The 2024 lifetime federal gift and estate tax exemption is $13,610,000 per person ($27,220,000 for a married couple) (the “Exemption”). The Exemption is indexed annually for inflation and likely will increase to $14,000,000 or more for 2025. Absent congressional intervention, the Exemption roughly will be “cut in half” in 2026. This reduction—often referred to as the “sunset” of the current Exemption—will take effect on January 1, 2026, unless the current law is extended.
Has This Happened Before?
We faced a similar dilemma in 2012: the then $5,250,000 Exemption was scheduled to revert to the prior law’s Exemption of only $1,000,000 under a similar sunset provision. Many clients rushed to take advantage of the higher Exemption by the end of 2012 only to have the Exemption be extended (with annual inflation increases) by legislation signed into law on January 2, 2013 (after the December 31, 2012 sunset).
What Should We Do Now?
The looming halving of the current $13,610,000 Exemption encourages many individuals to consider making large irrevocable transfers to avoid potential future estate tax. Nonetheless, making such a large gift ahead of a scheduled sunset that may not occur is not for everyone. There is no guarantee that the Exemption amount indeed will be reduced. As a result, clients carefully should review the risks and benefits of irrevocable lifetime gifting. The balance of this newsletter will present a few specific transfer tax planning strategies and highlight situations in which it may be the most advantageous to make a gift now, rather than wait.
Gifting Appreciated Assets
Gifting during your lifetime not only “locks in” the use of your Exemption, it also shelters all future appreciation from estate tax on your death. To the extent you make taxable gifts now, you will use some or all of your Exemption. The gift and estate tax rate is a flat 40%; thus, using $10,000,000 in your Exemption now will avoid $4,000,000 of estate tax and increase the amount available for your beneficiaries. In making a substantial gift, it may be most efficient to use cash or high basis assets. When appreciated assets are gifted, the recipients receive a carryover basis for capital gains tax purposes, meaning that they take on the tax basis of the donor. In contrast, property received upon a death comes with a basis equal to the asset’s then fair market value, which often is greater than its historical cost basis.
Can I Give a Portion of My Current Exemption Now?
Yes, but doing so may not have the tax beneficial effect you desire. Assume that you have a 2025 Exemption of $14,000,000 and you give $7,000,000 of assets to your children. If the Exemption is halved in 2026, your remaining Exemption would be zero (the 2026 $7,000,000 “halved” exemption, less the 2025 $7,000,000 gift). In order to capture the benefit of the sunsetting higher 2024-25 Exemption, you would need to give more than $7,000,000 (e.g., $14,000,000 in 2025 to realize the maximum Exemption benefit).
Can I Use My Current Gift Tax Exemption with Strings Attached?
There is an estate planning technique that allows a married couple to take advantage of the current high Exemption and retain enjoyment (to a limited extent) of the gifted assets. This technique—known as a Spousal Lifetime Access Trust or SLAT—is a vehicle that “locks in” all or a portion of the current Exemption while maintaining a measured degree of access to the trust assets. A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse (other beneficiaries typically include family members, most commonly children and grandchildren). The donor spouse uses his or her Exemption to make a tax free gift to the SLAT, and the other spouse is named as the current beneficiary. While the donor spouse gives up his or her right to the property transferred to the SLAT, the beneficiary spouse has access to that same property. There are potential downsides to a SLAT, however, because it is an irrevocable transfer. For example, if there is a divorce, access to SLAT funds by the donor spouse may be cut off, and when the beneficiary spouse dies, access to the funds ceases for the donor spouse. Therefore, a careful financial and tax analysis should be undertaken before a decision to create a SLAT is made.
Generation-Skipping Transfer Tax Planning
The Exemption is not the only exemption scheduled to be halved at the end of 2025. The Generation-Skipping Transfer (“GST”) Tax Exemption also was doubled and will revert to the 2017 level. The GST tax is designed to impose an estate tax on assets passing down at each generational level. Like the gift and estate tax, the GST tax rate is 40%. Absent tax avoidance provided by the gift and estate Exemption and GST Tax Exemption, assets passing from a grandparent to a grandchild upon the former’s lifetime gift or death will be taxed twice: a 40% estate tax and a 40% GST tax on the 60% balance, resulting in an effective tax on the transfer of 64%. This draconian result can be avoided by funding a lifetime “dynasty trust” with the current estate, gift and GST exemption amounts, avoiding all transfer tax for many generations.
Who Should Consider Making Gifts Before 2026?
Anyone who would have a taxable estate after the 2025 reduction (i.e., a taxable net worth above $7,000,000) should assess whether to act ahead of the scheduled halving of the Exemption. For those with estates not much larger than the current Exemption amount of $13,610,000 per person ($27,220,000 for a married couple), it may be difficult to justify giving away the bulk of one’s assets even to a SLAT. It is a much easier call for those clients who would not be adversely impacted because their estates are sufficiently large that a substantial lifetime transfer using their remaining Exemption amount would not cut into their lifestyle and well-being.
Challenges With the Unknown
The end of 2025 is a little more than a year and a half away. It takes time to develop and implement sophisticated estate planning techniques most efficiently and effectively to utilize one’s Exemption. Some transactions may require a qualified appraisal, and we cannot control how quickly financial institutions and advisors can act.
Although the reduction of the Exemption is scheduled for the end of next year, it is not guaranteed to happen. Congressional rules require 60 votes in the Senate if legislation is to increase the federal deficit beyond 10 years; accordingly, contentious legislation often includes the 10-year “sunset provisions” in current law. As we noted earlier, this is not the first time the Exemption has been scheduled to sunset (and it probably won’t be the last). The Exemption has not been reduced over the last four decades. Yet, it is impossible to predict what will happen given our current political landscape.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
About Gunster
Gunster, Florida’s law firm for business, provides full-service legal counsel to leading organizations and individuals from its 13 offices statewide. Established in 1925, the firm has expanded, diversified and evolved, but always with a singular focus: Florida and its clients’ stake in it. A magnet for business-savvy attorneys who embrace collaboration for the greatest advantage of clients, Gunster’s growth has not been at the expense of personalized service but because of it. The firm serves clients from its offices in Boca Raton, Fort Lauderdale, Jacksonville, Miami, Naples, Orlando, Palm Beach, Stuart, Tallahassee, Tampa Bayshore, Tampa Downtown, Vero Beach, and its headquarters in West Palm Beach. With more than 280 attorneys and consultants, and over 290 committed support staff, Gunster is ranked among the National Law Journal’s list of the 500 largest law firms and has been recognized as one of the Top 100 Diverse Law Firms by Law360. More information about its practice areas, offices and insider’s view newsletters is available at www.gunster.com
