CLIENT ALERT:  Changes to the Gift and Estate Tax are Coming

Current Law: The Tax Cuts & Jobs Act, enacted in 2017 and effective for years 2018 through 2025, more than doubled every individual’s exemption from gift and estate tax: the exemption amount was $5.49 million in 2017 and is currently $13.61 million. At death, a 40% tax applies to the value of an individual’s wealth in excess of his or her remaining exemption amount. For example, if an individual died in 2017 with $15 million of assets and had not used any exemption making lifetime gifts, that individual would owe $3,804,000 of estate tax; if that same individual instead died in 2024, only $556,000 of estate tax would be owed.

Reduction in Exemption for 2026 and Beyond: Due to the manner in which the Tax Cuts & Jobs Act was passed, the estate tax provisions are required to “sunset” (revert back to prior law) beginning January 1, 2026. The estate and gift tax exemption is expected to be reduced to approximately $7 million as a result of the sunset. Assuming no change in the law, if an individual dies on December 31, 2025 with approximately $15 million of assets, he or she may owe approximately $400,000 in estate tax1; if that same individual dies just one day later, in 2026, he or she may owe $3,200,000 in estate tax.

Currently Pending Legislation: The American Housing and Economic Mobility Act was reintroduced in Congress in July 2024. This proposed Act has the stated goal of creating new housing units and reducing rents for American families, which would be entirely paid for by increasing gift and estate taxes. Specifically:

• The gift and estate tax exemption amount would be lowered to $3.5 million per individual.

• The estate tax rate would be increased from 40% to a minimum of 55% for estates up to $13 million; to 60% on the next $80 million of value ($13 million to $93 million); to 65% over $93 million; and an additional 10% surtax would be imposed on estates over $1 billion. 

• The gift tax annual exclusion for individual donors, which is currently $18,000 per individual donee, would be reduced to $10,000 per individual done, and the total annual exclusion claimable by a donor each year would be capped at $20,000. 

• Various fundamental estate planning and wealth transfer techniques would be eliminated, such as irrevocable grantor trusts, grantor-retained annuity trusts (GRATs) and longer-term dynasty trusts. 

• Valuation discounts for family-controlled entities and assets held for investment would be greatly reduced or eliminated, increasing the gift and estate tax value of these assets.

• The income rate on estates and trusts would be increased. 

The text of the Act provides that these changes would generally become effective as of the date of its enactment. 

From time to time, similar bills have been introduced, but the changes have not been enacted into law.  While we tend to believe that this will remain the case, if the Democrats gain control of the Presidency, Senate and House of Representatives after the 2024 election – which seems far more possible now than it did a month ago – then some or all of the changes proposed by the American Housing and Economic Mobility Act could very well become law. 

What Does This All Mean? On January 1, 2026, the exemption from gift and estate tax will automatically be cut approximately in half. Individuals with taxable estates who did not take advantage of the higher exemption amount by making lifetime gifts before 2026 will have lost the opportunity to do so, causing them to incur approximately $2,800,000 of estate tax unnecessarily at death. 

If the law is changed before 2026, the estate tax cost for individuals who did not implement lifetime gifting and estate reduction strategies could be millions of dollars higher. Even worse, the changes may go into effect immediately upon the new law’s enactment, leaving no time to implement strategies to reduce a future estate tax bill. 

Should You Be Making Lifetime Gifts? While every client’s situation is different, some general rules of thumb may apply: 

• Clients who expect to be subject to estate tax under the current, elevated exemption amount (i.e., net worth in excess of $14 million for individuals and in excess of $28 million for married couples) should strongly consider gifting and other estate reduction strategies.

• Clients who would not currently be subject to estate tax but who later expect to be (e.g., clients building a business, or clients who for other reasons may experience a significant increase in net worth) should also strongly consider these strategies, so that the appreciation in net worth does not occur in their taxable estates. 

• Clients who would not be subject to estate tax under the current exemption amounts but who will (or might) be subject to the tax under a reduced $7 million or even $3.5 million exemption should consider lifetime gifts, although gifting may not be as clearly beneficial and may not be appropriate or advisable for some clients. 

• Clients who do not expect to be subject to estate tax under the current or reduced exemption amounts need not consider lifetime gifts as an estate tax reduction strategy, but may want to implement gifts or other lifetime transfers for other reasons (e.g., asset protection). 

Please keep in mind that there are significant numbers of individuals and couples who will be making lifetime gifts and exploring other estate reduction strategies before 2026 arrives. Many of them are waiting until after the November 2024 election to determine whether the law is likely to change before 2026, and then decide upon and implement gifting strategies shortly thereafter. As such, demand for attorneys who specialize in and can implement these strategies will only increase, and it is possible that some attorneys will not be able to accommodate all of their clients who wish to make gifts.  

If you think you might benefit from lifetime gifting or other estate reduction strategies, we recommend that you contact us sooner than later, so we can help you evaluate the potential benefits and ensure that you are in the best position to implement your chosen strategy if and when you decide to do so. 

[1] This assumes that the exemption amount, which is indexed annually for inflation, increases to $14 million for 2025.