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The year 2025 will bring new changes to estate and gift tax laws in the United States, with updated exemptions, rates, and regulations affecting taxpayers at both federal and state levels. As we await the 2024 general election results, it is important to stay informed about the latest updates and requirements to ensure proper planning and compliance. Whether you are a high-net-worth individual or a financial advisor with high-net-worth clients, understanding these changes can help you make informed decisions about estate and gift planning strategies.

Federal Estate, Gift and GST Tax

The IRS recently confirmed the 2025 inflation adjustments for federal estate, gift and generation-skipping transfer (“GST”) tax exemptions.

2025 Exemptions. Beginning on January 1, 2025, the federal estate, gift and GST tax exemptions will be $13,990,000 per taxpayer, an increase of $380,000 from 2024. This means, with proper planning, a married couple can shield a total of $27.98 million from federal estate, gift and GST tax in 2025.

2026 Sunset of Federal Tax Exemptions. Absent any new legislation, these higher exemptions are scheduled to sunset on January 1, 2026, and revert to where they were in 2017, as indexed for inflation. This means that the exemption will revert to approximately $7 million for individuals and $14 million for married couples in 2026. As discussed in our previous advisories, the IRS and Treasury issued final regulations clarifying that the government will not claw back (i.e., bring back into the estate tax net) amounts gifted between 2018 and 2025 up to the higher exemption amounts in those years, even after the exemptions drop down again in 2026 and beyond.

Tax Rate. The federal, estate and GST tax rate remains at 40%.

Illustration

Below is a simple illustration of how a married couple with a $20 million taxable estate would be taxed at death in 2025 under current federal law versus after the exemptions sunset in 2026:

Potential Estate Taxes During 2025Potential Estate Taxes in 2026 (after sunset)
Total Estate (married couple)$20,000,000Total Estate (married couple)$20,000,000
Combined Estate Tax Exemption ($13,990,000 per person)$27,980,000Combined Estate Tax Exemption ($7,000,000 per person)$14,000,000
Previous Taxable Gifts($1,000,000)Previous Taxable Gifts($1,000,000)
Remaining Estate and Gift Exemption$26,980,000Remaining Estate and Gift Exemption$13,000,000
Total Estate$20,000,000Total Estate$20,000,000
Less Remaining Estate and Gift Exemption (combined)($26,980,000)Less Remaining Estate and Gift Exemption (combined)($13,000,000)
Taxable EstateNo Estate Tax DueTaxable Estate$7,000,000
40% Estate Tax$040% Estate Tax$2,800,000

*The above comparison only illustrates federal estate and gift tax, and does not take into account individuals who reside in states that have an additional state estate, gift and/or inheritance tax.

2025 Annual Exclusion from Gift Tax. The federal gift tax annual exclusion amount will increase to $19,000 per donee in 2025, up from $18,000 in 2024. Accordingly, in 2025, a married couple can make gifts of up to $38,000 per calendar year per donee without using any portion of their gift tax exemptions. The exclusion for gifts made to a spouse who is not a citizen of the United States will be $190,000 in 2025 (up from $185,000 in 2024).

Summary

As we near the end of the year, it is an excellent time to consider making large gifts by year-end and, with the increased exemptions in 2025, it may be a critical year to consider topping off those gifts in advance of the 2026 sunset. If you have any questions about making gifts or anything else that is covered in this advisory, please reach out to your Wiggin and Dana attorney today.

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