The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the lifetime tax exemption limits for estates when it was enacted. For tax year 2024, the IRS further raised the limit to $13.61 million for an individual and $27.22 million for a married couple.1 However, if Congress does not act to extend this higher exemption limit, it will be sunset at the end of 2025. While the exact amount is currently unknowable, since the inflation rate in 2025 is needed, tax professionals are guessing the limit will be around $7 million.
This article on the estate lifetime tax exemption is part of a series of informational articles to help you better understand which TCJA laws are scheduled to sunset and how the changes may impact your tax planning strategies. Each article will delve into the specifics of a certain tax provision and is intended to educate as well as offer suggestions that can help minimize any negative tax implications. Articles in this series include:
- Key 2017 Tax Laws Set to Expire in 2025
- Planning for Personal Tax Laws Changing in 2026
- Were You Subject to the SALT Deduction Before the TCJA?
What is the lifetime exemption limit?
Each U.S. citizen can gift up to the exemption limit amount tax-free — either during their lifetime or upon death. While estate and gift taxes are both a transfer tax applied at separate times (the gift tax during life and the estate tax at death), they operate independently but utilize the same lifetime exemption amount. In other words, any exemption used during life via taxable gifts reduces the exemption left at death. In 2024, the lifetime estate and gift tax exemption limits are $13.61 million per individual.
How can I avoid higher estate taxes before 2026?
Here are a few ways you can capitalize on the opportunities currently presented by the higher exemption limit:
1. Gifts: If your estate is subject to estate tax, gifting assets can help reduce the size of your taxable estate, whether gifting to heirs or a charity. If you are a married couple worth $14-27 million or an individual worth $7-13 million, leaving these assets to beneficiaries after 2025 could incur a higher tax, therefore, it may be time to update your estate plan.
The table below is an example of a married couple gifting their heirs in 2024 vs. 2026, showing the difference in resulting net assets.
| Gift full 2024 exemption | Gift projected 2026 exemption* | |
| Current net worth | $50 million | $50 million |
| Gift in 2024 | $27.2 million | $14 million |
| Taxable estate at death | $22.8 million | $36 million |
| Estate tax at 40% | $9.1 million | $14.4 million |
| Net to heirs | $40.9 million | $35.6 million |
* Assumes both members of a couple make full lifetime exemption gifts; death of both spouses in 2026; and federal estate taxes only. The federal estate tax is calculated using a series of brackets with a maximum rate of 40%. For simplicity, these numbers were calculated using a 40% flat rate. The above example is for illustrative purposes only. Source: Preparing for Estate and Gift Tax Exemption Sunset (ml.com)
2. Trusts: Irrevocable trusts, specifically grantor trusts, can offer effective means for leveraging the exemption and relocating assets outside of your estate. One option is the spousal lifetime asset trust (SLAT), an irrevocable trust created for married couples that is established by one spouse for the benefit of the other during the beneficiary spouse’s lifetime. The SLAT reduces the taxable estate of the grantor spouse and assets in the SLAT can appreciate within the trust, free of additional transfer taxes. Another option is a credit shelter trust (CST), also known as a bypass trust or family trust, commonly used to help shield some assets from state estate taxes.
3. Life Insurance: A life insurance policy can help heirs pay any potential estate tax and help protect your legacy. You might also consider an irrevocable life insurance trust (ILIT), which allows the death benefit to escape estate taxation while also governing the management and distribution of a life insurance policy.
Next steps
The expiration date set for the higher lifetime estate and gift tax exemption limits may seem far away, but acting now can help minimize the potential impact on you and your heirs — and implementing any of these approaches may not be a quick process. The strategies listed here are only some of the many options that may be available because each family’s circumstances are different. Contact your wealth advisor to create a strategy that fits into your comprehensive wealth management solution.
If you’re not a Mercer Advisors client and want to know more about our family office and what steps you can take before the tax exemption limit might sunset at the end of 2025, let’s talk.
1. “Countdown for Gift and Estate Tax Exemptions,” Charles Schwab, Nov. 10, 2023.
Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
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