Current Estate Tax Exemption Amounts Expected to Sunset at the End of 2025

We have all heard the news: absent new legislation, the current estate tax exemption amount which practically doubled in 2018 under the Tax Cuts and Jobs Act (TCJA), will end (or sunset) on 12/31/2025 and the exemption amount is set to be reduced to pre-TCJA levels, adjusted for inflation. While the end of 2025 may seem like a long way off, individuals with significant estates should not hesitate in putting their wealth transfer plans in place; particularly if there is possible estate tax liability, whether now or after the sunset of the TCJA in 2026 and beyond.

To review: the TCJA was signed into law on December 22, 2017. This legislation doubled the 2017 lifetime gift and estate tax exemption amount from $5.49 million to $11.18 million per individual for the 2018 tax year, indexed for inflation. For married couples, that amount increased from $10.98 million to an inflation-adjusted $22.36 million. The current 2024 exemption Is $13.61 million for individuals and $27.22 million for married couples. These provisions of the TCJA are currently scheduled to expire on December 31, 2025, and as of January 1, 2026, the lifetime estate and gift tax exemption is expected to be lowered. Without further legislation, the exemption will revert to $5 million per individual, as adjusted for inflation.

With this in mind, let’s take a look at why you may benefit from transferring your assets out of your estate sooner rather than later.

When purchasing an expensive home or piece of luxury real estate, the down payment can be a matter of managing a significant cash flow event. Buyers and owners may consider cashing out on the equity accumulated in an existing home or selling stock in an investment portfolio. However, liquidating portfolio assets for a down payment may not align with your investment strategy, possibly impacting your longer-term financial goals.

A multi-collateral loan is a unique financing option that leverages eligible assets in an investment portfolio or trust by pledging — not selling — securities to purchase a new home. This type of loan allows the homebuyer to keep their investment portfolio intact and possibly avoid triggering a taxable event that was unplanned while enjoying the benefits of a traditional mortgage.

And even if the homebuyer has enough cash on hand to cover the down payment, a multi-collateral loan provides the option to use that cash to pay for home improvements or other personal expenses instead.

Implementing a Proactive Strategy

We all wish we had the crystal ball that would tell us exactly what happens on January 1, 2026. Since we don’t, the best advice is to not “wait and see” what will happen. The sooner a wealth transfer plan is structured that takes advantage of the current exemption amounts in place, the better. Losing the potential to minimize your estate taxes is a far less than ideal consequence of a wait-and-see attitude.

Strategies for Estate Tax Efficiency

There are several strategies that can be used to reduce the value of your taxable estate, which can decrease your estate tax liability. These strategies can be utilized with current lifetime gift and estate tax exemption levels, but they become even more valuable if the basic exclusion amount decreases with the sunset of TCJA provisions in 2026.

• Annual Exclusion Cash gifts. Under current IRS guidelines, in 2024 you can gift up to $18,000 a year ($36,000 for married couples filing jointly) to as many individuals as you want. This is especially attractive if you have a large extended family and are looking for a simple way to transfer considerable wealth to the next generation. These annual cash gifts don’t count against your lifetime exemption and are not taxable. This annual exclusion is also not subject to the TCJA, so absent other legislation, this is a strategy that will be applicable beyond 2025.
• 529 plan accelerated gifts. 529 plans are savings accounts operated by most states and are designed to help families save for college. The annual exclusion amount (currently $18,000) can be used to fund these gifts, and under the current tax law, you can accelerate five years of gifts to fund the educational accounts to children, grandchildren, and any other friends or relatives you choose to help. This means that you can gift a lump sum of up to $90,000 in a single year ($180,000 for a married couple) to each person on your list tax-free. Not only are you able to reduce your taxable estate, but you can also help loved ones save for future qualified educational expenses. The growth within the fund is tax-free and with certain exceptions, there is no tax due when the funds are withdrawn for qualified educational purposes.
• Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust that allows spouses the opportunity to transfer assets into a trust for the benefit of the other spouse during life. The gift to the trust reduces the taxable estate of the spouse making the gift. However, the gift will count against the grantor’s lifetime exemption and a gift tax return will need to be filed.
• Irrevocable life insurance trust (ILIT). Transferring or purchasing life insurance into an irrevocable life insurance trust (ILIT) removes the value of the life insurance from the taxable estate. There is no estate tax owed on the death benefit proceeds at the death of the insured because the death benefit is not part of the decedent’s gross estate and the death benefit proceeds do not constitute taxable income to the beneficiaries. Annual exclusion gifts can be used to fund the annual premiums which further serves to reduce the taxable estate.
• Dynasty trust. Establishing a dynasty trust allows for the transfer of assets across multiple generations. Dynasty trusts facilitate tax efficiency, as they do not incur estate or gift taxes on future trust asset income and appreciation. This ensures beneficiaries receive a larger share of family assets without the burden of additional tax liabilities.²

Time Is of the Essence

It is important to recognize that time is of the essence when it comes to putting an effective plan in place to accommodate whatever may happen when the TCJA sunsets at the end of 2025.

The strategies mentioned above are not an exhaustive list by any means. Your financial, legal, and tax advisors will have specific recommendations tailored to your unique financial situation, and it will take time to put new or updated strategies in place.

Knowing that up front, there’s bound to be a surge of individuals seeking to meet with their teams of professional advisors over the next few years. The more time you allow to work with your advisors, the more options you will have available to arrive at a suitable plan that not only increases the likelihood of controlling your future tax liability but also maintains your asset liquidity leading up to and through retirement.

Commerce Trust Can Help

Even if you think the sunset of TCJA legislation will not affect your estate planning strategy, it’s still important to revisit and adapt your plan based on your family’s personal financial situation to safeguard your legacy. Life events including marriage, divorce, the birth of a child or grandchild, and planning for when your children come of age are all good reasons to revisit your will and estate plan.

When it comes to timing tax strategies, obviously some investments are more tax-efficient than others. The tax laws are numerous and complicated – it’s important to seek advice from your team of professionals to help you determine which vehicles are the most appropriate and advantageous for your financial planning goals.

The Commerce Trust team of private client advisors, alongside your estate planning attorney and tax advisor, can help you explore the variety of options available to you and assist with making educated decisions based on your goals and unique financial situation. We are here to answer your questions and help you make informed decisions. Contact Commerce Trust today.

¹ FORVIS, “Estate Tax Planning with a 2025 Horizon,” https://www.forvis.com/forsights/2022/11/estate-tax-planning-with-a-2025-horizon, November 10, 2022.

² Martin Schamis, CFP^®, Vice President & Head of Wealth Planning, Janney Montgomery Scott, “What to Do Before the Tax Cuts and Jobs Act Provisions Sunset,” Kiplinger Personal Finance, https://www.kiplinger.com/taxes/what-to-do-before-tax-cuts-and-jobs-act-tcja-provisions-sunset, June 13, 2023.

Investments & Wealth Institute^® (the Institute) is the owner of the certification marks “CPWA,” and “Certified Private Wealth Advisor.” Use of CPWA, and/or Certified Private Wealth Advisor signifies that the user has successfully completed the Institute’s initial and ongoing credentialing requirements for investment management professionals.

The opinions and other information in the commentary are provided as of February 28, 2024. This summary is intended to provide general information only, and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.

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