The TCJA’s Higher Exemptions Sunset: A Guide for the Impact on Estate and 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.

How the TCJA Impacts Estate Planning

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.

The Implications for Taxpayers

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 $6 million in tax-exempt transfers. This potential loss underscores the importance of proactive planning to utilize the higher exemptions before they decrease.

Strategies to Consider

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.

Key Takeaways

• The TCJA's Sunset: Create or update an estate plan now before the exemption amounts for estate, gift and GST taxes decrease in 2026.
• Impact on Taxpayers: Failure to utilize the current exemption could result in a significant tax liability, with potential losses amounting to over $two million.
• Strategic Planning: Establishing an irrevocable trust, such as a SLAT, can be a savvy move to maximize the current exemptions and protect assets from future taxes.
• Professional Guidance: Work with a tax professional and an attorney to navigate the complexities of estate and gift tax planning effectively.

Conclusion

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.

Reference: Kiplinger, The Clock Is Ticking on Tax Cuts: Act Now to Avoid Missing Out