As 2025 approaches, there’s one important financial issue that may significantly impact your estate planning: the potential sunset of the current federal estate and gift tax exemption. For individuals and families in New York, this could have a major effect on how much of your wealth is transferred to your heirs and how much could be lost to taxes. At Schwartsman Law Group, we’re here to help you navigate these changes and plan for the future.
What Is the Estate and Gift Tax Exemption?
The federal estate and gift tax exemption is the amount of wealth an individual can pass on to heirs or give away during their lifetime without incurring federal estate or gift taxes. Currently, the exemption is historically high at $13.61 million per individual (or double the amount for married couples) as of 2024. This means most estates are not subject to federal estate taxes under current law.
However, unless Congress takes action, the estate and gift tax exemption will revert to a much lower threshold after December 31, 2025. The exemption is expected to drop to approximately $5 million per individual (adjusted for inflation), significantly reducing the amount that can be transferred tax-free.
What Does the Sunset of the Exemption Mean?
The “sunset” refers to the expiration of the current higher exemption amounts. If this happens, estates valued over the lower exemption threshold (around $5 million per individual) will face a 40% federal estate tax rate on the excess amount. For families with substantial wealth, this could result in millions of dollars in taxes, leaving less for your heirs.
Why You Need to Act Now
With the sunset of the exemption on the horizon, it’s essential to plan ahead. Waiting until 2025 may mean missing out on opportunities to make tax-free gifts or transfers under the current exemption limits. By acting now, you can take advantage of the higher exemption while it’s still in place.
At Schwartsman Law Group, we help clients structure their estate plans to minimize tax liability. Whether you’re considering large gifts, setting up trusts, or revisiting your current estate plan, it’s critical to explore strategies now that could help reduce the impact of the lower exemption in 2026.
What Are Your Options?
There are several strategies to consider before the exemption sunsets. Here are some of the most effective options:
1. Lifetime Gifting: You can make gifts to children, grandchildren, or other loved ones now, using the current high exemption to reduce the size of your estate. This allows you to pass on wealth tax-free before the exemption lowers.
2. Grantor Retained Annuity Trusts (GRATs): A GRAT allows you to transfer assets to your heirs while retaining an annuity for a set period. If the assets appreciate, the growth passes to your beneficiaries free of estate and gift taxes.
3. Irrevocable Trusts: By placing assets in an irrevocable trust, you remove them from your estate, potentially avoiding estate taxes. Irrevocable trusts can also provide creditor protection and control over how assets are distributed to beneficiaries.
4. Spousal Lifetime Access Trust (SLAT): A SLAT allows one spouse to create a trust for the benefit of the other while utilizing the current exemption. This trust can provide financial security to a spouse while removing the assets from the estate for tax purposes.
Real-Life Example
Imagine you’re a couple in New York with a $20 million estate. Under the current exemption, you could pass on $13.61 million (or double that amount) tax-free (if properly structured). However, if the exemption drops to $10 million total in 2026, your heirs could face a 40% tax on the remaining $10 million—resulting in a $4 million tax bill. By acting now, you can reduce or eliminate that tax hit.
What Should You Do Now?
Estate planning is not just for the ultra-wealthy—anyone with substantial assets should consider how the estate and gift tax exemption could impact their legacy. Schwartsman Law Group can help you:
- Analyze your current estate and financial situation
- Develop strategies to minimize your tax exposure
- Implement estate planning solutions like lifetime gifting, trusts, or charitable planning
The estate and gift tax exemption sunset is a significant event that could have major implications for your estate. The window to take advantage of the current high exemption is closing, but with proper planning, you can protect your wealth and ensure more of it passes to your loved ones.
At Schwartsman Law Group, we specialize in estate planning strategies that safeguard your assets and minimize tax liabilities. Our experienced attorneys are here to help you make the most of the current exemption before it sunsets. Contact us today to schedule a consultation and start preparing for your future.
