Reasons to Start Planning Now for the Looming Estate & Gift Tax Exemption ‘Sunset’

Heather Welsh- SQ Headshot
by Heather Welsh
Heather Welsh- SQ Headshot
by Heather Welsh

Jan. 1, 2026, may seem like forever from now, but for high-net-worth individuals, particularly business owners who may be looking to exit, the time to start planning is now. Why? Unless Congress acts, the current lifetime estate and gift tax exemption of $13.61 million ($27.22 million for a married couple) will be cut in half, indexed for inflation.

That of course represents a significant potential tax hit for individuals and couples with sizable estates, which is why they should consider making substantial gifts now before the exemption potentially sunsets. There could be much to do … and relatively little time to do it.

It is worth noting that the IRS has issued regulations stating that lifetime gifts that exceed the future (potentially lower) exemption amount will NOT be subject to any “claw back.” In other words, the opportunity to maximize the current estate and gift tax exemption threshold represents a clear “use-it-or-lose-it” opportunity, unless further Congressional action is taken to extend it, that is.

So what to do now? Determine your legacy goals. The potential planning ideas discussed here are irrevocable – so there are no “take backs.” Executing on wealth transfer planning is a big decision that should be approached thoughtfully and in conjunction with your wealth advisory team to avoid any “buyer’s remorse.”
Thankfully, you have options. There are several strategies to explore with your wealth advisory team to capitalize on the relatively high exemption amount while we still have it.

Utilize trusts to make the most of the current exemption amount

There are several trust strategies that can be beneficial in helping to use as much of the estate and gift tax exemption as possible, two of which are described below. Again, if the full exemption amount currently allotted is not exercised by the end of next year, it could potentially no longer be an option.

One trust strategy to consider is an intentionally defective grantor trust (IDGT), which places assets in the trust outside of your estate (and therefore not subject to estate tax), but any income the trust produces is taxed to you. That is actually a benefit because it allows you to spend down your estate, reducing what might be subject to estate tax in the future. Plus, those tax payments will not be considered a future gift to any beneficiaries.

For married couples, another attractive option that builds upon the benefits of an IDGT is a spousal lifetime access trust (SLAT). A SLAT allows for gifting under the current exemption amount while providing for considerable flexibility with trust assets. For example, your spouse can be named a beneficiary of a SLAT, thereby allowing you to access the assets in the trust through your spouse if needed in the future.

Explore charitable giving as a way to lessen exposure to estate tax

For philanthropically minded families, there are thankfully several charitable giving strategies that can help.

For example, charitable remainder trusts (CRTs) can be an excellent planning tool in the high-interest rate environment we currently find ourselves in, as they place a higher value on the remainder interest that goes to charity. A CRT provides flexibility as well, as it allows you to receive an income stream during the duration of the trust, or you can redirect that income to any heirs. After years of hikes, it is expected that interest rates will begin dropping, and this strategy becomes less attractive at lower rates. If it aligns with your goals, take advantage of higher interest rates, before they likely drop ahead of the expiration of the current exemption limits.

Additionally, it is important to add that you can currently make gifts at a higher percentage of your adjusted gross income (AGI) and deduct from your taxes a larger portion of those gifts in the year that they’re made. At this time, cash donations to public charities can equal up to 60% of your AGI. If the current tax law sunsets, that would drop to 50%. Even if you are not sure at this time which charities you want to benefit from your generosity, a donor-advised fund (DAF) can accept gifts today, which allows you to decide later the specific charities you want to support.

Don’t neglect the additional ‘money on the table’
The lifetime estate and gift tax exemption amount for 2024 has increased from $12.92 million to $13.61 million for individuals ($27.22 million for married couples)1. So even if you previously used all of your lifetime estate and gift tax exemption amount, you now have an additional $690,000 per person to gift and still fall under the exemption limit. Don’t neglect to evaluate opportunities to use your newly available exemption threshold.

Create liquidity to cover likely estate tax liabilities
If you believe you will likely experience an estate tax hit in the future or already have a taxable estate, an irrevocable life insurance trust (ILIT) presents an opportunity to “pre-fund” an estate tax liability with liquid assets so that your business interest and real estate holdings, for example, won’t potentially need to be sold to pay estate taxes owed in the future. Life insurance owned outside of one’s estate in an ILIT, enables payments to be made toward future estate tax liabilities without pulling the insurance proceeds into your estate and subjecting them to additional estate tax. It’s important to do this sooner than later before potential health issues emerge that could impact insurability.

Make use of all gifting opportunities available to you
Beyond estate planning and life insurance strategies, one of the simplest ways to systematically reduce your estate over time is to make direct gifts to heirs or others you want to support. Anyone can give up to $18,0001 in annual exclusion gifts per person, per year for any purpose (double for married couples) without using any of the lifetime estate and gift tax exemption. Above and beyond that, payments can be made directly to a medical provider or educational institution – in any amount – again without using any of the exemption.

Finally, special considerations for executives and business owners

For corporate executives, if you’ve been granted stock options, they can be highly advantageous in estate planning. However, it’s important to know if, and to whom, those options can be transferred. Some stock options are not allowed to be transferred to anyone; others can only be given to certain family members or a trust that benefits those family members. It’s important to have clarity on what’s possible so that your estate plan can be designed accordingly. Beyond transferability, you may also have limited windows where you are allowed to trade or transfer your corporate stock. Review your grant agreements and contact your human resources department to confirm any relevant restrictions.

Similarly, for business owners, it’s important to review any governing documents for the business to understand whether the gifting of interests in the business is allowed and to whom. If changes are needed, that will likely take considerable time to discuss with any business co-owners, as well as to review updated documentation with your attorneys. Not to sound like a broken record, but it’s best to begin those conversations now, with the estate and gift tax exemption sunset potentially looming.

To explore how you can best prepare for the potential sunsetting of the lifetime estate and gift tax exemption, please contact our family office team.

1IRS.gov

 

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