Introduction: The Closing Window of Opportunity
If you've built wealth throughout your lifetime, 2025 represents a critical turning point in estate planning. We're approaching a significant deadline that could impact how much of your hard-earned assets ultimately pass to your loved ones.
As an attorney with nearly thirty years of experience helping families preserve their wealth, I've guided clients through numerous tax law changes. However, the scheduled "sunset" of the current estate tax exemption on January 1, 2026, represents one of the most significant shifts in recent history.
This article will explain what's changing, why it matters, and what steps you should consider taking in 2025 to protect your family's financial future.
Understanding the 2026 Sunset: What's Changing?
The Current Estate Tax Landscape
In 2025, the federal estate and gift tax exemption stands at $13.99 million per person ($27.98 million for married couples). This means you can transfer up to this amount during your lifetime or at death without incurring federal estate or gift taxes.
Any amount above this threshold is subject to a 40% federal estate tax – one of the highest tax rates in our system.
The Coming Reduction
The Tax Cuts and Jobs Act of 2017 temporarily doubled the estate tax exemption, but this increase is scheduled to "sunset" (expire) after December 31, 2025.
Starting January 1, 2026, the exemption is projected to drop to approximately $5-6 million per person (with inflation adjustments) – less than half of the current amount.
What This Means For Your Estate
For individuals and couples with estates valued above the post-sunset exemption amount, this change could significantly increase potential estate tax liability.
Consider this example:
Robert and Linda have a combined estate worth $20 million. If they do nothing and both pass away after 2025 when the exemption has decreased to approximately $12 million for both of them combined, their estate could face taxes on roughly $8 million. At a 40% estate tax rate, that's a potential tax bill of $3.2 million.
Why 2025 Is the Year to Act
The "Use It or Lose It" Opportunity
For those with estates likely to exceed the post-2025 exemption amount, this year represents a "use it or lose it" opportunity. Making substantial gifts before the end of 2025 allows you to lock in the current higher exemption amounts.
The IRS has confirmed there will be no "clawback" if you use the higher exemption before it sunsets. This means gifts made now that use the current higher exemption will not be retroactively taxed if the exemption decreases as scheduled.
Strategies to Consider Before the Sunset
1. Strategic Lifetime Gifting
Using some or all of your lifetime exemption through gifts in 2025 can effectively remove assets and their future appreciation from your taxable estate. This strategy works particularly well for assets likely to grow significantly in value.
Continuing our earlier example:
Instead of doing nothing, Robert and Linda decide to gift $8 million to an irrevocable trust for their children and grandchildren in 2025. This uses the "extra" exemption amount that would otherwise disappear in 2026. When they eventually pass away, only the remaining $12 million is in their estate, which would be covered by their remaining exemption (assuming the exemption stays at approximately $6 million per person after inflation adjustments).
2. Specialized Trust Structures
Certain trust structures can be particularly valuable in this pre-sunset period:
Spousal Lifetime Access Trusts (SLATs): These allow you to use your exemption while still providing your spouse with potential access to the assets if needed.
Intentionally Defective Grantor Trusts (IDGTs): These can provide income tax benefits while removing assets from your estate.
Generation-Skipping Trusts: For those interested in multigenerational planning, the generation-skipping transfer tax exemption is also scheduled to decrease in 2026.
3. Family Business Strategies
For business owners, 2025 offers a unique opportunity to transfer business interests at the current higher exemption levels:
- Gifting non-voting interests
- Family limited partnerships or LLCs
- Sale to intentionally defective grantor trusts
- Preferred equity recapitalizations
Who Should Be Concerned About the 2026 Sunset?
While not everyone needs to worry about the exemption decrease, these groups should be particularly attentive:
1. Individuals with Estates Over $5 Million
If your individual net worth exceeds $5 million, you may have exposure to estate taxes after the sunset.
2. Married Couples with Combined Estates Over $10 Million
Married couples with combined assets exceeding $10 million may face estate tax exposure after 2025.
3. Owners of Growing Businesses
Even if your current net worth is below these thresholds, owners of growing businesses should consider the future value of their business when planning.
4. Real Estate Investors
Significant real estate holdings that are likely to appreciate could push your estate over the post-sunset exemption amount.
