Now that we are approaching the end of the year, the government is updating some of their parameters that impact aspects of estate planning. With this in mind, the IRS has recently released the 2025 estate tax exclusion level and another important update.
2025 Federal Estate Tax Exclusion
The estate tax exclusion is a set dollar amount that can be transferred free of taxation. Any portion of an estate that exceeds the exclusion is potentially taxable.
This year, the exclusion has been $13.61 million, and it will go up to $13.99 million in 2025. There is an unlimited marital deduction, which means you can leave unlimited property to your spouse free of taxation.
Since 2011, the estate tax exclusion has been portable between spouses, so a surviving spouse can use the exclusion that was earmarked for their deceased spouse.
Annual Federal Gift Tax Exclusion
It would be easy to get around the estate tax if you could just give lifetime gifts to loved ones who would be inheriting the assets anyway. Unfortunately, this is not possible because there is also a gift tax that is unified with the estate tax.
The $13.99 million exclusion that we will have next year applies to large lifetime gifts and the estate will be transferred after you’re gone. However, there is another annual gift tax exclusion that sits apart from the unified exclusion.
You can use the annual gift tax exclusion to give a certain amount to any number of people each year tax-free without cutting into your larger multimillion-dollar exclusion. In 2024, the annual exclusion was $18,000, and it is going up to $19,000 next year.
In addition to this exclusion, there is an educational exclusion that applies to tuition. Payments of school tuition for others are not considered to be taxable gifts. This does not apply to other expenses students may incur, but you could use your annual exclusion to provide additional support.
There’s also a medical exclusion. Under the tax code, you can pay medical bills for others without incurring any gift tax liability, and this exclusion applies to the payment of health insurance premiums.
Pending Exclusion Reduction
The exclusion that we have at the present time is at its highest level ever. It is a product of the Tax Cuts and Jobs Act that was enacted at the end of 2017.
That measure is going to sunset when 2025 comes to a close. At that time, the exclusion will revert back to the 2017 level with an inflation adjustment. It will be approximately half of what it was in 2025 on January 1, 2026, unless additional legislation is passed before then.
This means that you have a limited window of opportunity. You could fund certain types of tax efficiency trusts while the exclusion is that this record high level, and we can explain your options.
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