The Tax Cuts and Jobs Act of 2017 contained wealth transfer tax provisions that have been highly beneficial to those who may have a taxable estate in the future. (The wealth transfer taxes are the estate tax, gift tax, and generation-skipping transfer tax.)
Increased wealth transfer tax exemptions that were introduced in the 2017 act have allowed families to give more to their intended beneficiaries without incurring federal gift or estate taxes over the past eight years. These increased exemptions will sunset at the end of 2025 and revert to pre-2017-tax-act levels, unless Congress enacts new legislation to extend or modify them. If your assets have appreciated significantly in value, it’s wise to act soon and consider ways to minimize the tax burden on your estate.
Because the opportunity to make large tax-free gifts or large at-death transfers to your loved ones may end soon, now is the time to review your estate planning to make sure that you can take advantage of the higher exemptions and reduce your overall exposure to wealth transfer taxes. High wealth transfer taxes may otherwise reduce the amount you can eventually pass to loved ones.
Taxes That Affect Estate Planning
The wealth transfer taxes that clients need to address include gift, estate, and generation skipping transfer (GST) taxes.
- Gift taxes apply to gifts made during the giver’s lifetime.
- Estate taxes apply to transfers made at a person’s death.
- GST taxes may apply to either lifetime or at-death transfers.
Current Exemptions and Exclusions Available in 2025
Wealth transfer taxes have two exemptions, including:
- The Basic Exclusion Amount (BEA), which protects against both gift taxes and estate taxes, and
- The Generation-Skipping Transfer (GST) tax exemption, which protects again GST taxes.
The lifetime BEA for 2025 is $13,990,000 per person (which is actually $10,000,000 adjusted, or “indexed,” for inflation that has occurred since 2011). Unless congressional action is taken to retain this exclusion, under current law the BEA is scheduled to be cut in half and return to $5 million, indexed for inflation since 2011, as of January 1, 2026. This is estimated to produce a BEA of around $7,000,000. The GST tax exemption is also $13,990,000 per person for 2025 and is also scheduled to be cut in half and return to $5 million indexed for inflation since 2011 on January 1, 2026.
In addition to the BEA, the gift tax also has a special tax break called the “annual exclusion.” If a gift qualifies for the gift tax annual exclusion, then that gift does not use any of the giver’s BEA, and, if done correctly, the gifted assets will not be counted as part of the giver’s estate for estate tax purposes. Use of the gift tax annual exclusion can be a great way to reduce one’s exposure to gift and estate taxes, especially if it is used on gifts that are also designed to leverage the GST tax exemption and take assets outside the wealth transfer tax system for multiple generations. The annual gift tax exclusion for 2025 is $19,000. The gift tax annual exclusion applies to outright gifts and certain (but not all) kinds of gifts to trusts. It allows any individual U.S. citizen or U.S. permanent resident to make qualifying gifts with a total value of up to $19,000 to any other individual during 2025. The number of recipients is unlimited- one giver can make gifts to 50 different individuals if desired, or more, or fewer. Married couples who wish to give more than $19,000 to any given recipient in 2025 and who do not mind either each making separate gifts or filing a gift tax return and electing to gift-split for 2025 can make gifts with a total value of up to twice the gift tax annual exclusion ($38,000).
The GST tax also has an annual exclusion. However, the GST annual exclusion does not have the same rules as the gift tax annual exclusion. While some gifts will qualify for both exclusions, other gifts will only qualify for the gift tax annual exclusion and will still be subject to gift taxes. Having an attorney’s advice in this regard can be critical.
Finally, payments that are made directly by the giver to providers of medical services, including doctors, dentists, and even pharmacies and health insurance providers, as well as payments of tuition that are made directly by the giver to the school for which the tuition is being paid, may qualify as not being gifts at all for purposes of either the gift tax or the GST tax. Using this kind of payment to supplement annual exclusion gifts and other estate planning techniques can also be a huge help in wealth transfer tax planning. Again, however, it can be critical to get good advice to ensure that these payments qualify with the tax laws.
Estate Planning Strategies for 2025
We typically counsel clients on what can and should be considered now to take advantage of current provisions, including planning transactions for gifting assets. In the past several years, the primary goal of many of these gifting transactions has been to effectively use the BEA and the GST tax exemption before they get reduced. If you use enough of the BEA and GST tax exemptions before they drop, you can lock in the portion of these exemptions that would otherwise expire at the end of 2025.
Many people enjoy gifting cash and assets while they can see and enjoy the recipient’s gratitude rather than waiting to leave something of special value in a Will. In addition to giving outright cash gifts, money can be gifted in other ways, including contributing to 529 Plan accounts, IRAs, or Roth IRAs for children or grandchildren.
Clients should also consider gifting through a Trust. Grantor trusts (ones that are treated for income tax purposes as if they were the giver during the giver’s remaining lifetime) are often used for gifting purposes, because they can be drafted with great flexibility and they can also permit post-gifting transactions to take place without generating income taxes.
For many of our clients, GST planning is prudent. A client’s GST tax exemption may be used to help improve the benefits available to the client’s desired beneficiaries. Clients’ GST exemptions are used to make long term or dynasty trusts that will last for multiple generations, without unfavorable tax consequences. Long-term and dynasty trusts offer many potential tax and other advantages over outright distributions to beneficiaries. For example, assets distributed outright to beneficiaries through a Will can be exposed to attack by a beneficiary’s creditors, including a beneficiary’s spouse in a divorce, and can be exposed to gift and estate taxes in the beneficiary’s own hands. However, assets left to a beneficiary in a GST-planning long-term trust can receive protection from divorces and other creditor problems that beneficiary may have while also being sheltered from gift taxes and estate taxes during the beneficiary’s lifetime, after the beneficiary’s death, and even through multiple generations of that beneficiary’s descendants.
The Metro Atlanta-based estate planning attorneys at Morgan & DiSalvo have a thorough understanding of the taxes that can affect a person’s estate, and we can help you devise an estate plan that preserves as much of your wealth as possible while shaping your financial legacy.
Please call (678) 720-0750 or email info@morgandisalvo.com to schedule a consultation.
