The Federal Wealth Transfer Tax Exemption and its Sunset Provision

The federal wealth transfer tax system, which includes estate, gift, and generation-skipping transfer (GST) taxes, has undergone significant changes in the past decade. The Tax Cuts and Jobs Act of 2017 significantly increased the federal wealth transfer tax exemption amount and indexed that increase for inflation. As of 2024, the federal estate, gift, and GST tax exemption stands at $13.61 million per individual. This means that a person can transfer up to this amount during their lifetime or at death without incurring federal wealth transfer taxes. For married couples, the combined exemption is effectively $27.22 million.

However, the current high exemption amount is set to "sunset" or expire at the end of 2025. Without further legislative action, on January 1, 2026, the exemption will revert to its pre-2018 level of $5 million, adjusted for inflation (estimated to be around $6.8 million in 2026).

Until this sunset, there is a significant planning opportunity for high-net-worth individuals to make large gifts and utilize the higher exemption amount before it potentially decreases. Some basic planning strategies include making large gifts now to utilize the higher exemption amount or establishing irrevocable trusts and funding them with substantial assets in order to utilize the higher exemption and remove those assets from your taxable estate.

Of course, there can be significant disadvantages to making gifts now, such as the donor’s loss of control over the gifted assets, loss of access to the gifted assets, and loss of the step-up in tax basis to fair market value that would otherwise be available at the donor’s death. In some circumstances, these disadvantages could entirely negate the advantages of making transfers now. Each person must work with an experienced attorney to weigh the options and determine what makes the most sense for them and for their family.

Remember, that even if you are taking steps to avoid or reduce the federal wealth transfer taxes, you will likely still have state taxes to pay (which often have significantly lower exemption amounts). Also, it is important to remember that the tax laws can change. Congress could act to extend the current exemption or make other modifications before 2026, which might impact the effect of your planning.

The bottom line is that you should regularly review and update your estate plan to adapt to the changing laws and circumstances. It is important to work with an experienced estate planning attorney to maximize your tax benefits and achieve your goals.

If you would like a consultation on this or any legal matter, do not hesitate to contact Scaringi Law at 717-657-7770.