The current exemption on the federal (lifetime) gift tax and estate tax are set to sunset at the end of 2025.

Unless Congress acts to forestall the sunset, the exemption will revert to regulations as they stood in 2019.

The exemption, which is $13.61 million per person in 2024, will reset to $5 million plus adjustment for inflation

For many families, that change will have a significant tax impact unless changes are made to their estate plans. If the size of your estate is significant, you should discuss with your estate attorney whether you should consider alternatives such as annual gifts to members of your family, or establishing trusts that will minimize the estate tax or eliminate the tax completely.

Under the current regulations, you are allowed to gift up to $18,000 per year to an unlimited number of individuals without incurring any gift tax. The current yearly limit is expected to be approximately $19,000 in 2025.The individual you select for the gift does not have to be your relative. Your spouse may also make a gift to the same individual, meaning that a married couple can make gifts each year up to $36,000 per year to a given recipient without triggering the gift tax.

If you make a gift that exceeds $18,000 (or $36,000 as a couple) in one year, then you should file IRS Form 709 specifying the amount of any gift you make that exceeds $18,000. So, if you made a $50,000 gift in 2024 to an individual then you should report $32,000 on Form 709. Every individual is now allowed a lifetime gift allowance.

Under current estate regulations, the lifetime exemption is $13.61 million. That limit is also indexed to inflation each year. So, now an estate would incur no gift tax unless the total amount of gifts made above the existing per year limit exceeds $13.61 million. However, after 2025, depending on which party wins the presidential election, the limits may change significantly. For example, Sen. Elizabeth Warren, D-Massachusetts, is sponsoring a bill that reduces the annual gift tax exemption per donee to $10,000 per year. The bill also proposes reducing the estate tax exemption to $3.5 million.

The Savings Game: Should you name a trust as an IRA beneficiary?

The Treasury Department has indicated that individuals can make gifts until the end of 2025 using the levels currently in place. This means that an individual can make gifts between now and the end of 2025 using the existing limits. However, unless Congress passes other legislation, starting in 2026, the pre-2018 limits will apply. So, the lifetime limit of $13.61 million will still apply if the gifts had been established prior to the end of 2015.

Consider an irrevocable trust

There is a potential advantage in establishing an irrevocable trust prior to the end of 2025, as the funds in the trust will not be part of your estate.

The top estate tax rate is now 40%, so by establishing an irrevocable trust prior to the end of 2025, it is possible you can save a considerable amount of taxes. However, once you establish an irrevocable trust, you lose the flexibility to modify the terms of the trust. All beneficiaries subject to the existing irrevocable trust have to agree to any changes. In addition, you have to take into consideration the cost of establishing the trust.

Bottom line: It is by no means certain that Congress will pass new estate and gift tax regulations, and some households will be at risk for significant tax liabilities if regulations revert to the 2019 status quo ante: an exemption limit of $5 million, plus inflation adjustments. If you expect your estate will not exceed about $7 million (to use an estimate of what the exemption would be with inflation factored in), no action is required.

However, the laws in effect now are more favorable, regarding individual gifts and lifetime limits, and any actions you take between now and the end of 2025 will stay in effect and not revert back to pre-2019 limits. Discuss your options with an experienced estate attorney.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.