As we look toward 2025, changes to gift and estate tax laws are on the horizon, and these changes could have significant financial implications for estate planning. The current federal estate and gift tax exemptions are at their highest levels, but this will not last forever. Understanding what is expected to change in 2025 can help individuals and families plan effectively for the future.
Current Gift & Estate Tax Rules
As of 2024, the federal estate and gift tax exemption is $13.61 million per individual and $27.22 million for married couples. This means individuals can transfer up to these amounts tax-free during their lifetime or upon death. The annual gift tax exclusion is also set at $18,000 per recipient for 2024, allowing individuals to gift this amount to any number of recipients without impacting their lifetime exemption. Only estates exceeding these exemption amounts are subject to a federal estate tax rate of 40%.
However, these high exemption limits are temporary and were introduced by the 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire at the end of 2025. Without new legislation, the exemption will revert to around $5 million per person (adjusted for inflation) beginning in 2026.
What’s Changing in 2025?
The reduction in the federal estate and gift tax exemption scheduled for January 1, 2026 is one of the most significant changes. This could have profound effects on individuals with larger estates. Many who were not previously affected by the estate tax may now face liabilities due to the lower exemption limits.
- Reduction in Exemption Amounts
The estate and gift tax exemption will drop from $13.61 million to approximately $5 million per individual starting in 2026, after adjusting for inflation. For married couples, the combined exemption will decrease accordingly, significantly lowering the amount that can be transferred tax-free. - Increased Risk of Estate Taxation With the reduced exemption, more estates will become subject to federal estate taxes. Families with accumulated wealth, including real estate, investments, and business interests, could face steep tax bills if their estate values exceed the new thresholds.
- Estate Planning Adjustments Given the changes, estate planning strategies such as irrevocable trusts, gifting, and charitable donations will become even more important. These tools can help reduce the size of a taxable estate and ensure your assets are passed on efficiently.
Gift Tax Considerations for 2025
While the lifetime exemption is decreasing, the annual gift tax exclusion is expected to continue rising with inflation. This exclusion allows individuals to make smaller gifts without affecting their overall exemption. However, for larger gifts, the reduced lifetime exemption may have a significant impact after 2025. It’s advisable to make large gifts before the exemption is reduced to take advantage of the current, higher limits.
What You Should Do to Prepare
- Review Your Estate Plan Now: With the exemption set to decrease, it’s important to review your current estate plan to ensure it aligns with your financial goals. Working with an experienced estate planning attorney, such as our attorneys at Grissom Law Firm, we can help guide you through these upcoming changes and make any necessary adjustments.
- Consider Gifting Before 2025 Ends: In the absence of a legislative change and if you have a large estate, consider making gifts now while the higher exemption is in place. Gifting can help reduce the size of your estate and lower potential tax liabilities in the future.
- Plan for State Estate Taxes: Don’t forget to account for state-level estate or inheritance taxes. Many states impose their own estate taxes, often with much lower exemption limits than the federal government. If you live in a state with these taxes, additional planning may be necessary to minimize their impact.
Final Thoughts
The changes to gift and estate tax laws set for 2025 and beyond may dramatically alter how individuals plan for wealth transfer. To protect your assets and take full advantage of current laws, it’s necessary to review and possibly update your estate plan now. By staying proactive, you can ensure your legacy is preserved and your loved ones are protected from unnecessary tax burdens.
For more details or personalized advice, contact our experienced estate planning attorneys today.
Disclaimer
This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog site you understand that there is no attorney client relationship between you and Grissom Law, LLC.