New Exemption Amounts
The Internal Revenue Service recently announced that the federal estate and gift tax exemption amounts will be $13.99 million per individual for gifts and deaths occurring in 2025, increasing from the previous $13.61 million in 2024. This means that, in 2025, a married couple can now pass along a total of $27.98 million before having to pay any federal estate or gift tax. For a couple who has already utilized their entire exemption through lifetime gifting, they may now give away another $760,000 in 2025, and an individual who has similarly maxed out his or her exemption may now give away another $380,000 in 2025. The generation-skipping transfer tax (“GST”) exemption amount is also increasing to $13.99 million per individual. While the estate and gift tax is different from the GST tax, the amount a taxpayer can exempt from the respective tax is the same amount.
The annual gift tax exclusion is also increasing next year. The exclusion will be $19,000 per recipient for 2025, up from $18,000 in 2024. Furthermore, the annual amount that one may give to a non-US citizen spouse will increase to $190,000 in 2025, up from $185,000 in 2024.
Note that the federal, estate and GST tax rate remains at 40%.
What this Means
The Sunset of the 2017 Tax Cuts and Jobs Act
The 2025 exemption and exclusion amounts are record-setting highs. While these increases may not come as a surprise to most, 2025 is a pivotal year for estate and gift tax planning with the sunset of the 2017 Tax Cuts and Jobs Act coming in 2026. The increase to the federal estate tax exemption and gift exclusion amounts provides estate planners and clients with another year of increased gifting options, and clients who may be subject to federal estate tax should consider fully utilizing their lifetime gift tax exclusion by making lifetime gifts before it is too late.
The federal estate tax exemption and gift exclusion amounts are scheduled to return to 2017 levels in 2026, unless the appropriate legislation is passed extending the increased exemption. This means that the single taxpayer limit could drop back to an estimated $7 million, and a married couple might only be able to gift an estimated $14 million. Therefore, it is important that taxpayers consider using as much of their lifetime gift and estate tax exemption now before the exemption amount might be reduced.
Utilize Annual Gifting
The annual gift tax exclusion allows a taxpayer to give a certain amount (i.e., in 2025, $19,000) per donee per year, tax-free, without reducing the taxpayer's lifetime gift and estate tax exemption (i.e., in 2025, $13.99 million). This means that a married couple can give $38,000 per recipient per year, starting in 2025. This can be a powerful estate tax reduction tool. To illustrate, if a married couple has two children and five grandchildren, they may transfer $266,000 in 2025 to their descendants and their combined $27.98 million gift tax exemption remains intact.
Making Taxable Gifts Using Exemption
If a taxpayer gifts an amount greater than the annual gift tax exclusion, that taxpayer will use a portion of his or her lifetime gift tax exemption (i.e., in 2025, $13.99 million). Since the gift and estate tax exemptions are connected, the use of the taxpayer's gift tax exemption during the taxpayer's lifetime will reduce the estate tax exemption amount available at the taxpayer's death to shelter assets from estate taxes. Note that a taxpayer must file a gift tax return, due April 15 in the following year, to report such gifts and track the amount of the lifetime exemption that has been used. For example, a married couple, in addition to making annual exclusion gifts, may then decide to make additional significant gifts utilizing all or a portion of their combined $27.98 million gift tax exemption without owing gift taxes. Any such assets gifted are removed from the taxpayers' taxable estates, which also allows all future appreciation on those assets to avoid gift and estate taxes.
Gifts to Non-Citizen Spouses
Spouses who are both U.S. citizens generally may transfer unlimited amounts to each other without triggering a gift tax. This is because any assets transferred in excess of the couple's combined estate tax exemption (i.e., in 2025, $27.98 million) will eventually be taxed at the death of the surviving spouse. In other words, transfers of assets between U.S. citizen spouses simply defers the payment of estate tax and does not eliminate it.
However, gifts to a non-U.S. citizen spouse are not unlimited. If unlimited asset transfers were permitted to a non-U.S. citizen spouse, that transferred wealth could potentially avoid U.S. estate taxation upon the non-U.S. citizen spouse's death if the non-U.S. citizen spouse was no longer a resident for U.S. estate tax purposes. As such, when the donee spouse is not a U.S. citizen, regardless of whether such spouse is a U.S. resident or non-U.S. resident, the amount of tax-free gifts is limited to an annual exclusion amount. Pursuant to the IRS announcement, in 2025, the first $190,000 of gifts to a non-U.S. citizen spouse are not included in the total amount of taxable gifts, and do not reduce the donor spouse's lifetime gift tax exemption amount.
Please contact any member of our Trusts and Estates group if you have questions about the new exemption amounts and their impact on gift and estate tax planning strategies.
