How to Prepare for the Federal Estate Tax Exemption Sunset

The looming federal estate tax exemption sunset in 2025 has cast a shadow of uncertainty over the financial futures of many high-net-worth families. For those who have worked tirelessly to build generational wealth, the prospect of seeing a significant portion of their legacy diminished by taxes is understandably concerning. As the clocks tick toward December 31, 2025, the urgency to act grows with each passing day, and high-net worth families need to take action. 

To help navigate these choppy waters, here are six key strategies for preparing for the estate tax exemption sunset:

1. Maximize lifetime gifting using the current high exemption
2. Implement irrevocable trust structures to shield assets from future taxation
3. Leverage annual gift tax exclusions for systematic wealth transfer
4. Explore advanced techniques such as GRATs, IDGTs, and FLPs
5. Consider life insurance strategies to provide liquidity for estate taxes
6. Integrate charitable giving to reduce taxable estate while leaving a lasting legacy

This article will explore these strategies, offering a roadmap to help protect your hard-earned wealth. Remember, estate planning is a process that has no one-size-fits-all solutions. Given the complexities of tax laws and each family’s unique situation, working with a qualified estate planning consultant for high-net-worth families is crucial. Their experience will help you craft a tax-efficient estate plan that aligns with your family’s values and long-term goals.

Will the federal estate tax exemption sunset in 2025?

As it stands, the federal estate tax exemption is indeed scheduled to sunset on December 31, 2025. This change is part of the Tax Cuts and Jobs Act (TCJA) of 2017, which nearly doubled the lifetime estate and gift tax exemption from its previous levels.

Currently, the estate tax exemption in 2024 stands at an unprecedented $13.61 million per individual and $27.22 million for married couples. However, unless Congress takes action to extend or make these higher exemption amounts permanent, they will revert to pre-TCJA levels in 2026, adjusted for inflation.

While the exact post-sunset exemption amount isn’t set in stone, most projections estimate it will fall somewhere between $6 – 7 million per individual or $12 – 14 million per married couple. This significant reduction would bring many more families into the realm of estate tax liability.

It’s important to note that while changes in legislation are always possible, planning should be based on current law. The IRS has issued an “anti-claw-back” regulation, ensuring that taxpayers who use the higher exemption amounts before the sunset won’t be penalized if the exemption decreases.

6 ways to prepare for the sunset of the federal estate tax exemption

1. Maximize lifetime gifting using the current high exemption

By gifting assets now, you not only utilize the historically high exemption but also remove future appreciation from your estate, potentially saving even more in taxes. This can be especially effective for assets expected to grow substantially before your death. Particularly because, as mentioned, the IRS’s “anti-claw-back” regulation offers assurance that gifts made under the current high exemption won’t be penalized if the exemption decreases in the future. 

For those with estates valued between $14 – 27 million (married) or $7 – 13 million (individual), this strategy can be especially impactful, potentially eliminating future federal inheritance tax liability. 

Remember, any exemption used during your lifetime reduces the amount available at death, so it’s crucial to balance current gifting with your future needs and desires for after-death wealth transfer.

2. Implement irrevocable trust structures

Once funded, irrevocable trust structures remove assets from your taxable estate, allowing you to not only utilize your current exemption but also make sure that future growth occurs outside of your taxable estate. This can be especially powerful for assets expected to appreciate significantly. 

When properly structured, irrevocable trusts can also offer additional benefits such as asset protection from creditors and control over distributions to beneficiaries. However, it’s crucial to carefully consider the irrevocable nature of these trusts and verify that they align with your long-term financial needs and goals.

For married couples, consider using Spousal Lifetime Access Trusts (SLATs), which can provide additional flexibility while still achieving estate tax savings. SLATs allow one spouse to create a trust benefiting the other, effectively removing assets from the estate while still providing potential access to the funds. 

Continue reading: What is estate planning? And do you need a trust if you have a will?

3. Leverage annual gift tax exclusions

For 2024, the annual gift tax limit is $18,000 per recipient, allowing you to give this amount to as many individuals as you wish without impacting your lifetime exemption. Married couples can combine their exclusions, effectively doubling the gift tax limit in 2024 to $36,000 per recipient. 

