What Happens to Federal Estate Tax in 2025? Unless new legislation occurs, the Tax Cuts and Jobs Act of 2017 will expire, and the lifetime estate and gift tax exemption for individuals and married couples will drop significantly. With the IRS making clear it’s a “use it or lose it” proposition, a recent article titled “A Crucial Window For Estate Planning” from Financial Advisor provides some options to consider.
Lifetime and Annual Giving. These are basic strategies used to transfer wealth and minimize tax exposure. Removing assets from the estate, especially if they would have been gifted after passing, shields them from any possible future appreciation. The exclusion right now is $18,000 per individual and $36,000 for married couples. These numbers are not likely to be seen again.
Another way to reduce the estate is to pay for a family member or loved one’s medical or academic costs. Be certain to write checks directly to the school or the health care provider. If money is gifted to the person themselves, there may be gift tax consequences.
Trusts are used to minimize taxes and distribute assets with great precision. One trust used for appreciating assets, like a family business or real estate property, is the Intentionally Defective Grantor Trust (IDGT). When a trust is designated “intentionally defective,” the grantor can divide the income tax responsibility from the estate and gift tax liabilities. The assets in the trust may grow tax-free because the grantor is paying the income taxes, which reduces the estate size.
This is typically used when business or real estate assets are transferred in exchange for a promissory note, allowing the asset to grow outside the estate. The Trust repays the note with income from the business.
The IDGT has what is known as “swap power.” The person who created the trust can swap assets of equivalent value between their personal estate and the trust. These are complex estate planning instruments, and an experienced estate planning attorney must handle these strategies to achieve the desired goals.
What Happens to Federal Estate Tax in 2025? Many other changes will occur when the TCJA expires. Speak with your estate planning attorney to prepare for them.
Reference: Financial Advisor (July 12, 2024) “A Crucial Window For Estate Planning”
