Updated October 19, 2023, at 11:52 AM
The landscape of estate planning is constantly evolving, but there’s one crucial 2025 estate tax “sunset” looming on the horizon that financial professionals should be prepared for.
On January 1, 2026, the federal lifetime gift and estate tax exemption is scheduled to decrease to just $5 million per person*. This is an immense drop compared to the current exemption limit of $12.92 million, which was first raised in 2017 due to the Tax Cuts and Job Act (TCJA).
*The $5 million is indexed for inflation so the actual adjusted amount will be around $7 million.
It’s no surprise that this has sparked concerns, especially among high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals with more sizeable assets to pass down to their heirs.
The good news is that those who act now can take advantage of today’s more favorable exemption amounts. In this “use it or lose it” situation, financial professionals must be proactive in making or revisiting their client’s estate plans to seize this opportunity.
For your clients who need a tax-efficient wealth transfer, here are some estate and gifting strategies for you to explore.
Lifetime gifting is the most straightforward strategy for reducing potential estate tax exposure. By gifting assets to heirs now, your clients can reduce the size of their taxable estate and take advantage of the current exemption thresholds.
Clients can make “annual exclusion” gifts of $17,000 (2023, indexed) per recipient, which removes that amount, plus any growth on that amount, from the client’s estate. However, if gifts larger than the annual exclusion are made during the year, the client begins using their estate tax exemption.
Split gifts allow a married couple to combine their gifts to provide additional gift tax leverage, with an annual exclusion amount of $34,000 per recipient. That also means that the lifetime exemption limit is $25.84 million for married couples and it will adjust for inflation. This amount will adjust in 2024 and 2025. It also doesn’t matter which spouse owns the property as long as they both elect to treat the transfer as a split gift.
It’s important to note that even though no gift tax is owed on split gifts, the Internal Revenue Service still requires the couple to file a gift tax return. The gift tax return, Form 709, must be filed on or before April 15 of the year following the year the gift is made.
Present and Future Interest Gifts
Gifts of present interest qualify for the annual exclusion from the federal gift tax. With a present interest gift, the client has the right to use, enjoy, or possess the property at the present time the gift is made, not at a future date. Anyone can gift an amount up to the annual exclusion each year to any number of people without any gift tax concerns, as long as the gift is considered present interest.
A gift-in interest gift occurs when the recipient’s use, possession, or enjoyment of the property starts at a future date. For example, a trust can be a gift of future interest. In order for a future interest gift to be eligible for the annual exclusion, the IRS requires the trustee to give the beneficiary notice of their right to withdraw the gifted funds for a period of time—usually 30 days—using a “Crummey Notice.”
Once the period for withdrawal has lapsed, the trustee can use the funds to pay premiums or other purposes.
One concern that clients might have with gifting is passing along funds to a child or grandchild who isn’t ready or responsible enough to handle the assets so soon.
If a client is looking for a solution with added asset protection, an irrevocable trust could be the answer. The irrevocable trust holds the gifted assets according to the client’s wishes for the beneficiaries. Usually, it’s the client’s children and grandchildren.
It’s common for a life insurance policy to be an asset for the trust to hold and administer. Life insurance as a trust asset provides two things:
- Income and estate tax-free death benefit proceeds
- Tax-deferred cash value growth inside the policy
The trust will receive the death proceeds in a timely fashion to pay any estate taxes due.
Education and Medical Gifts
Education and medical gifts are another strategy for tax-free giving. Say your clients have a family member with substantial medical bills due to illness or a child/grandchild starting medical school. Unrestricted payments can be made to medical providers or educational institutions to cover these expenses, without triggering a taxable gift or impacting your lifetime or annual gift exemption amount.
This strategic method for transferring assets to beneficiaries can reduce the taxable estate while providing meaningful support to loved ones.
The tax exemption sunset also has implications for charitable donations. The TCJA of 2017 increased the annual deduction limit for cash contributions to public charities from 50% to 60%. But in 2026, this will return to 50%. This means that if you have clients who have considered making a sizeable donation to charity, it may make more sense to do so sooner rather than later.
Clients can establish charitable foundations, donor-advised funds, or set up specialized trust funds such as Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs) now. Through these avenues, your clients support causes they care about and help shrink the amount of their assets subject to taxation when passed on to heirs.
We Can Empower Your Estate Planning Discussions
We know that estate planning for HNW clients is no simple process. But with the clock ticking on current gift tax exemption amounts, there’s no time to waste. If you don’t have the necessary tools in your toolkit, it’s time to partner with a team of experts who do.
Whether you’re looking for trust services, estate planning, or advanced strategies for HNW clients, we have resources available to help you find the solutions your clients are looking for.
We’ve developed a complete end-to-end trust and estate administration platform for FIG financial professionals to empower your estate planning discussions. This proprietary technology includes everything from essential estate planning to drafting documents and corporate and successor trust matters.
If you’d like to explore all the available services for trust, estate planning, or advanced strategies, schedule a time to connect with us!