Will the Estate Tax Exemption Change in 2025?

 Posted on July 19, 2024 in Estate Planning

For people and families with substantial wealth, estate taxes may be a significant concern. The requirement to pay taxes on the assets a person owned can significantly reduce the amount that may be passed on to beneficiaries. Fortunately, federal law provides an exemption that ensures that a certain amount of assets will not be subject to the estate tax.

The Tax Cuts and Jobs Act (TCJA) of 2017 increased this exemption, but this change was not permanent, and it is likely to be reduced in the future. An experienced attorney can provide guidance on the best ways to address issues related to estate taxes, including taking steps to reduce the taxable value of an estate to preserve assets for future generations.

Changes to the Estate Tax Exemption

The TCJA substantially increased the estate tax exemption, effectively doubling it from its previous level. Here is a brief overview of the changes:

• Pre-TCJA exemption: Before the TCJA, the estate tax exemption was $5.49 million per person in 2017.

• Post-TCJA exemption: The TCJA raised the exemption to $11.18 million per person for 2018. This amount is adjusted annually for inflation, and it is $13.61 million per person in 2024.

• Reversion to previous exemption levels: The change to the estate tax exemption is scheduled to sunset after December 31, 2025. Unless a new law is passed extending the change, the exemption will return to its pre-TCJA level. It is estimated that the amount of the exemption will be around $7 million per person.

Strategies to Transfer Assets and Minimize Taxes

Given the impending change, people with estates that may exceed the estate tax exemption in 2026 or beyond should consider taking steps to transfer assets to family members or protect them against being subject to the estate tax. Some methods of doing so include:

• Lifetime gifts: The IRS allows people to give assets to others, which can reduce the taxable value of an estate. Gift taxes may apply when giving gifts, but an annual gift tax exclusion applies. In 2024, the exclusion applies when giving gifts of up to $18,000 per person. The estate tax exemption will also apply to lifetime gifts given to others, so it may be beneficial to use the current exemption to give gifts before the exemption is reduced in 2025.

• Irrevocable trusts: Assets transferred to an irrevocable trust are removed from a person’s taxable estate, and the trust can provide for beneficiaries according to that person’s wishes. Some common types of irrevocable trusts include Grantor Retained Annuity Trusts (GRATs) and Irrevocable Life Insurance Trusts (ILITs).

• Spousal Lifetime Access Trusts (SLATs): A person can create a trust for the benefit of their spouse and future generations. Transferring assets up to the current estate tax exemption level into a SLAT can ensure that these assets will be protected from estate taxes. The assets in the trust can be used by a married couple to maintain their standard of living, and any remaining assets can be distributed to other beneficiaries after the death of one or both spouses.

• Charitable giving: Donations to charitable causes or organizations can reduce the size of a taxable estate. By setting up charitable trusts or making direct gifts to charitable organizations, a person or family can enjoy tax benefits.

• Family limited partnerships (FLPs) or Family Limited Liability Companies (FLLCs): Business owners may take steps to transfer ownership of their business or investment assets to family members. Structuring a business to provide family members with ownership percentages can allow assets to be transferred at a discounted value for gift and estate tax purposes. This can ensure that a business owner will be able to maintain control over their business while gradually transferring their assets to their heirs.

Contact Our San Jose, CA Estate Tax Attorney

If you own significant assets, you may want to take proactive steps now to minimize the potential estate taxes that may apply after the law changes in 2025. At John D. Teter Law Offices, our San Jose, CA tax lawyer can help you develop a comprehensive plan that will protect and preserve your assets, providing for the needs of your family in the years to come. Contact us at 408-866-1810 to set up a consultation and learn more about how we can assist you in planning for the future.