Most people think of sunsets as beautiful, peaceful events. However, when it comes to the federal estate tax sunset, the words “beautiful” and “peaceful” do not come to mind. Significant changes are looming on the horizon, and 2025 is the crucial time to evaluate strategies and prepare for the changes. Let’s dive into what this means and how you can be ready.
What Is Federal Estate Tax?
The federal estate tax is a tax on the transfer of property after someone passes away. It applies to estates exceeding a certain threshold, known as the “applicable exclusion amount” or the “estate tax exemption.” After someone dies, an amount up to the exemption amount passes to their heirs free of estate tax. If their assets are worth more than the exemption, tax is assessed against the excess.
For example, the estate tax exemption in 2009 was $3.5 million. For a person who died that year with an estate worth $5 million, $3.5 million of their assets passed free of tax, and the excess, $1.5 million, was subject to tax.
The Current Landscape
When Congress enacted the Tax Cuts and Jobs Act (TCJA) in 2017, the applicable exclusion amount increased to historically high levels. In 2025, the exemption sits at $13.99 million per individual and $27.98 million for married couples. Most estates fall below these thresholds and avoid estate tax entirely.
However, the legislation did not make the high estate tax exemptions permanent. When it was enacted in 2017, the TCJA included a sunset clause to end the higher exemption amounts after eight years. Unless Congress takes action to extend or modify the law by the end of this year, the threshold will automatically revert to pre-TCJA levels on January 1st. If that happens, the exemptions will drop to $7 million per person and $14 million for a married couple.
Implications of the Sunset
A dramatic decrease in the estate tax exemption would mean that many estates which have been shielded from taxation will now face a tax bill from Uncle Sam. Because the tax is paid from the estate, there will be less remaining to distribute to heirs. Currently, the federal estate tax rate tops out at 40%, making it a crucial estate planning consideration for individuals with substantial assets.
How to Prepare
The good news is that we have until the end of the year to put estate plans in place which will take advantage of the higher exclusion amounts. Unfortunately, unless Congress acts quickly, the opportunity to do estate planning which takes advantage of the current exemption amounts will go away on January 1st. Proactive planning is essential to minimize potential tax burdens.
Stay Informed
Tax laws are complex and subject to change. Right now, the sunset of the TCJA applicable exclusion amount is scheduled for January 1, 2026, but political dynamics could influence whether it’s extended, modified, or replaced. Keeping an eye on legislative developments and maintaining a flexible estate plan will be key to navigating this evolving landscape. Our attorneys can work with you now to develop a plan of action ahead of the sunset.
Final Thoughts
The impending sunset of the high federal estate tax exemptions underscores the importance of timely and strategic estate planning. By acting sooner rather than later, you can protect your assets, ensure your estate reflects your wishes, and minimize or eliminate an estate tax burden for your heirs.
If you’d like to learn more or discuss your options, consider reaching out to Troyer & Good, PC, to start the process. Your legacy is worth it.