Preparing for Estate and Gift Tax Exemption Sunset (2024)

ALTHOUGH IT WENT RELATIVELY UNNOTICED AT THE TIME, one provision of the landmark Tax Cuts and Jobs Act of 2017 has had a profound impact on many people who may have a taxable estate in the future. This law more than doubled the maximum that families can give their beneficiaries — either during their lifetime or as part of their estate — without incurring federal gift or estate taxes. In addition, the amount is indexed for inflation. As a result, for 2024, a single taxpayer can claim a federal estate and lifetime gift tax exemption of $13.61 million. Couples making joint gifts can double that amount.

This exemption has helped affluent families pass along substantial gifts tax-free. But the time for taking advantage of this benefit may be drawing short — it remains in effect only through the end of 2025. After that, the amounts are scheduled to return to 2017 levels in 2026. Adjusted for inflation, the single taxpayer limit would drop back to an estimated $7 million.

It's possible the current exemption will be extended or modified, notes Kevin Hindman, a wealth strategies executive at Bank of America Private Bank who also works with Merrill clients. “But right now, this is the law,” he says. “To make any changes, Congress would have to pass new legislation, and that may be difficult.”

That’s why you should probably start planning now to take full advantage of today’s higher exemption. “The closer we get to the sunset, the greater the urgency becomes,” says Timothy Herbst, a wealth strategies executive for Bank of America Private Bank. As you discuss your estate and gifting plans with your advisor, here’s what to keep in mind.

Who may be affected by the return to previous exemption amounts

Just about anyone with a potentially taxable estate could see an impact, notes Herbst. Remember that your taxable estate includes not only your investment portfolio, but also your home and other real estate, any stake you may have in a closely held business and, in some cases, your life insurance policy. “There has been considerable appreciation in real estate as well as many businesses in recent years,” Herbst says. “You need to take that into account when calculating the size of your taxable estate.”

Before committing to a specific amount to give, Hindman suggests you first take stock of your assets, income and living expenses, then project those numbers out for your expected lifetime. Any excess remaining after your projected lifetime expenses is what you have available to pass on now. “You need to have 100% confidence that you'll be totally fine from a financial standpoint after having made the gifts,” he says.

How to leverage current gifting limits

The simplest strategy is a direct gift of cash, securities or other assets with a value up to the lifetime exemption. Keep in mind that you have other avenues for tax-advantaged gifting beyond that. You can, for instance, use the annual gift tax exclusion — $18,000 in 2024, $36,000 for couples — to make yearly gifts to as many people as you like.

“There are also what are sometimes called ‘free gifts,’” Herbst says. Those let you make a payment directly to a school to cover a child’s or grandchild’s tuition, or to a medical provider for health expenses, without incurring taxes. Neither “free” nor annual exclusion gifts count toward your lifetime gifting limit, and these rules are not slated to change in 2026.

How trusts can help you protect your legacy

Of course, you can transfer cash directly to children or other family members, but be aware of the potential drawbacks. “It’s the equivalent of writing a check for $13 million to a child, or to be divided among your children,” Hindman says. “That act can have life-changing implications, and not all of them may be positive.” One alternative you might consider is to create an irrevocable trust, permitting withdrawals based upon a schedule and conditions that you determine. This allows you to maintain a level of control over how and when the beneficiaries will receive distributions. “That’s a crucial part of the planning process — deciding what provisions will be built into the trust,” Hindman says.

For married couples, another type of trust that can be used is the spousal lifetime access trust, or SLAT. It’s designed to give married couples significant control and flexibility. One spouse can put the full lifetime exemption amount in a SLAT that’s set up to benefit the other spouse (and, after that, children and grandchildren, if desired). The second spouse can fund another SLAT to benefit the first, though the two trusts cannot be set up at the same time and cannot be identical. “If they’re constructed properly, SLATs can remove assets from a couple’s taxable estates while still giving them the benefit of the distributions,” Hindman says.

What assets may offer tax advantages if you’re gifting

When choosing which assets to gift or place in a trust, you may want to favor ones you expect will keep growing. When you gift assets using your lifetime gift tax exemption, the assets are transferred at today’s value, and there’s no tax to the beneficiaries. You can gift these assets using your lifetime gift tax exemption amount. “They are not only getting the benefits of the value of the asset today, but also all the appreciation it may experience in future years,” Hindman says.

He adds, “That’s true whether that’s an interest in a business that may be sold or go public, a high-growth portfolio or another kind of appreciating asset. In some cases, the future value might be considerably more than it’s worth today.” In addition, the IRS may allow you to discount the current value of an illiquid share in a business or a fractional interest in real estate, enabling you to gift an even larger amount.

Another consideration when you’re deciding whether to gift an asset now or leave it in your estate is future income taxes. This is especially relevant because with the sunsetting of the 2017 tax cuts in 2026, personal income tax rates also return to their previous levels.

On inherited assets, your beneficiaries may get what’s known as a step-up in basis to the market value at your death. With lifetime gifts, on the other hand, the beneficiary must use your cost basis. “If you gift assets with a low basis now, that could mean a big income tax hit on the next generation when the assets are sold,” Herbst says.

Instead, he says, you might consider giving them assets with a higher tax basis, while giving the assets with a lower tax basis directly to charity or using them to fund a charitable trust. This can also be a useful strategy if you’ve used up your gift tax exemption and are looking for other ways to reduce the size of your future estate. (For more on the tax advantages of donating appreciated assets, see “Making charitable giving more tax-efficient.”)

Why it’s important to start planning now

Two years may seem like plenty of time to adjust your estate plans. But unless you’re simply making large cash gifts, developing a new plan will involve detailed conversations with your advisors and estate planning attorney and careful drafting of documents, especially if a trust is involved.

“You need to think about how much you feel comfortable gifting and the structures that make the most sense,” Hindman says. “Remember, these trusts are irrevocable, so it’s especially important not to rush.” You will need experienced estate planning attorneys to craft the trusts, and as the clock ticks down toward 2026, those professionals are likely to be in great demand, Hindman notes.

The IRS has said that anyone who takes advantage of the current higher exemption won’t be penalized if the amount drops in 2026. “That gives us some comfort about doing something now,” Herbst says. “But these are complex issues, and determining what works best for a particular family will mean weighing many factors, from tax considerations to the ultimate goals of their gifting strategy.”

Whether your existing estate plan was created recently or some years ago, he adds, having a conversation with your advisor now can help you make better-educated decisions about your family’s future.

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