While it seems hard to believe, 2025 is just around the corner. As we all prepare to say goodbye to 2024, it is important to prepare for upcoming changes to federal gift and estate tax laws that will occur in 2025. Adjustments to the lifetime exemption and annual exclusion amounts, as well as the potential expiration of the Tax Cuts and Jobs Act (TCJA), will have significant implications for high-net-worth individuals. Preparing for these changes can help minimize tax exposure and maximize the transfer of assets to your loved ones. Toward that end, a Murfreesboro estate planning attorney at Bennett | Michael
| Hornsby explains what you need to know about the upcoming 2025 gift and estate tax updates.
Revisions to the Lifetime Exemption
The estate of every taxpayer is subject to federal gift and estate taxes at the staggering rate of 40 percent, highlighting the need for proper estate planning during your lifetime. For many people, the federal lifetime exemption shields a large portion of their estate from taxation by acting as a de facto deduction before taxes are levied. The American Taxpayer Relief Act of 2013 set the lifetime exemption at $5 million, to be adjusted annually for inflation. Several years later, however, the Tax Cuts and Jobs Act (TCJA) temporarily doubled the exemption, creating a unique opportunity for taxpayers. This temporary increase to the lifetime exemption offers a limited window for wealth transfers free of federal taxes.
For 2025, the lifetime exemption is set to be adjusted once again for inflation, increasing the limit from $13.61 million to $13.99 million per individual. In practice, this means that if you leave behind a taxable estate valued at $20 million in 2025, the first $13.99 million will not be subject to federal gift and estate taxes, saving your estate over $5.5 million in taxes. Individuals can utilize this increased amount to make significant gifts or fund trusts, effectively reducing the size of their taxable estate.
At the end of 2025, however, the exemption is scheduled to revert to its pre-TCJA level of $5 million, adjusted for inflation, putting the exemption near $6 million. This potential rollback underscores the importance of acting promptly to ensure that you benefit from the higher exemption amount in 2025, allowing you to significantly reduce the portion of your estate subject to federal taxes.
Annual Exclusion for Gift Taxes Will Increase
A popular and extremely effective estate planning tax avoidance strategy involves maximizing the use of the annual exclusion. In 2025, the exclusion will rise from $18,000 to $19,000 per recipient. This means individuals can gift up to $19,000 annually to as many people as they wish without affecting their lifetime exemption. Married couples can combine their exclusions, allowing for gifts of up to $38,000 per recipient annually. For example, a couple with two children and four grandchildren could gift $228,000 per year tax-free. You can also makes gifts to trusts and charities using the annual exclusion. This gradual transfer strategy reduces the taxable estate while providing financial benefits to loved ones during your lifetime.
Anticipating the Expiration of the TCJA
The TCJA’s doubling of the lifetime exemption was a significant tax relief measure, but it is set to expire at the close of 2025 unless Congress votes to extend the increase. When it does, the exemption will likely decrease to approximately $6 million per individual, adjusted for inflation, exposing considerably more estates to significantly higher tax liabilities.
To counteract the impending decrease, consider utilizing the current elevated exemption by establishing irrevocable trusts, making substantial gifts, or employing other advanced estate planning techniques. These measures not only reduce the taxable value of your estate but also allow you to lock in the higher exemption amount before it declines.
The Importance of Working with an Estate Planning Attorney
The upcoming changes highlight the critical need for early, comprehensive planning that should be accomplished with the assistance of an experienced estate planning attorney. Gift and estate tax laws are complex, and navigating the shifting landscape requires a personalized approach tailored to your financial situation and long-term goals. Working with an experienced estate planning attorney can help you identify opportunities to protect your assets, comply with legal requirements, and maximize the tax advantages available in 2025.
Contact a Murfreesboro Estate Planning Attorney
If you have additional questions about the upcoming gift and estate tax changes, or you are ready to update your estate plan, contact an experienced Murfreesboro estate planning attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.
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