Navigating the uncertain future of the estate/gift and GST exemptions

This article was originally published Sept. 19, 2024, and has been updated to reflect that Republicans will control a unified government beginning in 2025.

Estate planning is inherently complex, and the uncertainty surrounding the future of estate, gift, and generation-skipping transfer (GST) tax exemptions adds an additional layer of difficulty

The challenge lies in the fact that these exemptions are not static; they are subject to legislative changes that can significantly alter the landscape of wealth transfer planning. This uncertainty makes it difficult for individuals to make informed decisions about their estate plans, as the rules governing these exemptions may change, affecting the tax liabilities associated with transferring wealth.

Currently, there is a window of opportunity for individuals to make large gifts or other transfers. However, it's crucial to weigh the potential benefits against the risks. Consider your long-term financial goals and legacy aspirations when making these decisions.

What are the estate, gift and GST exemptions?

The lifetime exemption is the amount that individuals can transfer during their lifetime or at death to others without incurring a 40% tax.

For 2025, the lifetime exemption amount is $13.99 million per individual, or $27.98 million for a married couple. In addition to the estate and gift taxes, a separate generation-skipping transfer tax is levied upon amounts that skip a generation with similar exemption and phaseout timelines.

What will happen after Dec. 31, 2025, if Congress does not act?

Absent any legislative action, the current temporarily increased exemptions are set to revert to pre-2018 levels on Jan. 1, 2026, adjusted for inflation. This means the exemptions will drop to amounts estimated to be around $7 million per individual or $14 million for a married couple. Final regulations issued by the IRS generally ensure that there will be no “clawback” for gifts in excess of the decreased exemption made prior to Jan. 1, 2026.

This is not the first time these exemptions have been on the brink of reduction. In 2012, the exemptions were set to expire, but Congress intervened at the last minute and ultimately extended the increased exemptions.

Some individuals who made gifts in 2012 solely for the purpose of utilizing the exemption later regretted their decision when the higher exemptions were ultimately extended. Learning from our past, it is important to weigh whether you would regret making certain transfers if the temporarily increased exemptions are made permanent.

How did 2024 election results impact the estate/gift and GST exemptions?

Because Republicans gained majority control of both chambers of Congress, there is a greater likelihood that the exemptions will be extended or increased, either in full or in part. President-elect Donald Trump has said he hopes to extend or make permanent the increased exemptions enacted by the Tax Cuts and Jobs Act.

Notably, the nonpartisan Congressional Budget Office projects the cost of extending the exemptions would be about $189 billion between the end of 2025 and 2034. As a reference point, the government spent $6.13 trillion during fiscal year 2023. Even though there is a Republican majority, we can expect robust debate regarding these provisions in the 119th Congress, which begins Jan. 3, 2025.

What can you do to prepare?

Given the uncertainty surrounding the future of the estate/gift and GST exemptions, it’s crucial to consider your options based on your current net worth and future financial plans. Here’s a general guide based on your net worth (per individual):

If Democrats sweep the White House, Senate and House of Representatives, the exemptions could be reduced or eliminated. Even with a Democratic trifecta, however, it’s possible that Congress could extend or modify the exemptions.

On the other hand, if Republicans sweep the White House and both chambers of Congress, there is a greater likelihood that the exemptions will be extended or increased.

In the case of divided government, the policy outcomes would be more difficult to predict. And regardless of the power dynamics, the margins of majorities matter. Expect robust debate regarding these provisions in the 119th Congress, which begins in January 2025.

Notably, the nonpartisan Congressional Budget Office projects the cost of extending the exemptions would be about $167 billion between the end of 2025 and 2034. As a reference point, the government spent $6.13 trillion during fiscal year 2023.

What can you do to prepare?

Given the uncertainty surrounding the future of the estate/gift and GST exemptions, it’s crucial to consider your options based on your current net worth and future financial plans. Here’s a general guide based on your net worth (per individual):

If you decide to take advantage of the current higher exemptions, it’s essential to act now.

Estate planning requires careful planning and timely execution. Depending on the circumstances, there may be multiple strategies to review with tax professionals, attorneys, and other advisors. An appraiser may need to value assets before the transfer.

In addition, an attorney may need to draft several estate planning and transfer documents. The closer we get to Dec. 31, 2025, the more difficult it will be to ensure that a holistic wealth transfer strategy is implemented based on your goals and circumstances.

Consider taking the following actions:

• Review your estate planning documents to ensure they are in line with your goals.
• Gift in accordance with your annual exclusion and have your prior gifting reviewed to determine the available remaining exemption.
• Review assets for growth and potential to transfer.
• Engage advisors to review your gift plans, provide recommendations and draft documentation.
• Monitor your gift plans and update accordingly for any changes in your wishes, tax law, assets and family members.

Establishing trusts, such as irrevocable grantor trusts, can be an effective strategy for transferring wealth. However, there has been recent legislation and proposals to limit or eliminate the benefits of certain types of trusts, such as grantor trusts, including grantor retained annuity trusts. While there have been discussions and proposals, the specific details and the likelihood of these changes are uncertain.

The uncertainty surrounding the future of the estate/gift and GST exemptions necessitates proactive and informed planning. You can take preparatory steps—such as funding a trust to which you later sell assets, or executing documents and funding with a very small gift—in order to be ready to execute your estate planning strategies when there is more certainty. By understanding your current financial situation and potential legislative changes, you can make strategic decisions to protect your wealth and ensure a smooth transfer to your beneficiaries.