Think of your ideal sunset. Maybe it’s enjoying a golden hour on the lake or watching the sky turn a brilliant pink from a mountain cabin. Most sunsets are lovely.

The upcoming federal estate tax exemption sunsets? Not so lovely. 

Now, that beautiful lake house or mountain cabin, previously exempt from federal gift and estate taxes, could be subject to a 40% transfer tax at the time of your death.

The Tax Cuts and Jobs Act (TCJA) significantly increased the threshold for assets to incur federal gift and estate taxes, allowing individuals to pass significantly more wealth to their loved ones without incurring high taxes. However, the TCJA could potentially sunset at the end of 2025. 

So, how can you shield your estate and loved ones from tax increases and penalties? Let’s talk about it. 

What is the 2017 Tax Cuts and Jobs Act?

The 2017 TCJA made major changes to the federal estate and gift tax system. Notably, it doubled the maximum amount that individuals or married couples can give their beneficiaries without incurring federal gift or estate taxes during their lifetime or as part of their estate. 

In 2024, the exemption amount is $13.61 million per individual or $27.22 million for married couples making a joint gift.

This adjustment to the federal estate and gift tax system significantly impacted families’ ability to pass wealth down to the next generation. Because any asset above this exemption is subject to a 40% transfer tax, doubling the threshold enabled many families to save millions of dollars in tax exemptions.

However, this exemption is not permanent. Unless Congress extends the TCJA, it will expire on December 31, 2025, at which point it will revert to its pre-TCJA level, adjusted for inflation. While the TCJA may be extended, it is still prudent for families to act based on known circumstances, such as the fact that this law is set to expire within the next year. 

What happens if the exemption resets in 2026?

If the exemption resets in 2026, the threshold for incurring federal gift or estate taxes will drop to its pre-TCJA levels, adjusted for inflation. Thus, individuals with a net worth of $7 million or higher and couples with a net worth over $14 million (approximation)  may need to adjust their estate planning techniques to account for this change and protect their assets. 

If you’re not sure that you fall into this category, keep in mind that your taxable estate isn’t just your investment portfolio—it also includes your home, other real estate, business interests, and even, in some cases, your life insurance policy. (And remember the sizable appreciation of real estate assets in recent years in your calculations—these apply here!)

For example, if a married couple is currently worth $10–14 million, they may fall below the future estate tax exemption. But if their estate value appreciates, they may fall within the estate tax range within a few years. As such, it’s worth planning ahead.

It’s also important to keep in mind that if the TCJA sunsets in 2026, personal income tax rates may return to their previous levels (depending on which provisions revert), which could further tax the beneficiaries of your estate. These are related, but distinct issues. 

Reassess your estate plan now to set yourself up for success

To protect your estate and minimize the burden of transfer taxes, a knowledgeable estate attorney can help you navigate these potential changes and understand which options may be best for you, depending on your circumstances. 

Here are some potential estate planning techniques.

Lifetime gifting

Lifetime gifting allows households to begin the transfer of assets before an individual’s passing. Because individuals are allowed annual gift tax exclusions, you can gift assets annually under the current federal gift tax exemption to reduce future taxable estate. 

This can be beneficial for families that have years to plan for their estate transfer. 

With lifetime gifting, individuals can gift assets up to the federal gift tax limit ($18,000 per recipient in 2024 and $19,000 in 2025), which is not scheduled to decrease if the TCJA sunsets at the end of 2025. This allows you to transfer wealth to your loved ones over time without incurring gift taxes. 

Additionally, this reduces your taxable estate at the time of your death.

If you plan on bequeathing a large amount of your estate to someone who is currently a minor, consider ways to ensure their inheritance is properly protected, such as an irrevocable trust that allows for withdrawals based on a schedule or other conditions. 

Dynasty trusts

A dynasty trust allows people to fully take advantage of lifetime gifting. Depending on the state, it can last for multiple generations. Individuals can gift cash, investments, real estate, and other assets to the trust and apply their federal gift and generation-skipping transfer (GST) tax exemptions to those assets. 

As such, the trust assets would not be subject to estate or GST tax upon your death. 

When gifting assets to individuals or a trust, keep in mind that there are advantages to gifting assets now that may appreciate in the future. If the asset is under the gift exemption, even if it appreciates in the future, it will not be subject to federal estate tax. 

Note that the GST tax, which applies to transfers that skip a generation (typically to grandchildren), also has an exemption amount that matches the estate tax exemption. This exemption is equally important when setting up dynasty trusts or making substantial gifts to grandchildren.

Trusts

While trusts are a standard estate planning tool, they’re especially useful as we navigate uncertain tax situations. Two types of trusts that should be considered are the Irrevocable Life Insurance Trust (ILIT) and the Spousal Lifetime Access Trust (SLAT). 

An ILIT forms an irrevocable trust to hold a life insurance policy for its beneficiaries. The Grantor will make annual gifts to the ILIT to pay annual premiums on the policy. At the Grantor’s death, the life insurance proceeds are not considered part of the taxable estate and, therefore, are not subject to estate or GST tax.

On the other hand, a SLAT is an advanced estate planning technique in which one spouse forms an irrevocable trust for the lifetime benefit of the other spouse. 

This reduces the first spouse’s taxable estate at the time of their death and allows the other spouse to receive distributions from the trust during their lifetime. The second spouse can then put further protections in place to benefit the first spouse. 

However, as an irrevocable trust, the terms of the trust cannot be changed, and assets held in the trust cannot be reclaimed. As such, it’s critical that a SLAT trust is set up correctly. 

There are finer points and details that apply to the trust strategies mentioned, so it’s important that you enlist the services of an experienced planning attorney. 

Get guidance from a Texas estate planning attorney

Estate planning has the most impact when you plan ahead. If you wait until 2026, then you run the risk of a significantly higher estate transfer tax. Proactive strategies now will allow you to explore your options and ensure that your estate planning techniques are in place to protect your estate and your loved ones. 

Contact the Law Offices of Shann M. Chaudhry, ESQ., today to schedule a consultation. Let’s discuss how you can safeguard your assets and reduce the burden of estate taxes for your family.