How Will the Federal Estate Tax Exemption Change in 2025 Affect My Estate Planning?

If Congress does not act, the federal estate tax exemption will revert to $5 million in 2025. This change has taxpayers with significant estates scrambling to reduce the value of their estates and, subsequently, their potential estate tax liability.

What Is a Federal Estate Tax?

A federal estate tax is the tax on a decedent’s estate. An estate consists of the decedent’s money, property, real estate, business interests, and insurance. The decedent’s estate pays the federal estate tax. Then, the remainder of the estate goes to the decedent’s beneficiaries. Estate tax is different from inheritance tax. Some states assess an inheritance tax on beneficiaries receiving money from a decedent’s estate.

Federal Estate Tax Exemption to Sunset

Since the 2017 Tax Cut and Jobs Act (TCJA), many people have not worried about federal estate taxes. The law raised the federal estate tax exemption to a high threshold and increased it each year. In 2025, the exemption for a single individual is $13.99 million. For married couples, the exemption amount is $27.98 million.

Unless Congress passes another law, the federal estate tax exemption will revert to $5 million for 2026. While $5 million may seem like an exorbitant sum to many, if you live somewhere with high real estate prices, your estate could come close. For example, in California, your home bundled with your other assets may put your estate over the $5 million threshold. And with estate tax rates topping 40%, that could be a significant tax burden to your estate.

Your taxable estate includes:

• Cash
• Real estate in your name only
• Bank accounts and investments without a transfer on death (TOD) beneficiary
• Life insurance where the decedent is the policy owner, there is no named beneficiary, or the estate is the beneficiary

If Congress does not act to pass a new law and the $5 million threshold remains, you should review your assets and see how this might impact your estate.

For example, you may determine that your estate’s value is $7 million. Therefore, $5 million is tax-exempt, but $2 million will be taxed at a 40% tax rate. Your estate will pay $800,000 in federal estate tax, leaving less money for your beneficiaries.

How To Reduce Your Estate to Avoid Federal Estate Taxes

You can reduce your estate to avoid being impacted by the $5 million threshold. You can check beneficiary designations, make gifts from your estate, donate to charity, or create trusts to remove assets from your estate.

Check Beneficiary Designations

Certain assets are not part of probate, including bank accounts with transfer-on-death (TOD) designations. With a TOD account, you name someone to receive the proceeds of these accounts upon your death. If you do not name someone or that someone has predeceased you and you did not name a backup, there is no account owner. Therefore, the money in the bank account would become part of your estate. Similarly, if you have an insurance policy, a beneficiary must receive the proceeds, or it will go back to your estate. Make sure you have named beneficiaries on all TOD accounts, CDs, and insurance policies. You should also name a contingent beneficiary if the primary beneficiary has predeceased you.

Make Gifts From Your Estate

In 2025, you can give an individual $19,000 annually without having to file a gift tax return with the IRS. For married couples, the gift tax exemption is $38,000. Gift assets or make distributions to family members and friends while you are alive to reduce your estate. Talk to a tax advisor about gifting strategies and tax planning.

Consider Revocable and Irrevocable Trusts

You can create a revocable or living trust, which means you create a trust as a grantor and move assets (money, property, and real estate) into the trust. You can name yourself as the trustee of the trust to manage the property and name yourself as the beneficiary of the trust. You can add or remove any property into or out of the trust during your lifetime. Upon your death, the assets remaining in the trust are not part of your estate. It is called a revocable trust because you can revoke the trust during your lifetime.

An irrevocable trust is one that you can set up, but unlike a revocable trust, you cannot revoke it. Any property placed in the trust will stay in the trust. An example of an irrevocable trust is an irrevocable life insurance trust, where the trust owns a life insurance policy. Upon your death, the proceeds go to the beneficiaries of the trust; it is not a part of your taxable estate.

Another irrevocable trust is a Charitable Lead Trust. This is where you give money in trust to a charity. The property you give the charity in a trust is removed from your estate. However, during your lifetime, you may receive proceeds from the trust either as a fixed amount or as a percentage. Upon your death, the property goes to the trust.

Keep Up to Date on Tax Changes

If you have a high net worth, it is wise to keep updated on changes to the federal estate tax exemption amount, annual gift tax exclusions and any tax changes that may affect your estate. Congress could certainly revisit the estate tax before the sunset provision goes into effect, meaning the $13 million exemption could be extended, it could revert to $5 million, or there could be a compromise somewhere in between. An experienced estate planning attorney will be able to advise you on planning strategies to reduce your estate tax burden where possible and leave more money for your loved ones.

Related Resources

• 10 Ways To Reduce Estate Taxes (FindLaw Learn About The Law – Estate Planning)
• Estate Tax Law - FindLaw (FindLaw Learn About The Law – Estate Planning)
• Federal ’Death Taxes’ FAQ (FindLaw Learn About The Law – Estate Planning)