2025 Is Pivotal for Estate Tax Legislation: Preparing for TCJA’s Expiration
A set of 2017 reforms that significantly altered the way individuals and corporations navigate estate and gift tax is nearing its expiration, and what happens next has implications for all California attorneys advising on wealth transfer and tax planning.
The Tax Cuts and Jobs Act (TCJA) was the largest tax code overhaul in 30 years, enacted to stimulate economic growth by increasing the federal estate tax exemption and adjusting other key provisions. But nearly a decade later, multiple provisions affecting individuals and families are poised to sunset at the end of 2025.
While it was President Donald Trump’s administration that introduced the TCJA, agreement from the House, Senate and president is needed to extend the provisions, so banking on a particular political outcome next year is a risky approach. The TCJA permanently reduced corporate tax rates to 21%, but it only cut individual tax rates temporarily. Keeping the sunsetting provisions in place would maintain favorable conditions for wealth transfer and tax planning. However, letting them expire could generate more than $4 trillion in tax revenue — potentially aiding deficit reduction efforts.
As you monitor legislative and economic developments closely in 2025, aim to create estate plans that are flexible, tax-efficient and adaptable to various economic scenarios. Here’s what to keep in mind.
Under federal law, individuals can give away or pass on a certain amount of wealth during their lifetime or after their death without paying transfer taxes. The TCJA temporarily doubled the base amount of this exemption from $5 million to $10 million, adjusted annually for inflation.
The lifetime exemption for 2025 is $13.99 million per person (up from $13.6 million in 2024) and $27.98 million for married couples (previously $27.2 million). This means individuals can gift or leave up to that amount in assets without paying gift or estate taxes, as long as they haven’t already used the exemption through previous gifts. The same $13.6 million exemption applies to generation-skipping transfers (for example, gifting or leaving money directly to grandchildren).
The annual gift tax exclusion for 2025 is $19,000 — meaning individuals can gift up to this amount per recipient each year without using any of their lifetime exemption amount (this has increased from $18,000 in 2024).
If the TCJA sunsets at the end of 2025 as scheduled, more estates will be subject to federal taxes as the law will revert to $5 million per person, adjusted for inflation, which is expected to bring the exemption down to around $7 million.
The Trump administration could extend or modify the provision, but any potential reduction could significantly impact estate planning strategies for those with larger estates.
If the TCJA is not extended, anyone with an estate or lifetime gifts exceeding the exemption limit in 2026 could face a 40% tax on the amount over the cap — which means now is the time to help clients take advantage of the current exemption by considering additional gifts, trusts or other strategies.
Even in times of a stable regulatory framework, adaptability should be the cornerstone of any estate plan. Ideally, attorneys will draft documents that allow adjustments based on future changes in tax laws or personal circumstances. This might include disclaimer trusts, which allow beneficiaries to decide post-death whether to accept assets outright or fund a trust based on prevailing tax laws. It could also include using Clayton QTIP Election trusts, which provide added flexibility to married couples by allowing the decedent’s personal representative to determine what portion of the decedent’s estate should be allocated to a QTIP Trust (given the size of the decedent’s estate and the tax laws in effect at the time of the decedent’s death). Additionally, leveraging the power of appointment can give trustees or beneficiaries flexibility over how assets are distributed or held.
If the TCJA sunsets, tools that might have been underutilized during the high-exemption era — which some practitioners call the “alphabet soup” of trusts — are likely to regain prominence. Consider the following strategies to efficiently transfer wealth or remove appreciating assets from an estate while minimizing tax liability:
These are irrevocable trusts that individuals and families can use to transfer wealth without using much of their lifetime gift and estate tax exemption. The grantor can transfer assets into the trust and receive a fixed annual payment from the trust for a set number of years. At the end of the trust term, any remaining assets (which might have since grown in value) pass to the heirs, often with minimal or no additional gift tax owed.
This type of irrevocable trust can be used to remove assets from the grantor’s taxable estate, allowing them to grow independently while the grantor remains the owner for income tax purposes. Since the grantor is responsible for paying any income taxes on the trust income, this allows the grantor to deplete their taxable estate without further use of their lifetime gift and estate tax exemption amount. This is a good option for high-growth assets.
This irrevocable trust allows the grantor to donate assets to charity while also providing income for themselves or others over time. After transferring assets into the trust, the grantor or beneficiary receives payments over a certain number of years, after which the remainder goes to a charity of their choice. This strategy can help with retirement or living expenses and offers some tax benefits.
This trust distributes a regular payment to a charity until a certain date or event, with the remainder going to designated beneficiaries.
This is a trust that holds and pays for a life insurance policy on the grantor before distributing the policy payout to the designated beneficiaries. This removes the life insurance proceeds from the decedent’s (insured’s) estate when normally it would be included.
These two types of tax-advantaged education savings accounts are established to help minor beneficiaries and are typically set up during the lifetime of the account owner.
These accounts can provide essential funding for beneficiaries with disabilities who rely on government benefits. By funding these accounts inter vivos, contributions are considered completed gifts (rather than future interests in property), ensuring compliance with the annual gift tax exclusion limits and avoiding potential tax issues.
By gifting or transferring minority interests in a limited partnership to family members (or to a trust for their benefit), business owners can realize tremendous tax savings by utilizing valuation discounts and because potential future appreciation of the minority interests in the company is transferred out of the owner’s estate. This strategy is often paired with others, such as IDGTs, GRATs or CLTs.
These trusts allow grantors to use their lifetime exclusion amount to pass separate property assets onto a trust for their spouse’s benefit, who can receive discretionary distributions from the trust. This effectively removes the assets (and any future appreciation on them) from the grantor-spouse’s taxable estate while allowing the grantor-spouse to maintain indirect access to the assets through their marriage to the beneficiary-spouse.
Using the donor’s annual gifting exclusion amount, these programs allow the donor to give up to the annual exclusion amount each year to recipients without incurring gift tax.
As other provisions are poised to expire after 2025, here’s a look at some of the potential implications for California estate planning attorneys:
Estate planning is no longer just about minimizing taxes; it often overlaps with wealth management. Clients are increasingly relying on their attorneys to understand the broader economic factors affecting their estates, including fluctuating markets or inflation.
Next year could become the most consequential for tax legislation since the TCJA. And while no plan can truly “economy-proof” an estate, attorneys should aim to address various possible scenarios. Drafting built-in contingencies and staying informed about political and economic developments will be key to navigating these shifts.