2025 is quickly approaching, bringing substantial changes that may affect your estate tax situation—with the critical exemption scheduled to be cut after 2025. Now is the time to review your estate plan and ensure wealth stays in the family. The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the federal estate tax exemption and was adjusted for inflation. This is the amount you can gift or leave to your loved ones at your death without incurring a gift or estate tax liability. Any portion of the exemption used during lifetime reduces the total exemption amount available at death for estate tax purposes. Today, in 2024, the federal estate tax threshold is at $13.6m for individuals, which means $27.22 for married couples. This law profoundly affected wealthy families, allowing them to pass along gifts tax-free to their beneficiaries. While this law and the current exemption may be continued or modified, it would require Congress to pass the new legislation.
The countdown has begun for the potential sunset of this generous exemption by the end of 2025. Adjusting for inflation, the Congressional Budget Office estimates the new exemption amount will be $6.4 million in 2026.1 There are solid arguments for and against the changes in legislation. Whether the current exemption amount remains or is reduced to roughly $6.4 million, valuable insights from professional advisors can prepare you for either scenario. What is not taxable today might be taxable tomorrow.
The federal estate tax was first enacted in 1916 to generate revenue for the government. Over the years, various changes in exemption limits and rates have occurred.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) gradually increased the estate tax exemption and reduced the tax rate until it reached zero in 2010.2 However, unless further legislative action was taken, the estate tax for deaths in 2011 was set to return to the 2001 amounts.3 In 2011, the estate tax exemption was reinstated at $5.0 million.4
In 2017, the TCJA doubled the estate tax exemption from $5.49 million to nearly $11 million to stimulate economic growth and create jobs.5 The exemption continues to adjust for inflation, offering individuals an unprecedented opportunity to pass on substantial wealth free from federal estate tax.
A sunset provision was embedded within the TCJA to limit how long the higher estate tax exemption could continue. Without legislative intervention, it will be cut in half to $5 million adjusted for inflation in 2026, creating a potential estate planning crisis for people with considerable estates on December 31, 2025. Adjusting for inflation, the Congressional Budget Office estimates the exemption amount will be $6.4 million in 2026.6
Maintaining or increasing the already high estate tax exemption amount benefits wealthier families and others. It can also be seen as maintaining the status quo. Of course, under this current law, most people do not have this wealth and will not be subject to federal estate taxes.
A higher estate tax exemption was expected to foster economic growth and capital investment by allowing wealthier individuals and families to reinvest in businesses and job creation.7 Yet the federal government relies on estate tax revenue to fund various programs and wants to maintain this lucrative revenue source. Without the estate tax, other revenue sources would have to foot the bill for these programs, potentially resulting in cuts to benefits and services.
The TCJA was part of a short-term tax cut package. Lawmakers had to make room in the budget for the tax cuts introduced by the legislation.8 They did this by temporarily increasing the estate tax exemption.
Reverting to a lower exemption amount is believed to generate more revenue by increasing the number of people who pay the tax and increasing estate tax exposure to those with net wealth above the current exemption amount. Estate tax revenues are projected to rise sharply after 2025 when the exemption amount is scheduled to drop. From 2021 to 2031, the combined estate and gift tax revenues are projected to total $372 billion.9
With the strong possibility of significant changes to the estate and gift tax exemptions, as we move into 2024, it is crucial to review estate planning goals and strategies. We recommend that clients come in and have their estate plans reviewed for this impending change sooner rather than later. If you need assistance with reviewing your plans, call the attorneys at Altman & Associates at 301-468-3220 or through the website at altmanassociates.net.
