Selected Inflation Adjustments for 2025:
- The annual exclusion, i.e., the amount that may be given to individuals without use of any federal gift tax exemption, will be $19,000. For 2024, the amount was $18,000.
- The amount of federal estate, gift and skipping transfer tax exemption for 2025 will be $13,990,000. For 2024, the amount was $13,610,000.
- The limit on qualified charitable distributions from IRAs is $108,000.
Sunset of the Tax Cuts and Jobs Act of 2017
The amount of the federal estate, gift, and generation-skipping transfer tax (“GST”) exemption is at an all-time high as a result of the Tax Cuts and Jobs Act of 2017. If Congress does not act before the end of 2025, the various provisions of the Act will sunset. Why the sunset? The Act was passed via “reconciliation.” In a nutshell, reconciliation avoids the filibuster rule in the Senate—only 51 affirmative votes in the Senate are required as well as a majority in the House.
In order to preserve the filibuster, Congressional rules limit the use of reconciliation in various ways; one of the ways requires that certain provisions in a bill have a sunset in order to be included in a bill passed via the reconciliation process. Any revenue—reducing measure must sunset no later than 10 years after enactment. The Tax Cuts and Jobs Act of 2017, effective as of January 1, 2018, has an eight year sunset.
One change in the Act that reduced revenue was the increase in the federal estate, gift, and GST exemption. Absent Congressional action, the exemptions will revert to the amount in effect before the Act. The amount would have been indexed for inflation while the Act was in effect: a good working assumption is that the exemption will be halved (to approximately $7 million).
The (possible) effects of the result of the Presidential and Congressional Elections
Given the results of the recent Presidential and Congressional elections, what is likely to happen with the sunset? As someone once noted, predictions are difficult, particularly about the future. With that reminder, we offer a few thoughts.
As a result of the elections, Republicans will be in control of the Presidency and both Houses of Congress. Assuming party discipline prevails, Republicans will be able to pass tax legislation using the reconciliation process in 2025. So, what might happen? The federal transfer tax system raises relatively little revenue (for example, federal estate taxes raise approximately one–half of one percent of total revenue) and, given the high exemption, affects relatively few estates and donors. The emotive power of the estate tax, alternately called “death tax,” means that the debate is often out of proportion to the dollars involved, however.
Based on press reports, a significant portion of President–elect Trump’s coalition consisted of voters for whom the fate of federal transfer taxes may not be important. In light of this, it seems unlikely that there will be a move to eliminate federal estate, gift and generation-skipping transfer taxes altogether. What is more probable is that the current amount of the federal estate, gift and GST exemption will be retained for the next eight to ten years.
Federal transfer taxes did not figure prominently in the recent campaign. The only extended mention was in Vice President Harris’s adoption of the revenue-raising provisions of the “American Housing and Economic Mobility Act of 2024.” The revenue-raising provisions included increases in marginal estate, gift and GST tax rates, a reduction in the exemption, changes to the annual exclusion, and limiting the term of certain trusts used in estate planning. It seems safe to say that none of these changes will be included in a reconciliation bill passed by a Republican Congress. It also seems safe to say that any provision regarding federal transfer tax will be part of a larger reconciliation bill.
As to the possible details of the bill, the example of Senators Manchin and Sinema in connection with the “Build Back Better” Act is a reminder that, depending on the size of a party’s majority, the concerns and views of individual Senators and Representatives may have to be addressed. [The example of Senators Manchin and Sinema in connection with the “Build Back Better” Act is a reminder that having a majority in a house of Congress is no guarantee that legislation will pass.] Based on the timing of other revenue measures passed by reconciliation, we expect to see proposals sometime in the spring of 2025 and with enactment (should it occur) by late spring or the summer.
As the legislative process unfolds, the progress of reconciliation legislation in Congress should be followed. Anyone making an irrevocable decision before legislation is enacted should understand that the actual result of the reconciliation process may differ from the assumed anticipated result.
A word of caution: if things do not go as anticipated, i.e., the exemption will, in fact, be reduced, it will make sense to talk with financial and estate planning advisors as soon as possible once that result is clear. As a practical matter, implementing significant planning before the end of 2025 may be difficult, given the volume of such matters which advisors may face. Of course, we would be pleased to speak with you in advance of the enactment of a reconciliation bill.
For more information, please reach out to a member of our Trusts and Estates team.