawback: The IRS has made it clear that the higher exclusion amount will generally be respected in any future environment with lower thresholds. They have also provided a narrow set of strategies to steer clear of.

3. Access to Estate Planning Attorneys prior to year-end 2025: With the changing landscape, individuals should still assess their estate plans. This includes considering the timing of gifts, revising wills and trusts, and exploring advanced estate planning techniques. As we get closer to the end of the year if no legislative action on taxes materializes, there will be a flurry of estate planning activity. Finding and engaging with a competent estate planning attorney at the end of the year could prove to be very difficult.

Strategies to Consider to Mitigate the Impact of a Potential Sunset

1. Taking Advantage of the Higher Exclusion Now

A fundamental approach is to simply take advantage of the higher exclusion amount this year, which would involve making substantial gifts before the end of 2025. By doing so, individuals can lock in the benefit of the higher exclusion amount, potentially reducing future estate taxes.

Gifting Assets: Consider making lifetime gifts of assets that are likely to appreciate in value, particularly in strategic ways. This not only reduces the size of your taxable estate but also transfers future appreciation out of the estate.

Spousal Gifts: Married couples should consider both making gifts, doubling the amount that can be transferred tax-free. Each spouse should have the assets in their individual name to make such gifts separately, and “gift-splitting” should generally be avoided.

2. Establishing and Funding Trusts

Trusts are powerful tools for estate planning, offering flexibility and, potentially, a degree of control over the direction of assets. These trusts can be particularly beneficial in this environment:

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust established by one spouse (the grantor) for the benefit of the other spouse (the beneficiary), which often includes other family members as beneficiaries. The biggest advantage of a SLAT is the ability to effectively use your exemption via an irrevocable transfer while maintaining a “safety valve” for distributions in the event of unforeseen financial circumstances. A potential downside of a SLAT is the loss of direct control over the trust assets by the grantor. Additionally, careful planning is required to ensure that the trust is properly structured to achieve your goals and objectives, including the tax benefits.

Grantor Trusts are often a key component of an effective wealth transfer strategy. A grantor trust can minimize estate taxes, facilitate the transfer of wealth to beneficiaries and future generations, and allow the trust assets to grow income tax-free to the beneficiaries.

3. Utilizing Valuation Discounts

Certain assets, such as interests in closely-held businesses, private partnerships or real estate entities, are often eligible for certain valuation discounts (e.g. due to lack of marketability or minority interests) that make them attractive assets to give away. These discounts can reduce the value of gifted assets for tax purposes, allowing more wealth to be transferred within the exclusion limits.

4. Exploring Estate Freeze Techniques

In addition to or in lieu of using the full exclusion amount, further transfer techniques such as estate freezes (e.g. installment sales to grantor trusts and grantor retained annuity trusts) should be considered to transfer assets out of an estate. As assets are generally valued at the time of transfer for tax purposes, these strategies can be implemented to move asset appreciation outside of an estate, that has the effect of slowing the overall growth of a taxable estate.

5. Employing Irrevocable Life Insurance Trusts

There are a variety of life insurance-based strategies, which often involve Irrevocable Life Insurance Trusts (ILITs), that can be employed to meet client objectives. When properly structured, ILITs allow beneficiaries to receive insurance proceeds income and estate tax free. These strategies range from simple (e.g. traditional life insurance policies) to more complex and, arguably, more powerful (e.g. private placement life insurance).

6. Reviewing and Updating Estate Plans

Given the dynamic nature of tax laws in general, it is crucial to regularly review and update your financial and estate plans. This includes potentially revising wills, trusts, and other estate planning documents to reflect current laws and changing personal circumstances. Engaging with estate planning attorneys and tax and financial advisors can ensure your plan remains aligned and optimal while incorporating flexibility and optionality that can help you adapt to the future.

Why It’s Important to Start Planning Now

The potential sunset of the TCJA provisions related to the gift and estate exclusion may not present the urgency it once did but the need to engage in thoughtful planning remains important for wealthy families looking to meet their legacy goals. By understanding the implications and employing strategic planning, it is possible to mitigate potential tax liabilities and preserve wealth for future generations. Proactive steps like the ones detailed above can provide significant benefits both now and in the future. Summit Trail’s unique experience in working with successful individuals and families in establishing multi-generational plans can help you navigate this complex and uncertain environment to ensure a smooth and efficient transition of your assets.