Current Estate and Gift Tax Landscape

The Tax Cuts and Jobs Act of 2017 (TCJA) enacted significant changes in the federal estate and gift tax laws commencing in 2018. One of the most notable changes was that the TCJA doubled the federal lifetime gift tax exemption amount, from $5.49 million in 2017 to $11.18 million in 2018 per individual. Under the TCJA, this higher exemption amount was then indexed for inflation in each subsequent each year.

In 2024, each individual has a combined federal estate and gift tax exemption of $13,610,000 (less any prior gifts made during life). This means that for federal tax purposes, in 2024 an individual can make lifetime gifts totaling up to $13,610,000 to anyone or transfer at death up to $13,610,000 (less any gifts made during life) to anyone without triggering the imposition of the federal estate and/or gift taxes. Married couples have a combined exemption, allowing them to make gifts during their lifetimes totaling $27,220,000. Any gifts during life or transfers at death with a value in excess of the available exemption amount will be subject to a federal estate and/or gift tax at a rate of 40%.

In January 2025, this federal lifetime exemption amount will increase for inflation one more time. However, the historically high lifetime exemption amount under the TCJA is scheduled to expire, or “sunset”, on December 31, 2025, unless Congress acts to extend the TCJA or make the exemption permanent. Although at the time of enactment of the TCJA, this sunset seemed to be many years away, it is now just around the corner.

If no action is taken by Congress ahead of the sunset at the end of 2025, then under the current law, on January 1, 2026, the federal lifetime exemption amount will be reduced to approximately one-half of the current value. Based on the rate of inflation, we expect the exemption as of January 2026 to be approximately $7,000,000 per person.

Anti-Clawback

Following the enactment of the TCJA, there was concern over what would happen if an individual fully used his or her federal lifetime exemption amount before the end of 2025 and later passed away when the exemption amount was much lower after the sunset. Generally, the estate tax is calculated by first adding back taxable gifts to a deceased person’s gross estate and then reducing that sum by the appliable exemption amount at death. However, on November 26, 2019, the IRS published what is generally referred to as the anti-clawback regulations, confirming that in most cases, the IRS would not impose additional estate tax on gifts made when the exemption at death was lower than the exemption at the time of the completed gift.

What’s Next?

With the sunset of the increased gift and estate tax exemption looming at the end of 2025, we encourage clients to consider the opportunity to utilize their available exemptions before the end of next year. While it is always a fool’s errand to try to predict what Congress and the President will do, it is especially difficult with respect to the sunset of the TJCA legislation. First, the higher federal lifetime exemption amount is only one of several significant TJCA provisions scheduled to sunset at the end of 2025. Other major individual tax provisions that are scheduled to sunset include (1) the 37% maximum individual tax rate (set to return to the pre-TCJA rate of 39.6%), (2) the $10,000 limitation on the deductibility of State and Local Taxes, and (3) modifications that lessen the scope of the alternative minimum tax rules. Second, the results of the 2024 elections will directly impact the legislative changes surrounding the sunset of all these provisions, including the current high gift and estate tax exemptions.