Understanding the Sunset of the Estate Tax Exemptions Under the Tax Cuts and Jobs Act

Significant changes were made to the federal estate and gift tax system in 2017 with the enactment of the Tax Cuts and Jobs Act (TCJA). One of the most substantial changes concerned the increase of the lifetime exemption amount from $5.6 million to $11.8 million per individual — adjusted to $13.61 million in 2024 for inflation. The maximum amount married couples can give away this year tax-free is $27.22 million. However, these high estate and gift tax exemptions are only in place until the end of 2025, at which time they will be cut in half. While this might seem like a long way off, putting a plan in place could take longer than you might expect.

What is the Tax Cuts and Jobs Act Sunset Date?

The Tax Cuts and Jobs Act sunset date that was built into the legislation is December 31, 2025. This means that as of January 1, 2026, nearly all of the legislation’s changes to the tax-related provisions will revert to what they were before the TCJA was passed in 2017. While this date is approaching rapidly, it’s crucial to have a plan in place to take advantage of these benefits as soon as possible. Once 2026 arrives, the amount of the exemption will be cut in half unless a change is made to the tax law before then.

What are the Implications of the Sunset of the Estate Tax Exemptions?

When the current exemption is cut in half from $13.61 million, the exemption amount will be about $7 million. This means that if a taxpayer does not use any of their exemption before the sunset date, the cost of not using it could be about $2.644 million in extra taxes paid. For instance, if you subtract $7 million from $13.61 million, the result is $6.61 million. This is the approximate amount of exemption you would lose if you did not use it before the sunset date. The tax imposed on this amount is 40% — or a $2.644 million total loss.

How Can You Avoid the Higher Estate Tax?

While the high estate tax exemption amount has helped affluent families pass substantial gifts tax-free to their beneficiaries, the sunset of the exemption applies to everyone. If you can afford to use a portion of or all of your existing exemption amount prior to January 1, 2026, the amount you use now cannot be taken away from you later. Importantly, there are several ways you can prepare in advance for the upcoming expiration of the estate tax exemption.

Some planning approaches that may be considered to avoid high estate taxes regardless of whether the exclusion amount reverts to pre-TCJA levels can include the following:

• Setting up a spousal lifetime access trust (SLAT) — It may be beneficial for some individuals to transfer their assets into a spousal lifetime access trust (SLAT). This allows married couples to benefit from the current gift tax exclusions while also receiving income distributions by setting up an irrevocable trust.
• Using one spouse’s lifetime exemption — This can allow a spouse to utilize their complete lifetime exemption by gifting assets while preserving the other spouse’s exemption. This ensures that even after the anticipated reduction in the exemption, one of the spouse’s exemptions will still be available.
• Creating irrevocable trusts for children — An irrevocable trust can be created for your children and help ensure you take advantage of the estate tax exemption by removing taxable assets from your estate.
• Establishing a grantor retained annuity trust (GRAT) — GRATs are a type of irrevocable trust that serves the purpose of transferring assets away from the estate of the trust’s grantor while guaranteeing them a steady stream of income. The grantor then becomes eligible to receive a series of annuity payments for a certain number of years. The remaining assets are distributed to a remainder beneficiary.

If you expect to face estate tax liability in 2026, you might benefit from transferring assets out of your estate sooner rather than later. However, it's vital to have a full understanding of your finances in order to make informed decisions regarding your estate plan. A skillful estate planning attorney can best advise you of your options and potential strategies that can be utilized.

Contact an Experienced Trusts and Estates Attorney

If you are considering taking advantage of the high estate tax exemptions, it’s important to put a plan in place as soon as possible. A knowledgeable estate planning attorney can help ensure you meet your goals and satisfy your objectives. The attorneys at White & Bright, LLP have extensive experience assisting individuals and families in California with a wide variety of estate planning matters. Call us at (760) 747-3200 or fill out our online contact us form to schedule a consultation to learn how we can help.