Consider using these annual exclusions to fund 529 college savings plans, which can grow tax-free for education expenses, or to contribute to irrevocable trusts for minors. Remember, certain gifts, such as direct payments for medical expenses or tuition, are exempt from gift tax entirely and don’t count against your annual or lifetime limits. 

For example, a couple with three children and six grandchildren could transfer up to $324,000 annually without touching their lifetime exemption. These gifts not only help to reduce your taxable estate but also remove future appreciation on the gifted assets from estate tax consideration.

4. Explore advanced techniques such as GRATs, IDGTs, and FLPs

Exploring advanced estate planning solutions such as Grantor Retained Annuity Trusts (GRATs), Intentionally Defective Grantor Trusts (IDGTs), and Family Limited Partnerships (FLPs) can be crucial for high-net-worth individuals looking to maximize wealth transfer beyond the inheritance tax federal exemption. 

These sophisticated techniques allow for significant asset transfer while minimizing gift and estate tax exposure. 

• GRATs, for instance, enable you to transfer appreciation on assets above a specified interest rate to beneficiaries tax-free. 
• IDGTs offer the advantage of removing assets from your estate for estate tax purposes while allowing you to continue paying income taxes on the trust’s earnings, effectively enabling tax-free gifts to beneficiaries. 
• FLPs can provide both estate tax savings and asset protection by allowing you to transfer limited partnership interests to family members at discounted values. 

These strategies become increasingly valuable as we approach the potential reduction of the inheritance tax federal exemption in 2025. However, given their complexity and the potential for IRS scrutiny, it’s best to work with experienced estate planning professionals so that these strategies are executed correctly and align with your overall financial goals.

5. Consider life insurance policies

With exemptions potentially dropping in 2026, a well-structured life insurance policy — often held within an Irrevocable Life Insurance Trust (ILIT) — can offer tax-free proceeds to cover estate tax obligations, helping to prevent forced asset sales. This strategy becomes particularly valuable for estates rich in illiquid assets such as real estate or closely held businesses. 

As you prepare for the federal estate tax exemption sunset, it’s essential to review and update your estate planning documents, including any existing life insurance policies, to make sure that they align with your current needs and the changing tax landscape. 

Remember, life insurance strategies should be carefully integrated with other estate planning solutions to create a comprehensive plan that aims to address both tax efficiency and your family’s long-term financial security.

6. Integrate charitable giving solutions

As we approach the federal estate tax exemption sunset, philanthropy becomes an increasingly attractive option for high-net-worth individuals. Charitable donations can offer immediate income tax deductions while also removing assets from your taxable estate. Consider these charitable giving strategies:

• Establishing a private foundation or donor-advised fund allows you to make tax-deductible contributions now while retaining control over the timing and recipients of your charitable gifts.
• For those over 70½, Qualified Charitable Distributions (QCDs) from IRAs can satisfy Required Minimum Distributions while excluding the amount from taxable income.
• More complex strategies like Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs) can offer income streams for you or your heirs while also benefiting charities.

These approaches not only help mitigate potential estate tax liabilities but also allow you to support causes you’re passionate about, creating a meaningful impact beyond your lifetime.

Wondering how the federal estate tax exemption sunset will affect your estate plans? Let’s talk!

High-earning families should be acutely aware of the federal estate tax exemption sunset, as it could significantly impact their ability to transfer wealth to future generations efficiently.

Given the complexity of estate planning and the potential for substantial tax implications, partnering with financial professionals who can help you navigate these challenges is vital. The advisors at Avidian Wealth Solutions have the experience to help you develop a comprehensive strategy tailored to your unique circumstances, helping to ensure that you’re well-prepared for the upcoming changes.

Whether you’re in Houston, Austin, Sugar Land, or The Woodlands, don’t leave your legacy to chance — schedule a conversation today to start putting plans in place that aim to safeguard your family’s financial future.

More Helpful Articles by Avidian: 

• Preparing Children for Generational Wealth Transfer
• The Pros and Cons of Owning a Private Jet
• Key Considerations for Investing in the Real Estate Sector
• Investing in Texas Ranch Properties: a Long-Term Strategy for High-Net-Worth
• Maximizing the QSBS Exemption

---

Please read important disclosures here