As we navigate the current financial landscape, staying informed about estate and gift tax exemptions is crucial. These updates impact estate planning strategies, helping individuals and families efficiently preserve wealth and transfer assets. This article explores the latest estate tax changes, their implications, and key strategies to help preserve your wealth before potential reductions to the current estate tax exemption in 2026.
What is the estate tax exemption?
Estate and gift taxes are imposed on the transfer of wealth, either during a person’s lifetime or upon death. The IRS sets annual exclusions and lifetime exemptions to allow individuals to pass on a limited amount of assets without incurring federal taxes. These exemptions are adjusted periodically based on inflation and legislative changes.
The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the estate tax exemption, but under current law, these provisions are set to expire after 2025, potentially reducing the exemption by half in 2026. Therefore, understanding and utilizing 2025’s increased limits is essential.
Federal estate tax exemption in 2025: What’s changing?
One of the key updates for 2025 is the increase in the annual gift tax exclusion, which allows individuals to gift a specific amount per recipient without tax consequences.
New limits
- In 2025, the annual gift tax exclusion rose to $19,000 per recipient, up from $18,000 in 2024.1
- Married couples can combine their exclusions, allowing them to gift up to $38,000 per recipient tax-free.1
Consider a couple with three children and five grandchildren. By taking advantage of the 2025 gift tax exclusion:
- They can gift $38,000 per child and grandchild (a total of $304,000 annually).
- This strategy removes the assets and any future growth from their taxable estate and reduces potential estate taxes.
How the estate tax exemption compares to previous years
Even for those not concerned about estate taxes, the annual exclusion is a valuable tool for transferring wealth gradually while avoiding gift tax return filings. Beyond the annual exclusion, in 2025, individuals can transfer a more substantial amount over their lifetime or upon death without incurring federal taxes. For 2025:
- The estate and gift tax exemption is $13.99 million per individual, up from $13.61 million in 2024.1
- Married couples can shield a combined $27.98 million from federal estate or gift taxes.1
Key considerations for high-net-worth individuals
If you have already maximized lifetime gifts, the 2025 increase allows you to gift an additional $760,000 tax-free before the exemption potentially drops in 2026.2
With the new updates, a business owner with an estate valued at $30 million can:
- Gift $13.99 million in 2025 to heirs without triggering transfer tax.
- Utilize trusts and other estate planning tools to minimize future tax liabilities.
- Prepare for the 2026 exemption reduction by transferring wealth strategically.
Unless Congress takes action, the estate tax exemption will drop by half in 2026 (estimated to around $7 million per individual). This shift could expose more estates to federal taxation, making 2025 a crucial year for proactive planning.3
Gifts to non-U.S. citizen spouses
Married couples with one non-U.S. citizen spouse face different tax rules. Unlike citizen spouses, non-citizens do not qualify for the unlimited marital deduction:
- The annual exclusion for gifts to a non-U.S. citizen spouse is $190,000 in 2025, up from $185,000 in 2024.
- Gifts exceeding this amount may count toward the donor’s lifetime exemption.
Since a non-U.S. citizen spouse may not be subject to U.S. estate tax, unlimited tax-free transfers aren’t allowed — a rule designed to prevent estate tax avoidance. Proper planning, such as Qualified Domestic Trusts (QDOTs), can help maximize exemptions. Visit the IRS website for answers to frequently asked estate tax questions.
Estate planning strategies for 2025
With a possible reduction in 2026, 2025 presents a critical opportunity for estate planning. Consider the following strategies:
- Maximize annual gifting
- Take advantage of the $19,000 exclusion per recipient to transfer assets tax-free.
- Consider funding 529 college savings plans for grandchildren using this exclusion.
- Use the increased lifetime exemption
- If your estate is large, gift assets now to lock in the $13.99 million exemption.
- Explore irrevocable trusts, family limited partnerships, and charitable giving
- Plan for the 2026 reduction
- If Congress allows the exemption to revert, estates above $7 million may face tax liabilities.
- Work with a wealth advisor to determine whether gifting or trust strategies should be accelerated.
Next steps: How to prepare for estate tax changes
Estate tax planning in 2025 is more critical than ever, with increased exemptions offering a window of opportunity before potential reductions in 2026. Individuals can optimize their financial legacy by leveraging annual gift exclusions, lifetime exemptions, and strategic wealth transfer tools while minimizing tax liabilities. Visit our library of estate tax articles and contact your wealth advisor to create a strategy that fits into your comprehensive wealth management plan.
If you’re not a Mercer Advisors client and want to learn more, let’s talk.
1 Taylor, Kelly R. “What is the Gift Tax Exclusion for 2024 and 2025?” Kiplinger, March 2025.
2 Wells, Sara A. “IRS Announces Increased Gift and Estate Tax Exemption Amounts for 2025.” Morgan Lewis, Oct. 24, 2024.
3 “Prepare for Future Estate Tax Law Changes.” Fidelity, March 3, 2025.
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