Plan Ahead: Federal Estate Tax Breaks Could End Soon

The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the U.S. tax code, including substantial modifications to estate taxes. One of the critical aspects of the TCJA is its temporary nature, with many provisions set to expire, or "sunset," at the end of 2025. As we approach this sunset date, it's essential to understand how these changes will impact estate taxes and what individuals should consider in their estate planning.

Understanding the Tax Cuts and Jobs Act

The TCJA, signed into law by President Donald Trump, aimed to overhaul the tax code to stimulate economic growth. One of its key components was the increase in the federal estate tax exemption. Before the TCJA, the exemption amount was $5.49 million per individual. The TCJA doubled this exemption to $11.18 million per individual for 2018, with adjustments for inflation in subsequent years. For 2024, the exemption stands at $13.61 million per individual or $27.22 million for a married couple.

This substantial increase meant that fewer estates were subject to federal estate taxes, allowing individuals to transfer more wealth to their heirs without incurring tax liabilities. However, this provision, like many others in the TCJA, is temporary and is set to revert to pre-2018 levels after 2025.

Barring an act of Congress, the TCJA sunsets at the end of 2025 and the estate tax exemption will revert to approximately $5.49 million per individual, adjusted for inflation. This reversion has several implications for estate planning:

1. Increased Tax Liability for Estates

The most immediate impact will be a significant increase in the number of estates subject to federal estate taxes. Adjusting for inflation, the exemption for 2026 is expected to drop to around $7 million for individuals ($14 million per couple). An estate valued at $10 million could face estate taxes due on roughly $3 million. The lofty 40% estate tax rate would create an estate tax of roughly $1.2 million in this example.

2. Accelerated Estate Planning

With the impending reduction in the exemption, many individuals may accelerate their estate planning strategies. This could include making larger gifts before the end of 2025 to take advantage of the higher exemption while they still can. Under current tax laws, the IRS has clarified that individuals who use the higher exemption before it decreases will not be penalized when the exemption reverts to lower levels. This gifting strategy allows individuals to transfer wealth to their heirs during their lifetime, reducing the taxable estate.

3. Increased Use of Trusts and Other Estate Planning Tools

To mitigate the impact of the lower exemption, estate planners are likely to see increased use of trusts and other sophisticated estate planning tools. Trusts can help manage and protect assets, ensuring they are distributed according to the individual's wishes while minimizing estate taxes. charitable remainder trusts (CRTs), grantor retained annuity trusts (GRATs), and irrevocable life insurance trusts (ILITs) are examples of tools that can be employed to reduce taxable estates.

Conclusion

The sunset of the Tax Cuts and Jobs Act in 2025 will bring significant changes to the estate tax landscape. The reduction in the estate tax exemption will increase the number of estates subject to federal taxes and necessitate careful planning to minimize tax liabilities.

Tax laws can always be changed through Congress, however, with 2026 around the corner now is the time to review your estate plan with your attorney and financial advisor to make sure you plan for what’s ahead.

Best,

CRA Investment Committee

Matt Reynolds CPA, CFP®

Tom Reynolds, CPA

Robert T. Martin, CFA, CFP®

Gordon Shearer Jr., CFP®

Jeff Hilliard, CFP®, CRPC®

Joe McCaffrey, CFP®

Phillip Tompkins, CFP®

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