As we approach 2025, significant changes are looming in the landscape of gift and estate taxes that could impact many individuals and families engaged in estate planning. With the expiration of the 2017 Tax Cuts and Jobs Act (TCJA) provisions at the end of 2025, understanding these impending changes is crucial for anyone looking to optimize their financial legacy. This blog outlines what’s changing, what it means for you, and how you can prepare.
Key Takeaways:
- The federal estate and gift tax exemptions are set to decrease significantly in 2026, affecting estates that were previously under the threshold.
- Proactive estate planning adjustments can mitigate the impact of these changes.
- Immediate action, such as reviewing your estate plan and considering strategic gifting, may be advisable to take advantage of the current higher exemptions.
Current Gift & Estate Tax Rules:
As of 2024, individuals can transfer up to $13.61 million tax-free either during their lifetime or upon their death, with married couples allowed to double this exemption to $27.22 million. Furthermore, the annual gift tax exclusion stands at $18,000 per recipient, enabling generous tax-free gifting without tapping into the lifetime exemption. Estates exceeding these amounts are subject to a 40% federal estate tax rate.
What’s Changing in 2025?
With the TCJA set to expire at the end of 2025, the generous exemption limits are scheduled to revert to pre-2018 levels adjusted for inflation—approximately $5 million per individual. This rollback will significantly reduce the amount that can be transferred without incurring taxes and is expected to bring many more estates under the taxable threshold.
Reduction in Exemption Amounts:
- Lower Thresholds: The exemption for both estate and gift taxes will drop to around $5 million per individual. This reduction means that estates over this new threshold will be liable for estate taxes at the prevailing rates.
- Increased Estate Tax Exposure: Many families will need to reassess their estate planning strategies as assets that were not previously taxed could now be subject to significant estate taxes.
Estate Planning Adjustments:
- Irrevocable Trusts: Utilizing trusts can help minimize the taxable estate and shield assets from estate taxes.
- Accelerated Gifting: Consider making substantial gifts before the end of 2025 to take advantage of the current higher exemptions. This strategy can effectively reduce the size of your estate and the associated tax liability.
- Charitable Contributions: Increasing charitable donations can also reduce your taxable estate while fulfilling philanthropic goals.
Gift Tax Considerations for 2025: While the lifetime exemption will decrease, the annual gift tax exclusion is expected to continue to adjust upward with inflation. This mechanism allows for smaller, routine gifts that do not impact the larger lifetime exemption but could become a more critical component of estate planning strategies under the new rules.
What You Should Do to Prepare:
- Review Your Estate Plan: It’s crucial to revisit your estate plan in light of these changes. Adjustments may be necessary to align with the new tax landscape and your personal financial goals.
- Consult with Professionals: Work with estate planning attorneys and financial advisors who are well-versed in the latest tax laws to navigate these changes effectively. They can provide tailored advice and strategic planning options.
- State-Level Considerations: Also, remember to account for any state estate or inheritance taxes which might affect your estate planning, as state thresholds and rates can differ significantly from federal rules.
The upcoming changes to the gift and estate tax exemptions represent a pivotal shift that could affect many Americans. By staying informed and proactive, you can take steps now to mitigate the impact of these changes on your estate and ensure that your legacy is preserved according to your wishes.
Get Help Today with Hurban Law, LLC in Lawrenceville, GA
Don’t wait until it’s too late to adjust your estate planning strategy. Contact our office today to schedule a consultation and begin preparing for the changes ahead. Ensure that your estate plan remains robust and reflective of both your wishes and the new tax environment.
