Tax Cuts, and Sunsets, and Bears, Oh My!
Now that we are actually in 2025 there has been a flurry of alerts and articles about the potential sunset of the Tax Cuts and Jobs Act of 2017 (“TCJA”) on December 31, 2025. What is this all about? What can you do to avoid lost opportunities?
What Do I Need to Know?
The TCJA doubled the estate and gift tax exemptions beginning in 2018, with annual increases for inflation. For 2025, this means that individuals are given a lifetime gift and estate tax exemption of $13,990,000, or $27,980,000 per couple. This affords high net worth individuals a significant opportunity to shelter a substantial portion of their wealth from gift and estate taxation.
If nothing is done by Congress, the amount of the estate and gift tax exemption is scheduled to sunset at midnight on December 31, 2025, meaning it would return to the pre-2018 level of $5M per individual, with inflation adjustments making the amount closer to $7M per person. What this can mean to your estate plan is illustrated in the chart below, which, if properly utilized, a family can avoid estate tax entirely by sheltering assets now. If not done, those same assets could be subject to $5,592,000 in estate tax.
| Estate Tax Calculation of Couples | 2025 | 2026 |
|---|---|---|
| Assets Available to Gift (Married Couple) | $25,980,000 | $25,980,000 |
| Combined Estate Tax Exemption | $27,980,000 | $14,000,000 |
| Less Prior Taxable Gifts | ($2,000,000) | ($2,000,000) |
| Unused Estate Tax Exemption | $25,980,000 | $12,000,000 |
| Current Assets Available to Gift | $25,980,000 | $25,980,000 |
| Less Remaining Estate Tax Exemption | $25,980,000 | $12,000,000 |
| Taxable Estate | $0 | $13,980,000 |
| Estate Tax Due (40% rate) | NO TAX DUE | $5,592,000 |
In addition, the benefits derived from maximizing your estate and gift tax exemption through gifts made prior to the sunset, the IRS has confirmed that there will be no repercussions for doing so in the event that the sunset actually occurs. The IRS has indicated that it will not attempt to claw-back any gifts made in excess of the post 2025 estate and gift tax exemption. Those assets will remain exempt from estate and gift taxation, resulting in a savings of 40% of their value.
What Should Clients be Thinking About?
Transfers Between Spouses
Because the exemption amount may be decreasing in 2026, it is important to take a look at how a couple’s assets are titled. Transferring assets amongst spouses is a simple way to maximize the use of each spouse’s exemption. Ensuring that a couple is not in a situation where one spouse’s individual assets exceed the potential 2026 exemption amount, and the other spouse has well below the potential 2026 exemption amount is a bad result. Planning ahead can help avoid the accidental loss of exemption planning opportunities and the payment of unnecessary estate and gift tax.
Making Large Gifts and Adjusting Existing Trust Structures
Individuals should consider making large gifts in 2025, either directly to individuals or in trust to take advantage of the current exemption levels. This could include gifts to children or grandchildren (assuming the individual has sufficient generation-skipping tax exemption remaining or makes qualified gifts paid directly to educational or medical institutions on their behalf), or even to existing trust structures. Either way, gifting can help reduce your estate by transferring out assets up to the exemption amounts.
It also is a good time for clients to look at their existing trust structures to consider additional funding or changes. Adding funds to existing structures can be an inexpensive way to take advantage of the current tax climate. Since the structures are already created and funded, it could be as simple as making an additional gift to your trust.
It is, however, always important to review the trust, its purpose, and its tax structure prior to making an additional gift. For instance, making an additional gift to an incomplete gift trust would not have any net effect on your estate planning as the trust remains is includible in your estate. Likewise, making a gift to a grantor trust may cause an individual to remain responsible for the income tax liability of the trust assets without the benefit of access to the trust assets. Alternatively, a non-grantor, completed gift trust structure is typically a good option for additional gifting.
In reviewing your trusts, you may also determine that it is a good time to make changes to the trust to modernize it or make other structural changes. For instance, you may want to convert your trust to a directed trust to take advantage of an administrative trustee in a favorable trust jurisdiction, while engaging a separate investment professional to direct investments. Determining if it is the right time to convert an incomplete gift trust to a completed gift trust is another prudent option for usage of remaining estate and gift tax exemption.
It may also be a good time to consider exercising outstanding lifetime powers of appointment over existing trusts by appointing assets into a new trust with more modern terms. If modification of a trust is needed, states like Delaware can offer non-judicial options for effecting those updates to an existing trust under the right circumstances. As always, if you choose to modify a trust, it is important to consult with your trustee and local counsel to determine which method will best achieve your family goals while complying with local statutory restrictions.
Creating New Trusts
The potential sunset also encourages the creation and funding of new trusts in 2025, funded with amounts up to the current estate and gift tax exemption. Since the exemption is not subject to claw-back, making the gifts now and fully funding family trusts is a good way to preserve the record high exemption amounts and maximize the benefit to future generations. Clients should consider third party dynastic trusts for children and more remote descendants which can be funded with low basis assets that will grow over time.
Alternatively, conservative clients may wish to create specialized lifetime trusts to benefit his or her spouse during lifetime, known as spousal lifetime access trusts (“SLATs”). SLATs are a wealth transfer strategy designed to reduce estate tax while allowing one spouse to have access to the trust assets. Established as an irrevocable, completed gift trust, the SLAT is typically created by one spouse for the benefit of the other. The beneficiary spouse may receive income and principal using a health, maintenance, education and support standard. Where the trustee is an independent individual or entity the distribution standard can be broader. To maximize the benefits of the SLAT, it should be set up as a dynasty trust by continuing beyond the life of the spouse and naming descendants as beneficiaries after the initial term.
There are a few words of caution which should be considered when setting up a SLAT. SLATs are typically set up as grantor trusts, something that is not terribly concerning if one spouse has the potential to receive distributions. However, if the beneficiary spouse passes away before the donor spouse, the grantor spouse will continue to carry the burden of income tax responsibility for the assets of the trust without the benefit of access to the trust assets.
For this reason, it is a good idea to (1) consider including a mechanism for turning off grantor trust status if needed, (2) consider language allowing for loans to the grantor, or (3) review the law of the trust’s situs with regard to grantor tax reimbursement. Which path is followed should be considered with an eye towards the estate tax implications to determine what approach is best for the client and continues to avoid estate tax inclusion to ensure that the trust assets remain outside of the donor spouse’s estate.
Perhaps the best piece of advice this article can provide is to start the process of reviewing your estate plan early. Work with your attorney to determine what is best for your family. Be aware that there may be a large volume of individuals trying to take advantage of the significant 2025 estate and gift tax exemption levels at the end of the year, making resources low. By reaching out to your team of professionals early, you can ensure that your family can make the most of this opportunity.
Commonwealth Trust Company is pleased to provide this article as a guide. Commonwealth Trust Company is not engaged in the practice of law and is not providing legal advice by the provision of these materials. Commonwealth Trust Company recommends that clients seek the opinion of their attorney regarding the specific legal and tax issues addressed in this article.