2025 Federal Lifetime Estate and Gift Tax Changes: What You Need to Know
By Attorney Bryce Kaufman
As we enter 2025, significant changes to federal estate and gift tax laws are on the horizon, potentially affecting how families and individuals plan their financial legacies. With the temporary provisions of the 2017 Tax Cuts and Jobs Act (TCJA) set to expire, the lifetime estate and gift tax exemption may revert to lower thresholds, impacting the tax implications of wealth transfer strategies. (Note: Trump and his administration have signaled their intention to extend the estate tax exemption, and we will of course, keep you posted.) Understanding these changes is crucial for protecting your assets and ensuring your estate plan aligns with your goals. Here’s an overview of what to expect and how to prepare for these impending adjustments.
Annual Gift Tax Exclusion on the Rise
The annual federal gift tax exclusion is increasing, offering individuals an opportunity to transfer more wealth tax-free.
In 2024, the exclusion stood at $18,000 per individual or $36,000 for a married couple. In 2025, these numbers are seeing a boost to $19,000 per individual and $38,000 for married couples. This adjustment provides individuals more flexibility in gifting without triggering federal gift taxes. Gifts over the federal annual exclusion require the filing of a gift tax return, which will simply lower the federal estate tax exemption described below. As long as there is any remaining estate and gift tax exemption, they do not result in gift tax being paid by the donor.
Here in the Pacific Northwest, there is no gifting limit at the state level. That means that a gift above the federal gift tax annual exclusion has no negative ramifications on state-level estate tax, nor does anything have to be filed with the state. Lifetime gifts completely avoid state estate tax at death in Oregon and Washington. Oregon will tax an estate over $1,000,000, regardless of single or married, at a progressive rate of 10%-16%, while Washington will tax an estate over $2,193,000, regardless of single or married, at a progressive rate of 10%-20%. With such low state level estate tax, setting up a trust and lifetime gifts are extremely beneficial.
Changes in the Federal Lifetime Estate and Gift Tax Exemption
The federal lifetime estate and gift tax exemption plays a key role in long-term estate planning. Upcoming changes could significantly impact how you protect and transfer wealth, making it essential to stay informed and prepared.
In 2024, the exemption was $13,610,000 for individuals and $27,220,000 for married couples. Any amount over this exemption is taxed at 40%. This year, the exemption is $13,990,000 for individuals and $27,980,000 for married couples.
It’s important to note that these current exemption amounts were established in 2017 under the Tax Cuts and Jobs Act and are currently slated to sunset at the end of this year. Without legislative action before January 1, 2026, the federal estate and lifetime gift tax exemption amounts could decrease to approximately $6,800,000 per person or $13,600,000 per married couple, indexed for inflation.
For those who might be wondering about the urgency of these changes, it’s essential to understand that time is of the essence. The Internal Revenue Service (IRS) has made it clear that large gifts made before the end of 2025 will be “locked in” or “grandfathered” to utilize the higher estate and gift tax exemption, protecting individuals and couples from potential reductions in the future. For example, a married couple gifts a total of $20,000,000 over the annual exclusion in 2024. Since this amount is below the exemption of $27,220,000, there is no tax implications. Now let’s pretend the married couple passes away in 2026 and the tax exemption has decreased to $13,600,000. Even though they gifted $20,000,000 in 2024 ($6,400,000 over exemption), they were grandfathered in to the rules at 2024, saving the estate $2,560,000. (Note: Please see our November 2024 news article for a further breakdown of potential TCJA changes.)
What about Income Tax?
It is important to factor in income tax planning and what is called a “step-up in basis.” A step-up in basis refers to the adjustment of the value of an asset for tax purposes when it is transferred from one person to another, typically upon death (inheritance) or as a gift. This adjustment is often extremely beneficial for the recipient as it can potentially eliminate any income tax.
- Inheritance: When someone passes away and leaves assets to their heirs, the heirs generally receive a “step-up” in the basis of the inherited assets to their fair market value at the time of the decedent’s death. This means that the new basis for the heirs is not the original cost of the asset but its value at the time of the decedent’s death. This is advantageous because it can reduce the income tax liability if the heirs decide to sell the inherited assets in the future. This applies to any appreciated nonqualified asset such as property or stock that has been appreciated. If children inherit the family home and sell it shortly after the parent’s death, the only income gains they would pay, if any, is that on the appreciation from date of death to the date of sale.
- Gifting: When someone gifts an asset during their lifetime, the recipient generally takes over the donor’s basis in that asset. This is known as a “carryover basis.” However, certain gifts, such as those subject to the gift tax, may trigger a step-up in basis. For instance, if the donor paid gift tax on the gift, the recipient may receive a step-up in basis. However, they do not receive a second step-up after the donor’s death.
Looking Ahead: The Importance of Planning
The looming sunset of the current federal exemption at the end of 2025 underscores the need for planning. Without proper planning, individuals and families could face considerable estate tax liability.
As we move further into 2025, staying informed about these changes and consulting with financial and legal professionals becomes crucial for effective estate and tax planning. The evolving landscape of federal tax policies emphasizes the need for individuals to be proactive in navigating their financial affairs and ensuring that their legacy is protected for future generations.
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What is your all-time favorite book or movie?: My favorite book is Fourth Wing by Rebecca Yarros. There’s nothing better than getting home from a day at the office and jumping into a world of dragon riders and magic.
Most memorable place you have vacationed: In college, I had the opportunity to study abroad in London. If I could, I would go back in a heartbeat!
What is your favorite food: Any sort of potato is a friend of mine.
Parmesan-Crusted Roasted Potatoes
Ingredients:
- 2 tablespoons unsalted butter
- 1 (24 ounce) package baby Yukon Gold potatoes, halved
- ½ cup freshly grated Parmesan cheese
- 1 ½ teaspoons garlic and herb seasoning
- 1 teaspoon kosher salt
Directions:
- Preheat oven to 425 degrees F. Place butter in a 9 x 13-inch baking dish or nonstick baking pan and place in the oven until the butter melts, about 4 minutes.
- While the butter melts, score potatoes about 1/4-inch-deep in a diamond pattern (crosshatch). Set aside.
- Remove the pan from the oven and let cool slightly, about 2 minutes. Stir Parmesan cheese, garlic and herb seasoning, and salt into butter to form a paste.
- Spread about 1 teaspoon of the Parmesan paste on the cut-side of each potato; arrange, cut-side down, in the pan. Place in the preheated oven.
- Bake until the potatoes are tender and the Parmesan creates a golden crust on the bottom of the potatoes, about 25 minutes. Let stand 5 minutes before using a spatula to release potatoes from pan.
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