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Introduction
With the November 2024 election of a new US Congress and a new US President, the tax provisions contained within the 2017 Tax Cuts and Jobs Act (“TCJA”) are scheduled to sunset at the end of 2025 and surely will become an issue for Americans to watch. This legislation provided major changes to the Internal Revenue Code. For estate planners it doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemption amounts (collectively, the “Exemption”) from $5,490,000 in 2017 to $11,180,000 in 2018. Since then, the Exemption has increased each year as it is adjusted for inflation. For 2025, the Exemption is $13,990,000 per person. However, on January 1, 2026, the Exemption is scheduled to automatically reset (or sunset) to $5,000,000, indexed to inflation (estimated to be approximately $7,000,000), unless Congress acts prior to this date.
Historically, the United States has taxed legacies and intestate distributions of property as far back as the Stamp Tax of 1797. The current estate tax was created as part of the Revenue Act of 1916 and was a result of President Theodore Roosevelt advocating for an inheritance tax as a tool to address wealth inequalities. While the estate and gift tax laws have had numerous changes in the last 90 years, it is reasonable to assume that these laws will continue for the foreseeable future. The question, of course, is at what level and who will be affected.
Tax Legislation – What Will Happen
Every piece of federal tax legislation originates in the House Ways and Means Committee. From there, tax legislation eventually weaves its way between both Houses of Congress before being presented to the US President for signature. The November 2024 federal election gave the Republicans control of both the House of Representatives and the United States Senate. Inasmuch as the TCJA was part of President Trump’s tax agenda during his first term, presumably, he will seek to have the expiring provisions made permanent under new tax laws.
At the initial hearing of the current House Ways and Means Committee, various House Representatives expressed views and opinions on issues related to the TCJA extensions. Several Representatives, both Republican and Democrat, such as Michael Thompson (D – CA), James Panetta (D – CA), Brad Schneider (D – IL), Lloyd Smucker (R – PA), and Blake Moore (R-UT), were focused on the growing national debt and projected costs related to the extension of the TCJA. With the current national debt of approximately $36 trillion, and approximately $2 trillion of deficit spending in 2024, the approximate annual $25 billion of estate and gift tax revenues does not appear to be significant.[1] While it is difficult to predict if deficit spending and similar fiscal arguments, as opposed to making tax legislation permanent as a part of pro-growth tax policy, will prevail, those of us in the tax planning community should still focus on prudent and permitted tax planning for our clients.
What to Do
For clients with taxable estates in excess of the current Exemption, tax planners should continue implementing estate and gift tax strategies to freeze the growth of a taxpayer’s estate such as spousal lifetime access trusts (“SLATs”), generation-skipping dynasty trusts, sales of assets to intentionally defective grantor trusts (“IDGTs”), charitable remainder trusts (“CRTs”), private foundations and other similar strategies. These clients will be “estate tax payors” irrespective of whatever Congress decides to do with the sunsetting provisions of the TCJA.
For those clients at or below the Exemption thresholds, tax planners are at the mercy of the current Congress and tax planners for these clients need to watch and be prepared to react to any potential changes in the tax laws. The clients at risk are those in the “doughnut hole,” or those clients with taxable estates greater than $7 million, but less than $14 million. These clients will need to implement permitted tax strategies if the Congress allows the TCJA to sunset, but, conversely, would not if the TCJA provisions are made permanent. These clients may have a tough time committing to, and implementing, an estate plan strategy in 2025 only for it to be for naught if Congress either extends or makes estate and gift tax provisions in the TCJA permanent. Unfortunately, this will result in a “wait and see” approach and while this is understandable, it may not be the right approach for every client. For example, consider a client in this doughnut hole who may not have a taxable estate today, but could in the future due to asset growth, a liquidity event, or an inheritance. No two client situations are the same and each must be evaluated independently.
Clients in this in-between space may want to transfer assets but also wish to retain some interest in the transferred asset. While this cannot, for federal estate tax purposes, be accomplished directly, there are permitted indirect tax strategies. Married clients can consider a spousal lifetime access trust (SLAT). These trusts give married couples the flexibility of transferring wealth out of their estate for federal estate tax purposes, but indirectly they still have the benefit of the assets as the spouse is a beneficiary permitted to receive income and principal from the trust. Further, the other spouse can also fund another SLAT to benefit their spouse, though care must be taken as the “reciprocal trust” doctrine will prevent the trusts from being identical to each other. Single taxpayers will not benefit from a SLAT but could consider a private annuity or a self-cancelling installment note. These permitted tax strategies allow for the transfer of the asset from their gross estate but also permit an indirect retained interest that will not be included in their estate for estate tax purposes. Finally, all clients should continue with their annual gifting and using the annual gift tax exclusion (presently $19,000 for a single taxpayer and $38,000 for married taxpayers).
Those clients with taxable estates of $7 million or less still need our advice and counsel for orderly and efficient transfer planning, but these clients will not likely have to deal with the complexities of higher-end wealth transfer tax planning. While there will still be a few who may be willing to fund a charitable remainder trust or create a private foundation, the vast majority of such clients will be happy knowing that their estate can be passed to loved ones “estate tax” free.
Summary
Trying to predict whether the current Congress will make the exemptions permanent or allow them to sunset is not the duty of a tax professional. Instead, the tax community needs to watch this legislative process unfold, keep our clients reasonably informed and be prepared to act as circumstances dictate.
George Malis is an experienced, well-rounded corporate, business, tax and trust and estates attorney. He regularly assists clients with trust & estate planning, including business succession plans, as well as in the formation and structure of their entity, daily operations, acquisition of the entity, and the disposition of the entity. George has an LLM in Taxation, is admitted to the Michigan bar, where he is a member of its Business/Corporate Law, Probate & Estate Planning, Master Lawyers, and Taxation sections. He also served for many years as the chairperson for the Committee on Taxation for the U.S. members of Meritas, a worldwide organization of lawyers and law firms.
[1] Placed into perspective, the approximate estate tax revenues raised in relation to the 2024 federal spend of approximately $6.5 trillion represents .3845% of the spend, or $384.60 for every $100,000 spent by the federal government.
