The TCJA Sunset: Impacts on Estate and Gift Tax Planning

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, brought significant changes to tax laws, including estate and gift taxes. However, many provisions of the TCJA are set to sunset (expire) after December 31, 2025. This sunset will have profound implications for individuals and families, particularly those involved in estate and gift tax planning. Here's an overview of what the sunset means and how it may affect estate and gift taxes.

Current Estate and Gift Tax Provisions under the TCJA

Estate tax is a federal tax imposed on the transfer of assets from deceased individuals to their heirs or beneficiaries. Gift tax applies to lifetime transfers of assets from one person to another, excluding certain gifts under the annual gift exclusion limit (currently set at $18,000 per recipient as of 2024 for each individual).

The lifetime gift and estate tax exemption allows individuals to transfer a certain amount of wealth, either during their lifetime or at death, without incurring federal taxes. The TCJA doubled the exemptions, raising them from approximately $5.5 million per individual in 2017 to $11.8 million per individual (adjusted for inflation) in 2018, making it easier for families to transfer wealth without a large tax burden. Currently, the exemption is $13.61 million per individual (as of 2024), which amounts to $27.22 million per married couple.

In addition to raising the exemption, the TCJA also maintained a 40% tax rate on transfers above the exemption amount and continued to allow the use of "portability," which permits the unused portion of one spouse's exemption to transfer to the surviving spouse upon their death.

What Happens When the TCJA Sunsets?

Once the TCJA sunsets at the end of 2025, the estate and gift tax exemption will revert to pre-2018 levels. Unless Congress acts to extend or revise the law, the exemption is expected to return to an estimated $7 million per individual, or around $14 million per couple, adjusted for inflation.

Returning to the lower exemption amount means that estates worth more than the forecasted $7 million will be subject to federal estate taxes, at a rate of 40% on the amount above the threshold, less any lifetime gifts that didn't fall under the annual exclusion amount. This reduction will dramatically change estate planning strategies for high-net-worth individuals. Families that have not fully utilized the higher exemption for wealth transfers will have significantly less room for future tax-free gifts or estate transfers. High-net-worth individuals who haven’t acted yet may face substantial estate tax burdens.

One important clarification from the IRS has been the anti-clawback regulation. This rule ensures that gifts made under the current high exemption amounts won’t be subject to taxes if the exemption decreases. So, any gifts made before 2026 using the current higher exemption will be "grandfathered in" and will not be taxed retroactively.

Conclusion

The expiration of the TCJA would result in major changes to estate and gift tax laws. In the next edition of The Advocate, we will outline strategies to assist individuals and families in preparing for potential changes in the tax environment after 2025.