Today’s federal estate and gift tax laws may be remembered as the most generous to wealthy families since the Great Depression. The 2017 Tax Cuts and Jobs Act (TCJA) doubled the federal estate, gift, and generation skipping transfer (GST) tax exemptions. With inflation adjustments, these exemptions increased to $13.61 million per person, or $27.22 million per married couple, in 2024. However, unless Congress and the President act, these exemptions automatically will be cut in half on January 1, 2026, when the increase in exemption provided in the TCJA sunsets.
If you have a net worth (including life insurance benefits and retirement accounts) greater than $7 million individually, or $14 million as a married couple, you may want to revisit your estate plan and consider transferring assets to your heirs before any potential changes in estate and gift tax laws take effect. Prudent estate planning for wealthy families takes time and requires consideration of much more than estate and gift tax consequences, so be sure to engage with your estate planning and business advisers sooner rather than later.
How a Gift Today Can Save Tax at Your Death
The most basic planning strategy used by wealthy families to reduce estate taxes is a gift in trust for the benefit of the donor’s children and grandchildren. A gift to a properly structured and administered irrevocable trust removes the donated property from the donor’s taxable estate. Such a gift must be reported on a gift tax return filed by the donor for the year of the gift, and will use a portion of the donor’s lifetime gift tax exemption (and possibly, the donor’s generation skipping transfer tax exemption). Because the federal gift and estate tax exemptions are “unified,” the gift also reduces the donor’s estate tax exemption that will be available to shelter transfers from tax upon the donor’s death.
As a result of the unified structure of the gift and estate tax exemptions, a lifetime gift does not necessarily provide any immediate tax benefit for the donor because the value of the property removed from the donor’s estate is equal to the amount of gift and estate tax exemption applied to the gift. However, if the property transferred by the donor grows in value between the time of the gift and the time of the donor’s death, the post-gift appreciation remains outside of the donor’s estate, and thus escapes estate tax at the donor’s death. This strategy – a lifetime gift of an appreciating asset to a trust for the donor’s heirs – is sometimes referred to as an estate “freezing” transaction, because the value of the transferred property is “frozen” for estate and gift tax purposes at the time of the gift.
For individuals or married couples with a net worth exceeding the estate tax exemption, a gift of any size to an irrevocable trust can result in a reduction in estate taxes upon death, as long as the property transferred to the trust grows in value over time.
Larger Gifts Can Capture “Extra” Exemption Before It Expires
While a gift of any size may be beneficial as an “estate freezing” strategy, families who want to capture the increased gift and estate tax exemptions before their sunset in 2026 will need to make gifts with a value greater than half the current exemption amount. Why is this the case? Because federal law tracks lifetime gifts and remaining gift and estate tax exemptions on a cumulative basis. So, a taxpayer who makes a gift of, say, $1 million in 2024 will have used $1 million of her current and future estate and gift tax exemption, regardless of whether the exemption remains at the current level or is reduced by 50% in 2026. By contrast, if the exemption is in fact reduced by 50% to roughly $7 million (after inflation adjustments) in 2026, a taxpayer who made a gift of $10 million in 2024 will have used all of the $7 million available in 2026 and an additional $3 million of exemption available under pre-2026 law.
A visual analogy may help to illustrate this concept. Think of the gift and estate tax exemptions as a bucket that is currently twice as tall as it would normally be. As you make gifts that use your lifetime gift tax exemption, you fill the bucket with donated assets. When the TCJA exemption increases sunset, the height of the bucket will be reduced by half. The only way to benefit from the increased TCJA exemption amounts is to make a gift that will fill the bucket more than halfway before the TCJA exemption sunsets in 2026.
Opportunities and Challenges
The structure of the federal estate and gift tax system has always provided opportunities for tax savings for wealthy families who plan well and plan early. The increased exemptions provided by the TCJA enhance those opportunities – at least until the end of next year. As a result, attorneys, accountants, and others involved in the estate planning process are likely to be very busy assisting clients who are eager to capture the value of the TCJA exemptions before their sunset in 2026.
If you would like to review your estate plan and discuss whether you should consider making gifts prior to January 1, 2026, we encourage you to contact your estate planning attorney as soon as possible.
