Sunset on the Horizon
Estate, gift and generation-skipping transfer tax exemptions will be reduced in 2026. Are you prepared?
Even for wealthy individuals and families, the notion of giving away large sums of money can be unsettling. However, now is the right time to consider large gifts. Transfer tax exemptions are at historically high levels — $13.61 million per person and over $27 million for a married couple — but are scheduled to expire or “sunset” at the end of 2025, reverting to much lower amounts.
For wealthy families potentially facing hefty estate taxes, proactive planning before the sunset can have a lasting impact on multi-generational wealth preservation. Our whitepaper, Sunset on the horizon, discusses the benefits of gifting now, along with time-sensitive issues and planning strategies to consider. Here, we highlight some key issues addressed in the paper, to help you prepare for the sunset.
“The implications of the sunset are clear… time is running out for those who wish to take advantage of these historically high exemption amounts.”
5 key questions answered
1. Why is it important to make gifts now?
2. Will benefits from utilizing higher exemptions be lost after the sunset?
3. Do gifts under the higher exemptions need to be irrevocable?
4. How does the sunset affect taxpayers in states that have their own estate tax?
5. Should married couples utilize their exemptions together or separately?
1. Why is it important to make gifts now?
As a result of the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017, estate, gift and generation-skipping transfer tax exemptions are at historic highs of $13.61 million per individual and $27.22 million per married couple. However, certain provisions of the TCJA have a built-in expiration date, and exemptions will revert to pre-2018 amounts at the end of 2025 — about $7 million per person, indexed for inflation.
Wealthy individuals and families facing high estate tax exposure have a unique, perhaps once-in-a-generation opportunity to make large gifts now — which have the potential to significantly reduce estate taxes and create long-term legacies. It’s vital to take advantage of these unprecedented exemption levels now, before they expire.
Current estate, gift and generation-skipping transfer tax exemptions
| Year | Lifetime gift/estate tax exemption ($) | GST exemption ($) |
| 2017 | 5,490,000 | 5,490,000 |
| 2018 | 11,180,000 | 11,180,000 |
| 2019 | 11,400,000 | 11,400,000 |
| 2020 | 11,580,000 | 11,580,000 |
| 2021 | 11,700,000 | 11,700,000 |
| 2022 | 12,060,000 | 12,060,000 |
| 2023 | 12,920,000 | 12,920,000 |
| 2024-2025 | 13,610,000 | 13,610,000 |
| 2026 | 7,000,000 | 7,000,000 |
2. Will benefits from utilizing higher exemptions be lost after the sunset?
Some common misconceptions exist about the sunset. The first is that it may not even happen. While no one can definitively predict future legislation, the 2025 sunset is currently part of the TCJA — and will take effect unless new legislation is enacted to override the sunset.
Another critical misconception is that the benefits of taking full advantage of the higher exemptions will be lost after the exemptions expire. The IRS has clarified that gifts made now using the increased exemptions will not be added back (or “clawed back”) into the donor’s estate after the sunset takes effect. This means that gifted assets, along with all appreciation in value after the gift is completed, will not be subject to estate taxes.
3. Do gifts under the higher exemptions need to be irrevocable?
In order to utilize the higher exemptions, gifts must be irrevocable and complete — meaning that the donor must give up control of the assets and any rights to alter the gift. However, contemporary trust structures can provide a great deal of flexibility in the long-term control and administration of irrevocable trusts, thereby mitigating many of the concerns around anticipating the future needs of donors and beneficiaries.
4. How does the sunset affect taxpayers in states that have their own estate tax?
Thirteen states impose state estate taxes: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. For donors who live in one of these states, utilizing the larger exemptions in full can result in greater overall estate tax savings — since all of these states, except Connecticut, do not have a gift tax.
As a result, lifetime gifting removes assets subject to a state’s estate tax, along with all appreciation in value after the gift is complete, from the donor’s estate.
5. Should married couples utilize their exemptions together or separately?
Married couples have up to $27.22 million in gift tax exemptions and they are permitted to utilize their exemptions together. But to optimize their exemptions, it may be advisable to use each exemption separately — for example, with a popular vehicle called a spousal lifetime access trust (SLAT). Each spouse can set up a SLAT for the primary benefit of the other, thereby enabling the spouse/beneficiary to retain access to the funds during his or her lifetime.
Keep in mind that creating two SLATs requires thoughtful estate planning, since the IRS will disregard both SLATs for gift tax purposes if they are considered reciprocal, meaning that each spouse has created a virtually identical trust for the other. To avoid this, the SLATs must have sufficient variation, which may include differences in trustees, beneficiaries, distribution terms, and/or the timing of their funding and the nature of the assets contributed to each SLAT.
Now’s the time to act.
Contact your Merrill Private Wealth Advisor to discuss planning strategies that can help you prepare for the sunset in a way that fits your overall financial goals.
A private wealth advisor can help you get started.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.