Understanding Gift and Estate Taxes in the U.S.: The Current Law and Upcoming Changes in 2025

Gift and Estate Taxes: An Overview

Gift and estate taxes are federal taxes imposed on the transfer of assets. The gift tax applies to transfers of money or property made during an individual’s lifetime, while the estate tax applies to transfers of assets upon death. The purpose of these taxes is to prevent large transfers of wealth from escaping taxation.

Gift Tax

The gift tax is applied to any transfer of money or property to another person without receiving something of equal value in return. In 2024, the annual exclusion for gift tax is $18,000 per recipient, meaning you can give up to this amount to any number of people each year without incurring gift tax. Gifts exceeding this amount count against your lifetime exemption.

Estate Tax

The estate tax is levied on the value of a deceased person’s estate before the assets are distributed to their heirs. The value of the estate includes cash, real estate, stocks, and other assets.

The Lifetime Exemption

The lifetime exemption is a critical component of gift and estate tax planning. This exemption allows individuals to transfer a certain amount of assets without incurring federal gift or estate taxes. As of 2024, the lifetime exemption is $13.61 million per individual, meaning a married couple can shield up to $27.22 million from these taxes.

Unified Credit

The lifetime exemption is unified, meaning it applies to both gift and estate taxes. If you make significant gifts during your lifetime that exceed the annual exclusion, those amounts count against your lifetime exemption. For example, if you give $1 million in gifts above the annual exclusion, your remaining lifetime exemption will be reduced by that amount.

Scheduled Changes in 2025

The current lifetime exemption of $13.61 million is historically high due to provisions in the Tax Cuts and Jobs Act (TCJA) of 2017. However, this favorable tax environment is set to change. On January 1, 2026, the lifetime exemption is scheduled to revert to pre-TCJA levels, adjusted for inflation. While the exact exemption amount will depend on inflation rates, it is expected to be approximately $6 million per individual but many currently-pending tax proposals in the Congress take the exemption down as low as $1 million.

Planning Implications

The scheduled reduction in the lifetime exemption has significant implications for estate planning:

1. Accelerating Gifts: Individuals with substantial estates may consider making significant gifts before the exemption decreases in 2026. This strategy allows them to take advantage of the higher exemption amount, potentially reducing their future estate tax liability.
2. Revisiting Estate Plans: Estate plans created under the current law should be revisited to ensure they remain effective after the exemption changes. This might include updating wills, trusts, and other estate planning documents to reflect the new exemption limits.
3. Utilizing Spousal Transfers: Married couples can use strategies like spousal lifetime access trusts (SLATs) to maximize their combined exemption amounts and provide flexibility in their estate planning.

Conclusion

Understanding gift and estate taxes and the upcoming changes to the lifetime exemption is essential for effective estate planning. By taking proactive steps now, you can minimize tax liabilities and ensure a smooth transfer of wealth to your heirs. As the 2026 deadline approaches, consulting with an experienced estate planning attorney or financial advisor is more important than ever to navigate these complex tax laws and make informed decisions. Call us to discuss this important and fleeing opportunity to do planning to save on major taxes for your children and other heirs.