Estate and gift tax exemption thresholds could be cut in half starting on December 31, 2025, leading to substantial increases in tax liability for some estates. The good news: high-net-worth individuals and family businesses affected by the sunset still have plenty of time to prepare.
In 2017, the Tax Cuts & Jobs Act (TCJA) increased the basic exclusion amount (BEA) from $5 to $10 million for decedents dying, gifts made, and generation-skipping transfers before 2026. The TCJA includes a sunset provision reverting the estate and gift tax exemption to its pre-2018 level after December 31, 2025, unless Congress acts to extend or modify it before then.
Sunsetting the lifetime exemption amount could significantly impact high-net-worth individuals, business owners, and families who want to preserve and pass on their wealth or company to their beneficiaries. Business owners and individuals with taxable estates above $7 million per individual, or $14 million per married couple, may face up to a 40% estate or gift tax liability if they fail to plan ahead. This could increase overall transfer taxes by millions of dollars for some families—and that’s before factoring in state taxes.
Oregon and Washington are two of just over a dozen states that have their own estate taxes. Oregon residents may be subject to estate taxes of up to 16% on assets in excess of $1 million per individual, and Washington residents up to 20% on assets in excess of $2.193 million per individual. High-net-worth individuals may hit these thresholds quickly if they own a home or business.
Six steps to take advantage of the increased BEA before it sunsets
Engaging in early discussions and careful planning with professionals is imperative to protecting your family’s or business’s assets. Your legacy planning team can help you explore opportunities to use the increased BEA under this “use it or lose it” rule. To prepare for the work that’s ahead, familiarize yourself with these six steps for taking advantage of the sunsetting estate and gift tax exemption.
1. Evaluate your personal financial situation and goals
Your first step is determining eligibility—if and how lower BEA thresholds could affect you, your family, and your business in 2026 and beyond. Work with a financial advisor to gather and analyze the following information.
Start by assessing your personal financial requirements now and into the future. You’ll need to know how much you have, how much you’ll need to have going forward, and what you are comfortable giving away or giving up access to. Also, consider the impact that a potential gift or transfer will have on your family or business’s cash flow.
Next, examine your net worth, cash flow, and anticipated net worth over time. Determine how much your estate is likely to appreciate between now and the end of your life, and consider what 40% tax liability looks like 10, 20, or 30 years down the road. Based on these figures, you’ll have a good sense of how much you can afford to transfer and whether it makes sense to do so relative to your personal financial security requirements.
Keep in mind that any gifts you make now can grow tax-free outside of your estate. For instance, if you transfer $5 million to your children today and it grows to $30 million at your passing, the $25 million of asset appreciation is not subject to estate tax.
All this information will help your legacy planning team guide you on the most effective strategy for your financial situation and goals.
2. Give yourself adequate time to assemble a strong team
If you’ve determined that the estate and gift tax exemption sunset is something you or your family business should take advantage of, don’t wait until 2025 to start the planning process. A gift or transfer typically involves many people, including estate planning CPAs and attorneys, exit planners, appraisers, and financial advisors. Giving yourself at least 6-12 months to complete the process helps ensure you can get the job done while working around these professionals’ busy schedules.
3. Explore strategies
By transferring assets and their appreciation out of your estate before the exemption amount decreases, you can potentially save millions of dollars in estate and gift taxes and maximize the preservation of assets for your heirs.
Your legacy planning team can help you explore various strategies for taking advantage of exemption amounts and reducing current and future estate taxes. At Perkins & Co, we have specialized tools that help us analyze and illustrate what different techniques would look like for you. These techniques may include:
- Forming a family limited partnership (FLP) or limited liability company (LLC) to hold the assets and provide for valuation discounting, centralized management, and asset protection.
- Using trusts to make lifetime gifts. In this case, we would consider strategies such as:
- Selling assets to a defective grantor trust (IDGT) to transfer the asset’s appreciation out of the estate while retaining an income stream for a predetermined timeframe.
- Funding a spousal lifetime asset trust (SLAT) to transfer appreciation while retaining access to income and principal for a spouse.
- Establishing a grantor-retained annuity trust (GRAT) to transfer assets to an irrevocable trust for the heirs while retaining an annuity payment for a fixed term for the grantor.
- Making payments directly to medical providers or educational organizations, as these are not treated as gifts that use up the exemption.
4. Get granular and think about the bigger picture
Selecting a strategy—or even a combination of strategies—is often more complex than picking from a menu of options. For one, each approach has different variations to help you make the strategy work for your unique situation. Then, there are often additional layers to consider.
For example, depending on the size of your estate and family goals, adding generation-skipping transfer tax (GSTT) provisions could magnify the effectiveness of these strategies and preserve assets for multiple generations.
Living in a community property state like California or Washington may also require you to add advanced steps to your elected strategy.
Finally, there’s fine print you’ll need to understand for each approach. Pay special attention to trust terms, for example, as these are permanent, and you won’t have an opportunity to go back and amend them later on.
Each strategy has advantages, disadvantages, risks, and costs, which may not be suitable for every situation. It is advisable to seek professional guidance from experienced estate planning attorneys and CPAs, business transition planners, and financial advisors before making any decisions or taking any actions.
5. Perform a cost-benefit analysis
Once your team helps you determine the appropriate strategy for your situation, compare the amount it will cost you to execute that strategy to the amount of inheritance tax you will save. Determine how much you’d need to give away in order to benefit from the estate and gift tax exemption. To ensure you’re not paying for a solution to something that’s not yet a problem, always return to what’s driving your actions—Are you protecting your family or pursuing a tax reduction?—and use this information to guide your decision-making.
6. Satisfy IRS requirements
Once your legacy planning team and attorney have helped you architect the optimal strategy for your financial situation, you’ll add another person to your team—an appraiser. It is essential to have assets formally valued by a qualified appraiser to satisfy IRS requirements for gift and estate tax return purposes.
A qualified appraisal must be filed with the gift or estate tax return to document the fair market value with adequate disclosure to start the 3-year statute of limitations. The valuation of a business interest may include factors such as a key person, related party transactions, and discounts for lack of marketability, control, or voting rights.
A valuation can be an essential part of gift and estate planning and should also be used as part of an exit plan to build and maximize value through a third-party sale.
Could the sunset be extended?
While the estate and gift tax exemption is set to sunset at the end of 2025, there is a chance Congress will move to amend the exemption, extend it past 2025, or make it permanent. Following November’s election, politicians—along with our next president—will be doing a delicate dance to avoid tax increases while also avoiding increases in the budget deficit. If Congress does nothing, the exemption amount will revert to its pre-TCJA level.
Regardless of what happens in Washington, planning to make decisions for your family and legacy is always a good idea. Outside of the estate and gift tax exemption, there are additional benefits that come with setting up a trust, such as protecting your assets from a divorce in the family and putting parameters in place to ensure your wealth is transitioned according to your priorities.
Stay tuned for additional Perkins content on what to expect from the valuation process as you pursue strategies for taking advantage of the estate and gift tax exemption before year-end 2025. In the meantime, reach out to your Perkins & Co legacy planning team with any questions you have about the sunset and its potential impact on your estate.