The Tax Cuts and Jobs Act (TCJA) took effect in January 2018 after legislators voted to pass the bill in one of the largest overhauls of the Internal Revenue Code in decades.
The new law raised the exemption on the federal tax that is levied on a person’s estate. TCJA nearly doubled estate and gift tax exemptions from previous levels, adjusted each year for inflation, and effectively reduced an estate’s taxability.
In 2017, the estate exemption was set at $5.5 million for individuals and $11.1 million for married couples. With inflation adjustments, the 2024 exemption reached $13.6 million and $27.22 million for individuals and married couples, respectively.
However, TCJA is set to expire at the end of 2025 when the favorable exemption is slated to drop to nearly the same pre-TCJA levels beginning in 2026. At that time, the estate tax exclusion will fall to $5.49 million, adjusted for inflation. The exclusion is expected to be about half of their current totals -- $7 million for individuals and $14 million for married couples. This means if an estate value is over these totals, the estate will likely be taxable.
What About Rates?
Inheritance tax rates are progressive and are not scheduled to sunset. Therefore, they will remain the same. The tax rates start at 18 percent for taxable estates valued at $1 to $10,000. Those rates rise to 40 percent for taxable estates over $1 million.
With a lower exemption in place, the expiration of TCJA will greatly affect individuals in the $7 million to $14 million range and married couples in the $14 million to $28 million range as their estates that may have been previously nontaxable become taxable.
The Time to Act Is Now
The expected sunset of TCJA leaves limited time to adjust an estate plan to reduce taxability.
It is wise to have an estate plan, regardless of the owner’s age or the value of the estate. Everyone should consider the following:
To begin this planning, work with a group of professionals – certified public accountants, attorneys, investment advisors, and business valuators – to determine the best course of action.
Professionals can help determine the fair market value of assets, which is used to calculate the inheritance tax. They can also advise about which assets will have significant appreciation as well as provide financial planning and cash flow analysis to determine what is needed to maintain a current lifestyle.
Knowledgeable professionals can help taxpayers strategize to take advantage of the higher exemption now before it drops. There are several approaches, especially in the form of gifts. For example, taxpayers can use the $18,000 (2024) or estimated 2025 exclusion of $19,000 per individual gift tax exclusion. The simplest way to do this is to give cash gifts directly to individuals. Married couples can give up to $36,000 to one individual, with a maximum gift of $18,000 per spouse. Other ways of maximizing the current higher exemption is to include gifting low-basis stock that has appreciated to charity or a charitable donor fund.
In some cases, the best course of action may be to set up one or more irrevocable trusts and transfer assets to them. Another option is to set up a charitable trust and transfer assets to the trust. The taxpayer’s specific circumstances will determine the most reasonable approach.
As the Dec. 31, 2025, TCJA sunset draws near, the availability of these professionals will quickly become limited. It may be difficult to find qualified professionals closer to the time of expiration. It’s recommended that the sooner planning begins, the better.
The Bottom Line
While it might seem 2026 is still far off, effective planning takes time, for both the taxpayer and the skilled professionals. Setting a plan in motion now can help assure all areas of planning are addressed timely and in a way that meets the needs of the individuals and their heirs.