How the Potential Extension of the Tax Cuts and Job Act Could Significantly Impact Estate Planning

Posted on Jan 2, 2025 by

In a letter to French scientist Jean-Baptiste Le Roy in 1789, Benjamin Franklin famously wrote, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

He was absolutely correct, as our Constitution has been amended 27 times.  But, Franklin’s two certainties collide in the estate tax, or the tax levied on the net value of the estate of a deceased person before distribution to the heirs.

The first “estate tax” in the U.S. was enacted as part of the Revenue Act of 1916.  It imposed a maximum 10% tax on any amount a deceased person had in excess of $50,000.  The exemption doubled to $100,000 in 1926, as did the maximum tax, to 20%.  In 1942, the exemption then settled in at $60,000 for 35 years with a maximum tax of 77%.

In 1977, the exemption doubled again to $120,000 with a maximum tax of 70%.  The exemption steadily crept up to $600,000 in 1987, where it stayed for a decade.  The maximum tax also capped out at 55%.

Then, President Bush passed the The Economic Growth and Tax Relief Reconciliation Act of 2001, which incrementally reduced the maximum estate tax rate to 45% and while at the same time increased the estate tax exemption to $3.5 million in 2009.  Under EGTRRA, the estate tax went away entirely in 2010.  Former New York Yankees owner George Steinbrenner passed away that year and it is estimated that because of the timing, his estate avoided over $700 million of taxes.

These benefits were set to end in 2011, however, and the exemption was to revert to $1 million.  In the 11th hour, though, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which increased the exemption to $5 million and set 35% as the top tax rate.  The Act also created “portability,” which allows a deceased spouse to transfer any unused portion of his or her estate tax exemption to a surviving spouse.

President Obama then made these changes “permanent” by ratifying the American Taxpayer Relief Act of 2012, but did increase the maximum tax rate of 40%.  That was until President Trump passed The Tax Cuts and Jobs Act of 2017.  This law significantly increased the federal estate, gift, and generation-skipping transfer to a current exemption of $13.6 million per person, or $27.2 million for married couples.  This number will increase to $13.99 million per person in 2025.

However, these provisions are set to expire on January 1 of 2026, reverting to pre-TCJA levels, which would essentially cut the exemption in half.

During his campaign, Trump has indicated that he supports extending or even making permanent the high exemption amounts enacted under the TCJA.  With his reelection, this extension would have several implications for estate planning for high-net-worth clients:

Increased Planning Flexibility
With the continuation of the elevated exemption amounts, clients will have more flexibility in their estate planning strategies. The higher exemption allows individuals to transfer more wealth free of federal estate and gift taxes. This can be particularly beneficial for those with substantial assets, enabling them to make larger lifetime gifts to heirs or trusts, thereby reducing the taxable estate and potentially avoiding estate taxes altogether.

Preservation of Wealth
An extension of the high exemption amounts helps in preserving wealth across generations. High-net-worth individuals can use various estate planning tools such as irrevocable trusts, family limited partnerships, and charitable giving strategies to transfer significant wealth without incurring estate or gift taxes. This ensures that more assets remain within the family, contributing to generational wealth building.

Leveraging Lifetime Gifts
If the high exemption amounts are extended, clients can take advantage of making substantial lifetime gifts. These gifts can be strategically used to reduce the size of the taxable estate, leveraging the current high exemptions to minimize future estate tax liabilities.

Potential Legislative Uncertainty
While the new administration has expressed a desire to continue the TCJA increases, there is never a guarantee of legislative action. Clients need to stay aware of possible shifts in tax policy by talking with their attorneys and accountants. Proactive planning is crucial to adapt to any changes that may arise from future administrations or Congress.

If the estate tax exemption does revert to pre-TCJA levels, it is critical that high-net-worth individuals consult with their attorney to explore options.  Possibilities include the creation of various types of irrevocable trusts to take advantage of the higher exemption amounts before they go away.

Revisiting Estate Plans
High-net-worth clients should revisit their estate plans regularly, especially in light of potential changes in the estate tax laws. An extension of the high exemption amounts would necessitate a review of existing plans to ensure they align with the current laws and the client’s objectives. This might involve updating wills, trusts, and other estate planning documents to reflect the extended exemptions and optimize tax-saving opportunities.

In conclusion, when it comes to estate taxes, the only constant is change.  President Trump’s reelection, along with both houses of Congress having a Republican majority, will likely result in the extension of the high estate tax lifetime exemption amount would allow people to harness this change by providing transferring more wealth tax-free.  It would offer greater planning flexibility and the ability to leverage substantial lifetime gifts. However, it is crucial to remain prepared for any legislative changes and regularly review estate plans to maximize these benefits.

So, what will the estate tax exemption amount be in the future?  People are dying to find out.

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Reg P. Wydeven

Elder Law and Estate Planning Attorney at McCarty Law LLP
Hoping to follow in his father’s footsteps from a young age, Reg’s practice primarily consists of advising individuals on estate planning, estate settlement and elder law matters. As Reg represents clients in matters like guardianship proceedings and long-term care admissions, he feels grateful to be able to offer families thorough legal help in their time of need.
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