Historic Estate Tax Window Closing: Guide to Leveraging Your Exemption

When the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, it was the largest overhaul to the U.S. tax code in decades. And while some of the legislation’s provisions were intended to create permanent changes to the way our tax system works, others were temporary. Unless Congress intervenes, these temporary provisions will sunset on Dec. 31, 2025. Among the expiring provisions is one that doubled the lifetime estate and gift tax exemption. Should this provision sunset as planned, the result will be a substantial tax increase for Americans looking to transfer significant wealth to future generations.

Now for the good news: Your Northwestern Mutual financial advisor can help you build a personalized plan to take advantage of today’s exemption amounts while they’re still on the table. But now is the time to start planning. Here’s what you need to know.

The Political Environment

While the TCJA provision that doubled the lifetime estate and gift tax exemption is scheduled to expire at the end of 2025, there is the possibility that Congress will act to prevent this outcome. Of note, we anticipate that there will be a major debate on Capitol Hill about tax policy in 2025, and lawmakers will likely pass some type of tax bill that year.

That said, lawmakers could go in different directions on the lifetime estate and gift tax exemption levels, and this debate will largely be shaped by which political party controls Congress and/or the White House in 2025. Although preventing the expiration of the TCJA’s lifetime estate and gift tax exemption levels or, alternatively, allowing them to lapse are both distinct possibilities, lawmakers could ultimately do something different. For instance, Congress could decide that these levels should be even lower than they were prior to the TCJA. There’s a wide array of potential outcomes and significant risk that the post-2025 tax policy landscape could be more challenging for transferring wealth.

Given the uncertainty ahead, now is an opportune moment for affluent individuals and couples to lock in today’s historically high exemptions while they’re still available.

How Estate and Gift Taxes Work

Before we get into the planning opportunity, it’s important to understand how estate and gift taxes work. The federal government imposes three types of taxes when transferring wealth. First, you have the estate tax, which applies on wealth transferred at death, and the gift tax, which applies to wealth transferred during your life. Each is effectively a flat tax of 40 percent. Beyond estate and gift taxes, there is an additional 40 percent generation-skipping transfer (GST) tax that gets layered on if you make either type of transfer to a grandchild or further descendant.

How the Lifetime Estate and Gift Tax Exemption Works

Luckily, the law allows you to transfer a certain amount of assets (the exemption amount) without paying any estate and gift taxes. Previously, the amount was $5 million per person, but it doubled to $10 million per person in 2018 under the TCJA. This amount also increases with inflation, so it is already $13.61 million per person for 2024. If you’re married, you get twice this amount—a combined exemption of $27.22 million in 2024.

One thing to keep in mind is this is a unified exemption, which means that any gifts you give during your lifetime can affect your available exemption for the property you transfer at death.

The GST Tax Lifetime Exemption

It’s also worth noting that if you are looking to make a generation-skipping transfer, you have a GST tax lifetime exemption. This exemption functions similarly to the lifetime estate and gift tax exemption. Indeed, the GST tax exemption amount matches the lifetime estate and gift tax exemption amount (and is likewise scheduled to roughly halve at the end of 2025). But it’s important to note that the GST lifetime exemption is separate from the lifetime estate and gift tax exemption. In other words, this is not a unified exemption. This means that if you deplete your lifetime estate and gift tax exemption, you won’t necessarily deplete your GST tax lifetime exemption. That said, when gifting to grandchildren and other future-generation family members (or to a trust for their benefit), these exemptions can be applied concurrently.