How to Prepare for the Federal Estate Tax Exemption Sunset in 2025

The Federal Estate Tax Exemption is set to expire or “sunset” on December 31, 2025, unless Congress acts. Currently set at $13.61 million for individuals and $27.2 million for couples, this exemption allows individuals to transfer substantial wealth to their heirs to maximize estate planning benefits and reduce their tax obligation. However, this exemption is set to expire at the end of 2025, at which point it will be reduced by half. As a result, effective estate planning becomes crucial for individuals and families looking to minimize their tax liability and ensure a smooth transfer of assets to their beneficiaries before the exemption decreases. Understanding the implications of this upcoming change can help guide strategic wealth management and estate planning decisions that help reduce tax liabilities and facilitate a smooth transfer of assets.

Key Planning Concepts

• Understand individual and family goals: There are several options that are available to individuals planning their estate and gift strategy. Each stakeholder may have different preferences regarding wealth transfer—some may wish to see their impact during their lifetime, while others may prefer to keep arrangements private until after their passing. There is no single correct method for transferring wealth before the exemption expires. It’s crucial to discuss options with the appropriate family or business members before preparing documents. Professionals are available to offer guidance and ensure that tax and other strategies are implemented in an optimal way.
• State-Specific Estate Tax Considerations: It’s important to consider both federal and state-specific tax implications, should the federal exemption be reduced after December 31, 2025. For example, New York imposes a top estate tax rate of 16%, New Jersey has an inheritance tax but no estate tax, and Connecticut matches the federal exemption with a 12% rate. Therefore, if this planning opportunity is missed, individuals and families could face significant additional tax burdens as they transfer wealth, depending on the state tax laws that will apply to them.
• Factor in Political Uncertainty: The anticipated reduction in the federal estate tax exemption introduces a level of uncertainty due to the results of the recent election. While the current trend suggests a likely reduction due to fiscal needs, upcoming political shifts could alter this trajectory. Planning for both scenarios will ensure effective estate planning regardless of future developments.

Estate Planning Valuations and Tax Saving Methods

• Life Insurance: Insurance as a crucial component of estate planning, providing liquidity to pay taxes and equalize family business interests. The portability of the unused exemption from the death of the first spouse to the surviving spouse is a key aspect, although New York does not offer portability.
• Section 6166: This allows an estate executor to defer the payment of federal estate tax attributable to the interest in a closely held business, extending payments up to, but not exceeding, fourteen years and nine months.
• Discounts: Gifting fractional interests in entities holding securities or other assets can produce significant estate tax savings due to valuation discounts for lack of marketability or minority interest. For example, a 30% discount on a $10 million interest could save around $1.2 million in estate taxes.
• Gifting Strategies: Substantial gifting is an opportunity to fully benefit from the current exemption, with options including outright gifting, irrevocable trusts, Spousal Lifetime Access Trusts (SLATs), and Dynasty Trusts. These strategies help move wealth outside of the taxable estate and provide privacy, creditor protection, and potential multi-generational benefits.

Types of Trusts

• Revocable Trusts: These lifetime trusts are part of the grantor’s estate and can be modified. They help avoid probate and provide privacy but are not considered completed gifts.
• Irrevocable Trusts: These trusts are not part of the grantor’s estate and cannot be changed once set. Assets in irrevocable trusts are considered completed gifts, allowing individuals to move wealth outside their taxable estate and avoid estate taxes.

Ensuring that agreements align with estate planning documents can prevent significant tax consequences. It’s never too early to start planning for the future. The earlier insurance policies, trusts, and other planning vehicles are established, the more value they can provide. A well-crafted roadmap can greatly influence tax and financial outcomes.

The combination of the upcoming estate tax exemption sunset, low valuations, and high-interest rates makes now an ideal time for estate planning. Engaging with professionals who understand the intricacies of estate planning will empower you to secure a legacy that aligns with your financial goals and aspirations. To help our clients be well-prepared, Anchin collaborates with Claris Advisors to assess individuals’ current estate plans and insurance strategies, providing tailored recommendations to optimize their planning ahead of the approaching expiration date.

For more information on how to leverage the federal exemption before it expires at the end of 2025, please contact George Teixeira,  Alicja Mierzwa, or your Anchin Relationship Partner.