THE TCJA'S HIGHER EXEMPTIONS SUNSET: A GUIDE FOR THE IMPACT ON ESTATE GIFT TAXES The Tax Cuts and Jobs Act (TCJA,) which significantly changed estate, gift and generation-skipping transfer (GST) taxes, was enacted in 2017 with a December 31, 2025, "sunset" date. As we edge closer to the "sunset" date, individuals who understand the implications can optimize their tax exemptions.
Paying taxes on asset transfers has been around for a while. The Internal Revenue Code established a flat 40% on transfers made during life (the gift tax), transfers after death (the estate tax), or transfers to someone two or more generations below the donor's (the generation-skipping transfer tax). Before the TCJA, the Internal Revenue Code allowed tax-free gifting on amounts up to $5 million, known as the unified credit or exemption amount.
As Kiplinger discussed in an article, the TCJA's modifications to estate, gift, and GST taxes were straightforward. It doubled the exemption amount for these taxes from $5 million (indexed for inflation) to $10 million and further adjusted to $13.61 million in 2024 after indexing. This adjustment allows married couples to collectively shield up to $27.22 million from these taxes. This exemption will decrease by 50% on the first day of 2026, unless legislative action is taken to extend or modify the current provisions.
Reduced exemption amounts in 2026 could have significant financial implications for taxpayers. Based on the 40% tax rate applied to the difference between the current and projected exemption amounts, individuals will lose approximately $2.644 million in tax-exempt transfers. This potential loss underscores the importance of proactive planning to utilize the higher exemptions before they decrease.
An irrevocable trust, such as a spousal lifetime access trust (SLAT), is one effective strategy to leverage the current exemption. A SLAT allows the donor to provide for their spouse (and potentially descendants), while utilizing their exemption amount. This trust structure excludes assets and appreciation from the donor's estate, mitigating future estate tax liabilities.
Create an estate plan that leverages the current estate and gift tax provisions for substantial tax savings and the financial security of future generations. Consider strategies like the SLAT and work with an estate planning attorney to make informed decisions that align with their financial goals and family needs.
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THE TCJA'S HIGHER EXEMPTIONS SUNSET: A GUIDE FOR THE IMPACT ON ESTATE GIFT TAXES
Reference: Kiplinger, The Clock Is Ticking on Tax Cuts: Act Now to Avoid Missing Out
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