5. Those with Substantial Retirement Assets
Large IRAs and other retirement accounts, while not subject to gift tax during life, count toward your taxable estate.
Key Considerations Before Acting
While the 2026 sunset creates urgency, careful planning remains essential:
1. Maintain Financial Security
Never gift assets you might need for your own financial security. Your planning should ensure you retain sufficient resources for your lifetime needs.
2. Consider Asset Basis
As discussed in my previous article, gifting appreciated assets transfers your cost basis to the recipient. In some cases, it may be more tax-efficient to retain highly appreciated assets to receive a step-up in basis at death.
3. Asset Protection Concerns
Once gifted, assets generally cannot be reclaimed. Ensure any gifting strategy includes appropriate provisions for protecting assets from potential creditors or divorce.
4. Long-Term Care Planning
Remember that gifts made within 60 months of applying for Medicaid can trigger ineligibility periods. If long-term care may be needed within five years, consult with an elder law attorney before making substantial gifts.
Balancing Tax Planning with Personal Goals
While the tax implications of the 2026 sunset are significant, your estate plan should always reflect your personal values and goals:
Family Harmony and Communication
Major gifting decisions can impact family dynamics. Clear communication about your intentions can help prevent misunderstandings or perceived inequities.
Control and Flexibility
Different gifting strategies offer varying levels of control. Trusts can provide continued influence over how assets are used, while direct gifts relinquish control.
Legacy and Values
Consider how your gifting aligns with the values and legacy you wish to leave. Some clients prefer to include charitable components or incentive provisions that encourage certain behaviors or achievements.
Case Study: Maximizing the 2025 Opportunity
To illustrate a comprehensive approach to the 2026 sunset, consider this case study:
Michael and Jennifer, both 72, have an estate valued at $22 million, including their home, investment accounts, and Michael's interest in a family business. Their main concern is the reduction in estate tax exemption coming in 2026.
Working with their estate planning team, they implement a multi-faceted strategy:
- They establish a Spousal Lifetime Access Trust (SLAT), funding it with $8 million of their combined exemption amount that would otherwise be lost after 2025.
- They include Michael's business interests in the gift to take advantage of potential valuation discounts, effectively transferring more economic value than the nominal gift amount.
- They structure the trust to provide Jennifer with access to funds if needed, maintaining financial security.
- They retain their home and sufficient assets for retirement security.
- They continue making annual exclusion gifts ($19,000 per recipient in 2025) to further reduce their estate.
By using the "extra" exemption before it disappears, they potentially save over $3 million in estate taxes while maintaining their lifestyle and financial security.
Taking Action: Your 2025 Planning Checklist
With the 2026 sunset approaching, consider these steps:
- Schedule an estate plan review to assess the potential impact of the reduced exemption on your situation
- Quantify your potential estate tax exposure under both current and post-sunset exemption amounts
- Identify assets suitable for gifting that align with your financial security needs and personal goals
- Explore trust structures that might provide tax benefits while addressing your control and access concerns
- Coordinate with your financial and tax advisors to ensure a comprehensive approach
- Implement changes with sufficient time before the end-of-year deadline
Conclusion: Don't Let This Opportunity Pass
The scheduled sunset of the current estate tax exemption creates a once-in-a-generation planning opportunity for families with significant assets. While tax laws can always change, the current law clearly establishes that the exemption will decrease dramatically in 2026.
For those affected, proactive planning in 2025 could save millions in potential estate taxes while accomplishing important personal and family goals. However, these strategies require careful consideration and professional guidance.
How We Can Help
If you're concerned about how the 2026 sunset might impact your estate plan, we're here to help. With offices in both Minnesota and Florida, our team has nearly three decades of experience helping clients navigate complex estate planning challenges.
Call us at our Florida office at 941-909-4644 or our Minnetonka, MN office at 763-420-5087 to schedule a consultation. Alternatively, fill out the contact form on our website, and a member of our team will reach out to schedule your consultation.
Don't let this critical planning window close without exploring how you can protect your family's financial future.
If you would like to discover more,
If you would like to discover more, click here to read our Complete Guide to Gifting 2025 Edition
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