The current tax law in the United States includes provisions for estate and gift taxes, which come into play when assets are passed down through inheritance or gifts. Under the Tax Cuts and Jobs Act of 2017, the estate and gift tax exemption were raised significantly, but only temporarily. This law increased the estate and gift tax exemption to $11.18 million per individual, up from the previous level of $5.49 million, with this increase set to expire on December 31, 2025. This means that the current higher estate tax exemption will "sunset" in 2026, after which it will revert back to a lower amount of $5.49 Million adjusted for inflation.
This provision has significant implications for estates and gifts, as it determines the amount of property and assets that can pass to heirs and beneficiaries without being subject to estate and gift taxes. The higher exemption has allowed individuals to transfer more wealth to their heirs and beneficiaries while minimizing tax liability. The implications of this change are significant for individuals and families who may be impacted by estate and gift taxes. While the higher exemption provides a greater opportunity to pass down wealth to future generations without incurring significant tax liabilities, the reversion to a lower exemption may require careful planning and decision-making in order to minimize tax consequences.
It is important to note that estate and gift taxes are levied only on those with significant wealth. The current exemption amount of $12.92 million per individual and $25.84 million per couple means that only a small fraction of the population is subject to these taxes. However, for those with substantial assets, estate and gift taxes can represent a significant financial burden.
In light of the coming changes to the estate and gift tax exemption, it may be wise for affected individuals and families to consult with financial and legal professionals in order to develop strategies for managing their assets and minimizing tax liabilities. These strategies may include making gifts to heirs before the exemption sunsets, creating trusts to hold assets, or other measures designed to minimize the impact of estate and gift taxes.
As the 2025 deadline approaches, it will be critical for those affected to review and update their estate planning documents to ensure that those documents continue to reflect their wishes.