Estate and Gift Tax Changes for 2025: What You Need to Know

As we enter 2025, estate planning strategies are more important than ever, particularly in light of changes to federal estate and gift tax exemptions. These updates provide unique opportunities to protect your wealth and reduce future tax burdens, but they also come with deadlines and potential pitfalls to consider. Here’s a detailed breakdown of what’s new and what it means for your estate plan.

Updated Federal Estate and Gift Tax Exemption

For 2025, the federal estate and gift tax exemption has increased to $13.99 million per individual, up from $13.61 million in 2024. For married couples, this means a combined exemption of $27.98 million. This exemption amount represents the total value of assets you can transfer during your lifetime or at death without incurring federal estate or gift taxes.

Why This Matters:
This increase allows you to transfer even more wealth tax-free. However, this higher exemption is scheduled to sunset on December 31, 2025, reverting to approximately $7 million per individual (adjusted for inflation) in 2026. If your estate exceeds the lower exemption amount, you could face significant estate tax liability unless you act now to lock in today’s higher limits.

Increased Annual Gift Tax Exclusion

The annual gift tax exclusion has also risen for 2025. You can now gift up to $19,000 per recipient without impacting your lifetime exemption. For married couples, this doubles to $38,000 per recipient.

Example:
If you have three children and five grandchildren, you and your spouse can gift up to $304,000 in 2025 without dipping into your lifetime exemption. This is a simple and tax-efficient way to reduce your taxable estate while helping loved ones achieve financial goals.

Planning Opportunities Before 2026

The temporary increase in exemptions creates a narrow window of opportunity to transfer significant wealth without triggering federal estate or gift taxes. Strategies to consider include:

1. Lifetime Gifting:
   Use your lifetime exemption to transfer assets now, such as cash, real estate, or business interests. Gifting during life not only reduces your taxable estate but also allows you to watch your loved ones benefit from your generosity.

2. Irrevocable Trusts:
   Trusts, such as Spousal Lifetime Access Trusts (SLATs) or Grantor Retained Annuity Trusts (GRATs), can help lock in today’s higher exemptions while maintaining flexibility and control over your assets.

3. Business Succession Planning:
   If you own a business, consider transferring ownership to the next generation using your exemption. This ensures a smoother transition while minimizing tax burdens.

What Happens After 2025?

Unless Congress takes action, the current exemption amounts will revert to pre-2018 levels at the start of 2026. Estates valued above the reduced exemption threshold could face a federal estate tax rate of up to 40%. Planning now allows you to maximize current exemptions and prepare for potential changes under a new administration, which could bring further modifications to tax laws.

Act Now to Protect Your Wealth

The changes in estate and gift tax exemptions for 2025 create both opportunities and challenges. A proactive approach can help you secure your legacy while minimizing taxes. Contact us today to review your estate plan and develop strategies tailored to your needs before the sunset provisions take effect.