This month on the CPMT podcast, Tony Turner explains how some of our clients may be affected by an upcoming scheduled change to the federal estate and gift tax exemption.
This exemption is particularly relevant to those with substantial assets.
The current high exemption levels have allowed many individuals to transfer wealth with minimal tax burden, but these exemptions are scheduled to sunset after 2025.
What Is the Estate & Gift Tax Exemption?
The estate and gift tax exemption determines the amount of wealth individuals can transfer without being subject to federal estate or gift taxes.
This lifetime exemption applies to both gifts made during a person’s life as well as the value of assets transferred at death.
As of 2023, the exemption is historically high, sitting at around 14 million. Any transfer beyond this exemption is taxed at a 40% rate.
However, this generous exemption is set to expire, or “sunset,” at the end of 2025, where it may revert back to pre-2018 levels unless new legislation is passed.
A Brief History
The estate and gift tax exemption has a long and evolving history.
The Tax Cuts and Jobs Act (TCJA) of 2017 resulted in a significant increase to the exemption, with inflation adjustments made each year since.
This change was always designed to be temporary, and provisions have long been to end after 2025.
Recent Changes
In recent years, the estate and gift tax exemption has increased to an all-time high due to inflation adjustments.
For this reason, it has provided many individuals and families with the ability to transfer significant wealth without incurring hefty estate or gift taxes.
Additionally, portability provisions allow a surviving spouse to inherit their deceased spouse’s unused exemption, which effectively doubles the exemption for married couples.
What Happens After 2025?
When the TCJA’s provisions sunset after 2025, if no other legislation comes into play, the estate and gift tax exemption will revert to the pre-2018 level, though that will be adjusted for inflation.
Some estimate the exemption will fall to approximately $6 million per individual, which could significantly lower the threshold for taxable estates.
As a result, more estates could be subject to federal estate taxes, with higher potential tax burdens on heirs and beneficiaries.
However, for each presidential administration since Clinton, this exemption has seen increases of some kind.
What that may look like will depend on who is elected to office in November, but at this time, our CPMT experts do not foresee any reason to panic.
Looking Ahead: How to Prepare
The sunsetting of the estate and gift tax exemption in 2025 is as much an opportunity as it is a challenge.
While the future of estate tax laws is uncertain, individuals with substantial assets should consult with their estate planning team at CPMT ahead of time so we can help get you in a good position for any transitions that may occur.
Planning now, before the sunset takes effect, can help you secure current exemptions and reduce future tax burdens.
As we approach 2025, many are watching closely to see whether Congress will act to adjust the exemption levels or allow them to sunset as scheduled.
CPMT is here to help you be proactive in managing your estate so that you and your loved ones are taken care of for years to come.