Federal Estate Tax Exemption and Wealth Transfer: Part I
By: Marie Feindt
The federal estate tax exemption, a critical component of wealth transfer planning in the United States, is set to undergo significant changes in the coming years. Under the Tax Cuts and Jobs Act (TCJA) enacted in 2017, the exemption amount in 2025 is $13.99M per person with portability between spouses which allows shielding $27.98M from federal estate taxation. During the Trump administration, the exemption may remain in place and not “sunset” for several more years.
The Current Landscape of the Federal Estate Tax
The estate tax, often referred to as the "death tax," is a levy on the transfer of assets from deceased individuals to their heirs. It applies only to estates exceeding the exemption threshold, with rates ranging up to 40%.
Implications of the Sunset
If the federal estate tax exemption reverts to pre-TCJA levels, millions of additional estates could become taxable, significantly increasing the tax burden on families and potentially forcing the liquidation of assets to pay the tax. This change would have far-reaching implications:
Wealth Transfer Strategies: Families may need to revise their estate plans to account for the lower exemption, exploring tools such as irrevocable trusts, charitable donations, and lifetime gifting strategies.
Impact on Family-Owned Businesses and Farms: These entities often face challenges in liquidity, and a reduced exemption could lead to the forced sale of assets to meet estate tax obligations.
Increased Administrative Complexity: Estate planning professionals would need to navigate more frequent tax filings and audits as more estates become subject to the tax.
The Trump Administration’s Proposal
During the Trump administration, there were discussions about extending the enhanced estate tax exemption beyond 2025. Advocates for an extension cited several key arguments:
Economic Growth: They contended that a higher exemption supports economic stability by allowing businesses to remain in family hands, fostering job retention and long-term investment.
Taxpayer Relief: Extending the exemption would prevent a sudden tax increase for families who have structured their estate plans based on current law.
Predictability in Planning: A longer horizon for the enhanced exemption would provide individuals and families with greater certainty in their financial planning.
Proposals to make the higher exemption permanent or extend it for an additional five years gained traction among policymakers and industry groups. However, such measures faced opposition from those who viewed the estate tax as an essential tool for addressing wealth inequality and generating federal revenue.
Planning Strategies in Light of Uncertainty
Given the uncertainty surrounding the future of the estate tax exemption, individuals and families should take proactive steps to prepare:
Lifetime Gifting: The current high exemption presents an opportunity to transfer wealth to heirs tax-free through lifetime gifts. Utilizing this exemption before the sunset could lock in significant tax savings.
Trust Structures: Establishing irrevocable trusts, such as grantor retained annuity trusts (GRATs) or spousal lifetime access trusts (SLATs), can help shield assets from future estate taxes.
Charitable Giving: Donating to charitable organizations not only reduces taxable estates but also supports philanthropic goals.
Review and Update Plans: Regularly reviewing estate plans with legal and financial professionals ensures alignment with changing laws and personal circumstances.