With significant changes on the horizon for estate and gift taxes, understanding the upcoming shift in the exemption threshold is crucial for effective financial planning. The year 2025 is set to bring notable adjustments that could impact high-net-worth individuals, families, and their estate strategies. Optima Tax Relief reviews these adjustments and how they can affect your taxes.
What Are Gift and Estate Taxes?
The gift and estate taxes are federal taxes imposed on the transfer of wealth, either during an individual’s lifetime or at their death. The gift tax applies to transfers of money or property made while a person is still alive, whereas the estate tax is levied on the transfer of assets after death. These taxes are designed to prevent individuals from avoiding estate taxes by gifting their assets before they pass away.
How They Work
- Gift Tax: If you give a gift that exceeds the annual gift tax exclusion amount (currently $18,000 per recipient as of 2024), the excess amount counts against your lifetime exemption. Only after the exemption is fully used will additional gifts be subject to the gift tax rate.
- Estate Tax: When an individual passes away, the value of their estate— including cash, property, and other assets— is assessed. If the total value exceeds the exemption amount, the excess is taxed at the federal estate tax rate, which can reach up to 40%.
Current Estate and Gift Tax Landscape
As of 2024, the estate and gift tax exemption stands at an impressive $13.61 million per individual, courtesy of provisions set by the Tax Cuts and Jobs Act (TCJA) of 2017. This exemption allows individuals to transfer up to this amount during their lifetime or at death without incurring federal estate or gift taxes. For married couples, the combined limit reaches nearly $27.22 million.
The 2025 Changes
In 2025, the annual gift tax exclusion will rise to $19,000 per person. This means you can gift $19,000 to an individual without being taxed in 2025. Married couples can give $38,000 per year per recipient in 2025. In addition, the lifetime gift and estate tax exemption will increase to $13.99 million in 2025.
Implications for Estate Planning
The drop in the exemption could lead to a substantial increase in the number of estates subject to taxes. For those who have built substantial wealth, this change calls for a proactive approach to estate planning. Strategies such as gifting assets before the exemption decreases or setting up trusts can help minimize future tax liabilities.
What to Watch For
While the TCJA’s temporary increase provided estate planning opportunities, these provisions are set to unset beginning in 2026 unless it is extended by Congress. For individuals and families with estates exceeding the anticipated reduced exemption, consulting with financial and legal advisors is a prudent step to adapt strategies and preserve wealth.
Conclusion
The upcoming change to the estate and gift tax exemption in 2025 signals a potential shift in wealth transfer strategies. High-net-worth individuals should act swiftly to make the most of the current favorable exemptions and prepare for a return to tighter limitations. With careful planning, it’s possible to mitigate future tax impacts and ensure a smoother transition for heirs.
