Many of the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) affecting individual taxpayers are scheduled to expire at the end of 2025 (the “sunset”). If it occurs, the sunset will result in over $4 trillion of tax increases in 2026. The scheduled tax increases include higher individual income tax rates and an approximately $7 million decrease in the estate tax exemption amount. This possibility has Congress awash in tax proposals to avert the sunset. In addition, various legislative proposals have been circulated to provide additional tax relief, including eliminating tax on tips and expanding the state and local tax deduction limitation.

Transfer taxes (gift, estate, and generation-skipping transfer [GST] tax) constitute one of the smaller tax revenue items at stake1 but several proposals have been introduced to specifically address these taxes. The current exemption amount for all three federal transfer taxes is $13.99 million per person ($27.98 million for married couples). In other words, an estate’s value up to $13.99 million (for a single person) does not incur federal estate tax upon the owner’s death. Estate tax is levied at a rate of 40%. If the sunset occurs, all three transfer tax exemption amounts will decrease to approximately $7 million as of January 1, 2026.

Both houses of Congress have introduced separate bills to extend the 2017 tax cuts. Both of these bills include provisions to avoid the scheduled transfer tax sunset by maintaining exemption amounts at their current levels. There are, however, differences between the House and Senate bills. The House has introduced one bill, endorsed by President Donald Trump as “one big, beautiful bill.” The one big, beautiful bill addresses border security, energy policy, and tax cuts. The Senate bill addresses border security first, and tax cuts will be addressed later in a second, separate bill.

The one big, beautiful bill would allow all issues to be addressed at the same time and provide a quicker resolution for taxpayers. The Senate plan to address the issues in two separate bills would result in extended uncertainty regarding tax cuts, which would make tax planning harder for individuals. To add more confusion, over 200 members of the House and Senate are supporting the Death Tax Repeal Act, which would eliminate estate and GST tax but retain gift taxes.

It is expected that the congressional reconciliation process would be required to pass any of the bills dealing with transfer taxes. Use of reconciliation would result in a temporary, rather than permanent, extension of the 2017 tax cuts. A temporary extension would not last for more than 10 years and could potentially be as few as two to four years. It is confusing enough not knowing what will pass. The likelihood that whatever passes will be temporary and potentially subject to change in a few years, increases the difficulty of planning.

How Has Planning Changed?

Prior to the recent election, many taxpayers with estate tax issues2 planned on making pre-sunset gifts to lock in the current exemption amounts. That is because the IRS has announced that any exemption-qualified gifts made prior to the sunset will not have to be recaptured at a decedent’s death. For example, if a married couple gifts $27.98 million this year and both pass away on January 1, 2026, when the exemption amount is scheduled to be approximately $7 million per person ($14 million per married couple), the difference between the $27.98 million gift and the estate tax exemption amount of $14 million (for the married couple) would still escape estate tax. In that situation, the use of the couple’s exemption amounts now would shield an additional $13.98 million from estate tax, which equates to approximately $5.6 million in estate tax savings. All future appreciation on gifted assets would also escape estate tax.

The Republican sweep in the recent election made it more likely that the current exemption amounts will be extended, or that estate taxes may be repealed altogether. This has led to less urgency for pre-sunset planning than was felt prior to the election, but as discussed above, the uncertainty of what will happen and how long any extensions will last has led to confusion about what planning should be done.

What to Do From Here?

The uncertainty in the tax laws should not result in a cessation of all planning activity. There are still many reasons to engage in estate planning:

  • Review your financial plan with your investment advisor to see what your financial situation looks like, not only now but in the future. This will help identify whether planning should include income tax planning, probate avoidance, liquidity planning, or estate tax avoidance.
  • Estate taxes may not sunset or could be eliminated. Taxpayers should be aware of this and be prepared to act quickly based on their particular situation. That may require the creation of trusts that can be quickly funded should the need arise.
  • Consider the state tax issues that may affect your estate. Regardless of what happens with the current exemption amounts, approximately 17 states still have state estate or inheritance tax for which planning may still be required.   
  • Make sure IRA accounts, especially large ones, are part of a coordinated estate plan.
  • For estates not subject to estate tax, income tax planning should be a high priority.
  • Ensure your current plan protects your beneficiaries from creditor and divorce claims.

Conclusion

The uncertainty about extending the estate tax exemption amount and the possibility of estate and GST tax being repealed in their entirety makes for a fluid and difficult planning environment. Estate taxes are probably not going away permanently and planning still needs to be considered for certain taxpayers. Furthermore, a variety of other factors require that estate planning not be forgotten. Every situation is different so consultation with a qualified professional is essential to analyze your specific situation and determine the best course of action to pursue.

  1. Estate tax is currently only imposed on approximately 2,500 estates per year. https://taxfoundation.org/data/all/federal/estate-tax-returns-data/ ↩︎

  2. The rest of the discussion focuses on the combined lifetime gift and estate tax exemption amount even though GST tax would also be affected. ↩︎

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