Anaya Nolan
The current estate tax law is set to sunset on December 31, 2025, unless Congress takes action to extend it or make it permanent. The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the federal estate tax exemption to roughly double the previous amount of $5.49 million. This means that individuals can currently gift up to $11.18 million ($13.61 million in 2024) during their lifetimes or at death without paying any federal gift or estate tax. However, if the law sunsets, the exemption amount will revert to its pre-TCJA level of $5 million, adjusted for inflation, resulting in a significant increase in the number of estates subject to federal estate tax. Therefore, it is important for individuals and families with high-value assets to consider implementing estate planning strategies before the end of 2025 to maximize the current exemption and reduce potential tax liabilities.
| Characteristics | Values |
|---|---|
| Sunset Date | 31 December 2025 |
| Sunset Time | Midnight |
| Sunset Year | 2026 |
| Applicable Laws | Tax Cuts and Jobs Act (TCJA) of 2017 |
| Sunset Condition | Unless Congress acts to extend or make it permanent |
| Sunset Impact | Federal estate and gift tax exemption amount will decrease |
| Sunset Amount | Approximately $7 million per person or $14 million per married couple |
| Previous Exemption Amount | Approximately $14 million per person or $28 million per married couple |
| Tax Rate | 40% |
| Bonus Exclusion Amount | $6,610,000 |
| Action Required | Estate planning strategies, irrevocable trusts, revocable trusts |
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What You'll Learn
The Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant changes to the federal estate and gift tax system. The Act was tax reform legislation enacted in December 2017, and it is scheduled to sunset on December 31, 2025, unless extended or made permanent by Congress.
One of the most notable changes was the substantial increase in the federal estate tax exemption, which was roughly doubled from the previous amount of $5.49 million. For 2024, the exemption amount is set at $13.61 million per individual or $27.22 million per married couple, allowing investors to transfer assets to their heirs during their lifetime or at death without incurring federal gift or estate tax. This amount is indexed for inflation and was $11.18 million per individual or $22.4 million per married couple when the law was enacted in 2017.
The TCJA also made changes to the standard deduction, increasing it from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for joint filers. This reduction in the number of individuals benefiting from itemized deductions was accompanied by changes to the structure of itemized deductions, including limiting the itemized deduction for total state and local taxes to $10,000 annually for both single and joint filers.
Additionally, the TCJA reduced the corporate tax rate from 35% to a permanent flat rate of 21%, changed flow-through taxation, increased depreciations, and implemented significant changes to taxing international income. The Act also eliminated the penalty for not having minimum medical insurance as mandated by the Affordable Care Act.
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Estate planning strategies
The current estate tax law is set to sunset on December 31, 2025, unless Congress takes action to extend it or make it permanent. This means that the time to act is now, as the window of opportunity to take advantage of the current law is closing. Here are some estate planning strategies to consider:
Understand the Changes and Take Action
It is crucial to understand the upcoming changes to the estate tax exemption to protect your assets and ensure your family's financial security. The estate tax exemption amount is expected to decrease significantly in 2026, which will result in a higher number of estates being subject to federal estate tax. By understanding these changes, you can develop a proactive plan to minimise the impact.
Consult with Professionals
Engage the services of experienced estate planning professionals, such as attorneys and tax specialists, to navigate the complexities of estate planning and ensure your strategy is tailored to your unique situation. They can guide you through the process and help you make the most of the current favourable estate tax laws.
Review and Optimise Your Estate Plan
Take time to review your current estate plan to ensure it aligns with your goals and takes full advantage of the higher exemption before it sunsets. Evaluate your existing trusts and consider establishing new ones to optimise your estate planning strategy effectively.
Evaluate Gifting Options
Consider making significant gifts before the exemption decreases. This can include direct gifts to heirs or contributions to irrevocable trusts. By gifting now, you can utilise the higher exemption amount and shield those assets from future estate taxes. Remember to assess the impact of gifting on your current financial situation and long-term goals.
Stay Informed and Proactive
Estate planning is an evolving landscape, and it's essential to stay informed about potential legislative changes that could impact your plan. Proactive preparation is key to maintaining wealth and minimising future tax obligations. Regularly review the current tax laws and understand how changes may affect your financial plan.
