The Tax Cuts and Jobs Act (TCJA), passed by Congress in 2017, introduced a number of sweeping changes to tax laws, one of the most significant being the substantial increase in the lifetime gift and estate tax exemption. Currently, this exemption allows individuals to transfer significant amounts of wealth—either during their lifetime or at death—without facing federal estate or gift taxes. However, this expanded exemption is set to expire on December 31, 2025, unless Congress takes action to extend or revise it.
For individuals and families with substantial assets, the potential reversion of the exemption to pre-2018 levels presents a limited-time opportunity to preserve more wealth for future generations by making gifts before the TCJA’s expiration. In this article, we will explore the current exemption limits, the potential changes after 2025, and why making gifts before the expiration of the TCJA is a smart strategy for minimizing future tax liabilities.
Understanding the Current Gift and Estate Tax Exemption Under the TCJA
One of the major provisions of the TCJA was the doubling of the federal lifetime gift and estate tax exemption. Before the act was signed into law, the exemption was $5.49 million per person in 2017. Under the TCJA, that amount increased to $11.18 million in 2018, and it has continued to rise with inflation each year. As of 2024, the lifetime exemption is $13.61 million per individual, or $27.22 million for a married couple.
This means that individuals can transfer up to $13.61 million during their lifetime, or through their estate at death, without being subject to the 40% federal estate and gift tax. Any amounts gifted or transferred that exceed the exemption are taxed at this rate, which can significantly reduce the amount of wealth passed down to heirs.
The Sunset of the TCJA: What Happens After 2025?
Unless Congress intervenes, the expanded gift and estate tax exemption will revert to its pre-TCJA levels on January 1, 2026. While the exact exemption amount will depend on inflation adjustments, experts estimate it will fall back to approximately $6 million per individual, or $12 million for a married couple. This would be roughly half of the current exemption.
The result is a compressed window of opportunity for high-net-worth individuals and families to take advantage of the higher exemption. After 2025, transfers exceeding the reduced exemption threshold will once again be subject to the 40% tax, which could create a significant tax liability for estates and reduce the amount of wealth passed on to future generations.
Why Acting Now Can Preserve Wealth
The impending expiration of the TCJA’s gift and estate tax provisions presents a unique planning opportunity. Here are several reasons why making substantial gifts before 2025 can help preserve your wealth and maximize your gift and estate tax exemption.
1. Locking in the Higher Exemption
The most compelling reason to act now is to lock in the current high exemption. By making gifts before 2025, you can take full advantage of the $12.92 million exemption, effectively transferring up to that amount tax-free.
The IRS has clarified through regulations that individuals who make large gifts under the TCJA’s higher exemption will not face a “clawback” when the exemption amount decreases in 2026. This means that if you gift $12 million in 2024, for example, and the exemption drops to $6 million in 2026, the IRS will not retroactively apply the lower exemption to your prior gifts. In other words, by gifting now, you can secure the full benefit of today’s higher exemption even after it shrinks.
2. Minimizing Future Estate Tax Liabilities
For those with estates exceeding the reduced exemption expected after 2025, failing to make gifts before the deadline could result in substantial tax liabilities in the future. If your estate surpasses the lower exemption, any excess will be taxed at the federal estate tax rate of 40%. This could result in millions of dollars in taxes that could have been avoided by gifting during the window of opportunity under the TCJA.
For example, consider an individual with a $20 million estate who passes away in 2026. If the exemption has fallen back to $6 million, $14 million of their estate would be subject to the 40% estate tax, resulting in a tax bill of $5.6 million. Had that individual gifted $12 million before 2026, they could have reduced their taxable estate to just $8 million, avoiding $4.8 million in taxes.
3. Leveraging Wealth Transfer Strategies
Making gifts before the expiration of the TCJA also allows for the use of advanced wealth transfer strategies to further minimize tax liability and maximize the transfer of assets. High-net-worth individuals can use vehicles such as:
- Irrevocable Trusts: Transferring assets to irrevocable trusts allows you to remove those assets from your taxable estate while still controlling how they are distributed to beneficiaries. Trusts can also protect assets from creditors and ensure they are managed in accordance with your wishes.
- Grantor Retained Annuity Trusts (GRATs): GRATs allow individuals to transfer appreciating assets to beneficiaries while minimizing gift tax liability. By locking in the value of the assets at the time of transfer, any future appreciation occurs outside the grantor’s estate.
- Family Limited Partnerships (FLPs): FLPs provide a mechanism for transferring ownership of a family business or other assets while retaining control. They can also provide valuation discounts, further reducing the taxable value of gifts.
Each of these strategies can be employed to maximize the use of the current exemption and reduce the size of your taxable estate.
4. Taking Advantage of Annual Exclusion Gifts
In addition to the lifetime exemption, individuals can also make annual exclusion gifts of up to $17,000 per recipient in 2023 ($34,000 for married couples). These gifts do not count against your lifetime exemption, allowing you to transfer additional wealth tax-free each year. By combining annual exclusion gifts with larger lifetime transfers, you can further reduce your taxable estate.
Conclusion: Act Before the Window Closes
The expiration of the TCJA’s expanded gift and estate tax exemption on December 31, 2025, represents a significant shift in the tax landscape. For high-net-worth individuals, this presents both a challenge and an opportunity. Acting now to make substantial gifts can help preserve wealth, reduce future estate tax liabilities, and lock in the benefits of today’s generous exemption limits.
By working with our estate planning professionals, you can develop a gifting strategy that maximizes your use of the lifetime exemption before it is cut in half. Don’t wait until 2025 rolls around as many estate planners will be overwhelmed with implementing gift strategies, many of which will require careful and custom tailored panning to the to avoid or minimize the triggering of property tax reassessment under Proposition 19. The time to act is now—before the window of opportunity closes, and with it, the chance to protect your wealth for your kids, heirs or future generations.