As the holidays and new year approach, it’s December 31, 2025, that has financial advisors talking with renewed urgency.
That’s when the estate tax exemption is scheduled to plummet to its pre-2018 level of around $5 million per person—or $7 million adjusted for inflation—and $14 million per couple. Reducing this threshold—which sets the amount of wealth that passes to heirs free of the federal estate tax—would raise more government revenue from high-value estates. When due, estate taxes are paid by the deceased’s estate prior to the distribution of estate assets, reducing the amount to heirs.
A closer look at the estate tax
- The modern estate tax saw its origin in 1916 with an exemption amount of $50,000 and a top tax rate of 10%.
- Since then, these amounts have fluctuated. For instance, between 2000 and 2017, the exemption went up from $675,000 (with a top tax rate of 55%) to $5,490,000 with a 40% tax rate.
- Then, the Tax Cuts and Jobs Act of 2017 (TCJA) more than doubled the exemption amount—bringing it to $11,180,000 per person in 2018, adjusted for inflation.
- Today, the exemption is $13,610,000 ($27,220,000 for a married couple).
This change has advisors like Karla Salinas, a financial planner at BOK Financial®, and Kimberly Bridges, director of financial planning at the organization, in urgency mode. Both say that many people either don’t realize the time needed to update their estate plans or, even if they do, underestimate the volume of estate plans that attorneys will need to work through by the deadline.
“The sooner you act, the better chance you’ll have to get everything ‘all tied up with a bow’ before the sunset window closes,” said Bridges. “If you’ve not yet begun the conversation with your advisory team, then the sooner, the better.”
Though the change has been years in the making—it was included in the Tax Cuts and Jobs Act of 2017—many to be affected have been slow to act. Election year jitters, anticipated interest rate changes and volatile markets have added to the uncertainty and hesitation, experts said.
“The sooner you act, the better chance you’ll have to get everything ‘all tied up with a bow’ before the sunset window closes.”- Kimberly Bridges, director of financial planning at BOK Financial
Will you or your heirs be impacted?
Even with the lower exemption amount, relatively few U.S. households will be impacted by the federal estate tax. After all, only the top 2% of households have estates valued at near $2.5 million. Families with less than $14 million in assets (or $7 million per spouse) will likely remain under the exemption amount or can take relatively easy steps to get there, said Salinas.
However, families who expect a large inheritance or who may benefit from a highly appreciating assets could still find themselves in estate tax territory and may need to act expeditiously. To avoid estate taxes, they’ll need to move assets below the exemption amount. However, that may not be prudent if doing so would materially affect ongoing income (such as gifting stocks that pay dividends) or a preferred lifestyle, Salinas cautioned. “In estate planning, you never want the tax savings to outweigh the practical considerations,” she said.
Highly valued estates often involve even more aggressive measures and complex tactics, so time is of the essence to update these estate plans before the sunset window closes, they said. “For these more advanced strategies, you don’t want it to be a rushed job,” said Salinas.
What high-net-worth (HNW) individuals and families need to do
If your estate is large enough to be impacted by the federal estate tax—either now or with the upcoming lower threshold—you can start taking steps today to potentially reduce your heirs’ tax burden, Bridges and Salinas said. These steps include:
- Assessing the value of your estate.
- Consulting your CPA, estate planning attorney and wealth manager to identify your options and choose the right strategy for you. “Assess each strategy and consider the downside risks. These decisions can’t be made in a vacuum and need a team approach,” said Bridges.
- Prioritizing and acting accordingly. For some, gifts to heirs may outrank charity. Others may want charities to be their sole beneficiaries, eliminating estate taxes altogether. Either approach can be accommodated with proper planning and timely implementation.
- Recognizing illiquid assets. Real estate, businesses and collectibles, for example, can make adjusting an estate plan extra challenging because they add to the value of the estate. In fact, they may push the estate into what planners call “estate tax territory,” sometimes without the holders of these assets realizing it (or having planned how to pay the extra taxes), experts said. These assets also can be difficult to value and require a qualified appraisal, increasing the lead time needed to implement effective estate planning strategies.
- Understand that uncertainty plays a role. The exemption amount may change late in the process, with little notice, or even be extended. Salinas recommends making changes you can live with given that some are irreversible.
Tactics for high-net-worth (HNW) families
Meanwhile, Salinas and Bridges provided specific, actionable tactics that can move assets out of the grantor’s estate to reduce its tax liabilities including:
- Gifting to qualified charities, especially gifts of highly appreciated stocks, either outright or through a donor-advised fund (DAF). Gifts are tax-deductible in the year of the gift.
- Gifting cash or securities to loved ones, either as a lump sum or as an annual gifting program utilizing the annual gift tax exclusion. The 2024 limit is $18,000 per individual and is estimated to be $19,000 in 2025 based on recent annual increases of $1,000. Each spouse of a married couple can give up to the limit per qualified recipient.
- Gifting business ownership shares.
- Paying college tuition and medical expenses for loved ones (these must be paid directly to the institution).
- Purchasing a life insurance policy within an irrevocable trust, with heirs named as beneficiaries.
- Establishing an irrevocable trust as the holder of assets and gifting assets to the trust.
- Lending money at allowable sub-market interest rates to purchase a home or start a business, for example, and then allowing loan forgiveness, or using the annual gift exclusion to pay the interest.
With any of these tactics, care should be taken in selecting which assets to give, as the gifted assets will receive a carry-over basis and will not receive a step-up at death, Bridges said.
Whom will your wealth go to?
Some HNW individuals and families may be hesitant to make changes to their estate plan because of fear of mortality, lack of time or other factors, but the consequences of waiting can be costly, experts said.
“When planning for estate tax minimization, you have to find the right balance that will bring the most satisfaction and the least regrets,” said Bridges.
For all these reasons, it’s now time to align your estate plan with the exemption reduction that’s effective January 1, 2026, Bridges said.
“Your estate can go to three types of recipients: your loved ones, your favorite charities or Uncle Sam. By focusing on the first two, you can reduce or eliminate the third.”- Kimberly Bridges, director of financial planning at BOK Financial
INVESTMENT AND INSURANCE PRODUCTS ARE: NOT FDIC INSURED | NOT GUARANTEED BY THE BANK OR ITS AFFILIATES | NOT DEPOSITS | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | MAY LOSE VALUE.
The content in this article is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice. Neither BOK Financial Corporation nor its affiliates offer legal advice.
. © 2024 BOKF, NA.