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Bonus exclusion amount
The bonus exclusion amount is a key consideration when it comes to estate planning and tax strategies. This refers to the amount that individuals can give as gifts during their lifetime without incurring federal gift taxes. The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the federal estate tax exemption, doubling the previous amount of $5.49 million.
As a result of this legislation, the lifetime exemption amount was raised from $5.6 million to $11.18 million per individual, indexed for inflation. For 2024, the exemption amount is $13.61 million per individual or $27.22 million per married couple. This allows for substantial tax-free transfers of assets to heirs during one's lifetime or at death.
However, this increased exemption amount is not permanent and is scheduled to sunset or expire on December 31, 2025, reverting to its pre-TCJA level of $5.6 million per individual, adjusted for inflation from 2017. This adjustment brings the projected exemption amount for 2026 to around $7 million per individual or $12-14 million per married couple.
The bonus exclusion amount, therefore, refers to the difference between the current exemption amount and the projected exemption amount after the sunset of the TCJA provisions. This amounts to $6,610,000, and it represents a valuable opportunity for individuals to maximize their estate planning strategies. By making use of the bonus exclusion amount before the law sunsets, individuals can take advantage of the increased exemption and protect their gifts from future tax liabilities.
It is important to note that gifts made within the bonus exclusion amount will be protected by the anti-clawback rule, which ensures that a decedent's exemption will be based on the greater of what they have previously gifted or the current amount at the time of their death. This provides individuals with the flexibility to make irrevocable gifts during their lifetime without sacrificing their lifestyle or financial security.
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Irrevocable trusts
The current estate tax law is set to sunset on December 31, 2025, with the exemption amount predicted to revert to $5 million, adjusted for inflation. This will result in a significant increase in the number of estates subject to federal estate tax.
In light of this upcoming sunset, individuals may consider setting up an irrevocable trust as part of their estate planning strategies. Irrevocable trusts are a commonly used category of trusts in special needs estate planning. They are designed to move assets from the grantor's control to the beneficiary's. The key characteristic of an irrevocable trust is that its provisions cannot be amended by the grantor, nor can the grantor spend the trust funds for anyone other than the beneficiary unless the trust document specifically allows it. The grantor of an irrevocable trust cannot make large changes, recall the property, or terminate the trust without court intervention. This means that the assets of an irrevocable trust are generally not included in the grantor's taxable estate upon death, and the grantor is relieved of tax liability on the income generated by the assets.
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Congress' role
The current estate tax law is set to sunset on December 31, 2025, unless Congress acts to extend it or make it permanent. The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the federal estate tax exemption to roughly double the previous amount of $5.49 million. This law is scheduled to sunset at the end of 2025, and if no action is taken, the exemption amount will be reduced to an inflation-adjusted $5 million (from 2017).
The role of Congress in this context is crucial. Congress has the power to extend the current estate tax law or make it permanent. Without congressional action, the exemption amount will revert to its pre-TCJA level, adjusted for inflation. This will result in a significant increase in the number of estates subject to federal estate tax and higher tax liability for those already subject to it.
Congressional action on this matter is not guaranteed and depends on various factors, including political considerations and law-making complexities. For example, the former Trump administration supported making the estate tax changes under the TCJA permanent, but this has not been enacted.
The uncertainty surrounding congressional action means that individuals and families must carefully consider their estate planning strategies. It is recommended to implement these strategies before 2025 to maximize the benefits of the current exemption and reduce potential tax liabilities.
In summary, Congress plays a pivotal role in determining the future of the current estate tax law. Their decision to extend or make permanent the TCJA of 2017 will have a significant impact on individuals' and families' estate planning strategies and their potential tax liabilities.
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Frequently asked questions
The current estate tax law is set to sunset on December 31, 2025, unless Congress acts to extend it or make it permanent.
The Tax Cuts and Jobs Act (TCJA) of 2017 substantially increased the federal estate tax exemption to roughly double the previous amount of $5.49 million.
In 2024, the exemption amount is $13.6 million per individual or $27.22 million per married couple.
It is recommended that individuals implement estate planning strategies before 2025 to reduce their taxable estate. This may include setting up an irrevocable trust to protect assets from taxation.
