The Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the federal estate and gift tax system. Among its key provisions was a substantial increase in the lifetime exemption amount, which rose from $5.6 million to $11.18 million per individual or $11.18 million to $22.36 million per married couple, adjusted annually for inflation. In 2023, the lifetime exemption amount was $12.92 million per person or $25.84 million per married couple. As of 2024, it is $13.61 million per individual or $27.22 million per married couple. Assets transferred beyond these exemption limits are subject to a 40 percent transfer tax.
However, this high exemption amount is temporary. It will "sunset" on December 31, 2025, unless Congress extends it or makes it permanent. The federal exemption following the sunset is uncertain, but most estimates suggest it will likely fall within $6 to $7 million per person or $12 to $14 million per married couple. This could lead to a notable rise in estates subject to federal estate taxes and higher estate tax liabilities.
Who This Affects & Potential Tax Strategies to Employ
Individuals with a net worth of $5 to $7 million or married couples with a net worth of $10 to $14 million. If you fall within this range, you are below the estate tax exemption and might not have considered your estate tax liabilities. However, when the exemption sunsets, your estate could quickly become subject to estate tax as its value grows. It's crucial to have a well-drafted revocable trust that includes provisions for estate tax planning to minimize future liabilities.
Individuals with a net worth of $7 to $13 million or married couples with a net worth of $14 to $27 million. In this bracket, you have sufficient exemption to avoid paying federal estate taxes. However, if the exemption amount decreases after 2025, your estate could exceed the exemption limit, making estate tax planning essential. A revocable trust remains important, and you should also consider additional strategies, such as gifting to irrevocable trusts. Utilizing your current high exemption to transfer assets can help shield future growth and appreciation from estate taxes, keeping those assets out of your taxable estate.
Individuals with a net worth of more than $13.6 million or married couples with a net worth of more than $27 million. Within this range, your estate is already subject to estate tax, and any assets exceeding the exemption amount will face a 40 percent tax upon your death. It is crucial to have a well-drafted revocable trust and consider establishing irrevocable gifting trusts. Additionally, employing discounting strategies can help reduce the taxable value of your estate. These strategies enable you to lower the reported value of your assets, potentially allowing you to transfer more into irrevocable trusts while staying within the exemption limits. Employing "freezing" techniques to halt future growth and appreciation of your assets may also become necessary within this range.
Importance of Timely Action for Estate Tax Exemption
If your estate is already above the current exemption amount, any assets exceeding this threshold will be subject to a 40 percent tax upon your death. Advanced planning is critical, and you should explore establishing irrevocable trusts and utilizing discounting strategies. These techniques can help reduce the taxable value of your estate, potentially allowing more assets to be transferred into trusts while remaining within exemption limits. Additionally, "freezing" techniques can halt future growth and appreciation of your estate's value within the taxable estate.
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