Navigating the 2025 Estate Tax Sunset: A Guide to Lifetime Giving and Split Gifts

Estate planning is a complex process that requires careful consideration of various factors, including the estate tax. The year 2025 is significant for estate planning due to an impending change known as the “Estate Tax Sunset.”

The 2025 Estate Tax Sunset

The Estate Tax Sunset is a term used to describe a change in the federal estate tax exemption, which is the amount of money an individual can pass on at death without incurring estate taxes. For 2022, the exemption is set at $12.06 million per individual. However, as of January 1, 2026, this exemption is set to revert to its pre-2018 levels, which were approximately $5.6 million per individual (adjusted for inflation).

The implications of this change are significant. If your estate exceeds the exempted amount, it could be subject to substantial estate taxes. This is where lifetime giving and split gifts come into play.

Lifetime Giving

One strategy to address the 2025 Estate Tax Sunset is to engage in lifetime giving. Instead of waiting to pass on assets through your will, you can make gifts during your lifetime. These gifts can help reduce the overall value of your estate, potentially minimizing your estate tax liability.

Lifetime giving allows you to provide financial support to your loved ones while simultaneously taking advantage of the current, higher estate tax exemption. It’s essential to consult with an estate planning professional to navigate the intricacies of gift tax rules and ensure your gifts are structured in a tax-efficient manner.

Split Gifts

Another tactic to manage estate taxes is through split gifts, which can be especially beneficial for married couples. In a split gift, each spouse contributes to a gift, essentially “splitting” it into two equal parts, even if one spouse provides all the funds. By doing so, both spouses can utilize their individual exemptions, potentially doubling the amount sheltered from estate taxes.

Split gifts are a powerful strategy when done correctly, but it’s crucial to adhere to the IRS guidelines for this method. Seek advice from an estate planning expert to ensure that your split gifts are executed in compliance with the law.

Considerations and Caution

While lifetime giving and split gifts can be valuable tools in managing your estate tax liability, they require careful planning and execution. Some important considerations include:

Annual Gift Exclusion. The IRS allows you to make annual tax-free gifts up to a certain amount per recipient without affecting your lifetime gift tax exclusion. This exclusion can be used strategically to reduce your taxable estate.

Gift Tax Return. Remember that gifts above the annual exclusion limit must be reported on a gift tax return. This reporting helps track your lifetime gift tax exemption.

Potential Gift Tax. While the estate tax exemption is high, the gift tax exemption is not. If you use your entire gift tax exemption during your lifetime, it can affect your estate tax exemption, so balance your strategies carefully.

Seek Professional Advice. Estate planning is intricate, and tax laws are subject to change. To make the most of lifetime giving and split gifts, it’s essential to consult with an experienced estate planning attorney or financial advisor who can tailor a plan to your specific needs and the evolving tax landscape.

Strategies like lifetime giving and split gifts can be instrumental in mitigating estate tax liabilities and preserving your assets for your heirs. However, the effectiveness of these strategies depends on meticulous planning and adherence to IRS regulations. Therefore, it’s advisable to work with experts who can guide you through the complexities of estate planning in the face of changing tax laws. Let’s meet to discuss your options, and we’ll help you protect your assets as you pass them to your heirs.