As we approach 2025, taxpayers have one year left before the expiration or “sunsetting” of the current lifetime gift and estate tax exemption on December 31, 2025. This shift could have major implications for families hoping to transfer wealth to the next generation in a tax-efficient manner. While the recent election may favor an extension of the high lifetime exemption, there are no guarantees – so proactive planning is recommended.
For those families wanting to beat the expiration date and optimize their estate planning, now is the time to take advantage of the historically high lifetime exemption. While there is no one-size-fits-all solution, creating a customized estate plan to safeguard your family’s wealth is essential.
What Is Changing for Lifetime Exemption?
The lifetime exemption is the amount individuals can give to others, either through gifting or their estate, without paying federal estate or gift taxes. Currently under the Tax Cuts and Jobs Act (TCJA) of 2017, this exemption is at a historical high of $13.61 million per individual (2024) with a slight increase for inflation to $13.99 million (2025). As current law stands, on January 1, 2026, this exemption will revert back $5 million – with adjustments for inflation to around $7 million. Things to consider:
- Reduced lifetime exemption amount: The historically high exemption amount was only temporary under the TCJA. In 2026, it will revert to pre-TCJA levels to an estimated $5 million (indexed for inflation to around $7 million) per individual.
- Impact on estate planning: Individuals who pass away or make large gifts after 2025 will be shielding much less from federal and gift taxes than they have been in recent years. Next year’s expiration date makes it more beneficial for individuals to use the higher exemption before it decreases.
- Estate tax increase: Starting in 2026, if your estate exceeds the lower exemption, the excess will be taxed at the federal estate tax rate of 40%.
These implications make planning and executing wealth transfer strategies for families with significant wealth crucial in order to save a substantial amount in taxes.
How to Approach the Exemption Sunset: “Form then Fund”
There is still time to act before the TCJA provisions expire – and assuming legislation is not passed to extend or make permanent the current lifetime exemption amounts. It’s important to take proactive steps in estate planning to help reduce estate tax liabilities and preserve more wealth for years to come. Our recommended approach to navigating the exemption sunset is “Form then Fund.” This strategy offers flexibility while preparing you to make a strategic move at the ideal moment. Here’s how it works:
1. Evaluate Trust Options Right for Your Family
The type of trust you choose depends on your family’s unique needs, goals, and assets. Different types of trusts come with their own advantages, and understanding them can help maximize tax benefits and ensure your assets go to your desired beneficiaries.
Common Trust Types:
- Irrevocable Trusts: Offer a strong shield from estate taxes and are excellent for asset protection. Once assets are transferred into an irrevocable trust, they’re generally removed from your taxable estate. Specific Examples include Spousal Lifetime Access Trusts and Grantor Trusts.
- Grantor Retained Annuity Trusts (GRATs): GRATs are a popular vehicle for families with appreciating assets, as they allow you to transfer assets with little to no gift tax while retaining an annuity for a set period.
By evaluating trust options now, you’ll be ready to implement the most tax-efficient solution that aligns with your family’s future goals.
2. Form the Trust Early to Keep Your Options Open
Establishing a trust sooner rather than later gives you the flexibility to act quickly when an opportunity arises. The trust structure will already be in place, so when you’re ready to fund it, you can seamlessly move assets out of your estate to shield them from future tax liabilities.
If a favorable change occurs in the coming years—whether due to market conditions or tax law adjustments—you’ll be able to act accordingly and with confidence that you were prepared.
3. Consult a Valuation Expert to Understand How High-Interest Rates Impact Valuations
Higher interest rates can create a unique window of opportunity for transferring family-owned business assets at a lower tax cost. Here’s how:
- Discounted Valuation: Higher rates may lower the valuation of certain assets, such as a family-owned business. This lower valuation allows you to transfer these assets into a trust while consuming less of your lifetime exemption.
- Informed Decisions: A valuation expert can provide guidance on how interest rates affect your unique assets, enabling you to make a well-informed move that saves on taxes.
Working with a valuation expert can allow you to strategically transfer your business interests or other assets with lower tax consequences due to today’s elevated interest rates.
Protect Your Legacy with Proactive Trust and Estate Planning
The impending sunsetting of the lifetime exemption should be a call to action for families with substantial wealth. Establishing a trust and working closely with valuation and tax professionals will help you make the best decisions for preserving your legacy. At Calvetti Ferguson, we are here to guide you through every step of this process. Our goal is to help you understand which type of trust or specific plan best suits your needs. We listen to you and help determine the planning strategies needed to achieve your goals. By forming and then funding the right trust for your family, you can take proactive steps today to ensure your wealth is passed on effectively and efficiently.
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