The Tax Cuts and Jobs Act of 2017 nearly doubled the previous gift and estate tax exemption. This enabled many Americans to pass on a larger portion of their legacy tax-free. However, these tax benefits are set to expire at the end of 2025. 

Will the government choose to extend the increased exemptions, or will the values revert to a lower amount in 2026? It’s impossible to know. While the future of estate taxes remains uncertain, it is essential that you start preparing now.

How Did the Tax Cut and Jobs Act Affect Estate Tax Exemption?

The Tax Cuts and Jobs Act (TCJA), signed into law on January 1st, 2018, provided a major overhaul of existing tax codes and policies. Some key areas the TCJA impacted included tax brackets, tax credits, corporate tax rates, and estate taxes.

The implementation of the TCJA nearly doubled the lifetime gift and estate tax exemption from $5.45 million to $11.18 million. With annual inflation adjustments, the exemption value for 2025, the final year before the TCJA expires, is $13.99 million. 

Once the TCJA sunsets, the estate tax exemption may fall to around $7 million or less. 

Will the Higher Estate Exemption Rates Be Extended?

The tax cuts that were part of the TCJA are set to expire on December 31st, 2025. The future of estate taxes is unknown, and many arguments exist for and against extending or expanding the exemption. 

What is the Impact of the TCJA on Estate Tax Revenue?

In 2017, before the TCJA, 5,500 taxable estate returns were filed. The total tax liability was estimated to be $20 billion. In 2018, after the TCJA was signed into law, the number of taxable estate tax returns fell to 1,900. The estimated total tax liability was just $14.9 billion. 

However, despite a decrease in taxable estate tax returns(i.e., only 0.14% of estates in 2022 were taxable), by 2023, the total tax liability surpassed pre-TCJA levels, hitting an estimated $24 billion. 

Making the Tax Cuts Permanent - Increasing the Federal Budget Deficit

There are many proponents of making the temporary tax cuts of the TCJA permanent. This would mean the estate tax exemption would stay at a higher level, increasing each year with inflation. 

However, the Congressional Budget Office (CBO) estimates this action could substantially increase budget deficits. If just the estate tax exemption part of the TCJA was extended, the CBO estimates a deficit of $167 billion over the next 10 years. Furthermore, if all provisions of the TCJA are extended, the result is a staggering $3.3 trillion deficit. 

Support for Lowering or Repealing Estate Taxes

In addition to extending higher estate tax exemption rates, several groups want to tackle the estate tax rate directly. 

Project 2025, a conservative policy proposal created by the Heritage Foundation, suggests not only making the tax cuts from the TCJA permanent. It also encourages lawmakers to lower the estate rate to a maximum of 20% (the current rate tops out at 40%). 

Other lawmakers have taken things one step further by introducing a bill to repeal both the estate tax and generation-skipping transfer tax. 

How Should I be Planning Ahead for Future Estate Tax Changes?

Will estate and gift tax exemptions increase, decrease, or disappear altogether? With the TCJA sunsetting, changes are likely to happen soon. However, there is no certainty in what the result will be. Taking steps now to prepare for future estate tax changes might be the wisest move. 

1. Take Advantage of High Gift and Estate Tax Exemptions Now

You still have time to take advantage of the high estate tax exemptions. If the exemption decreases in the future, you’ll be protected thanks to the IRS’s anti-clawback ruling. And if the exemption increases in 2026, you’ll be well-positioned to make additional tax-free gifts. 

2. Purchase Life Insurance

With the possibility of the exemption decreasing, purchasing life insurance to cover the cost of estate taxes could be a smart move. Your financial advisor can guide you in selecting the right plan and setting up a life insurance trust. 

3. Utilize Other Estate Tax Breaks

There are numerous ways to reduce the value of your estate and your estate tax bill beyond your lifetime gift and estate tax exemption. Consider making charitable donations, setting up a 529 plan, or establishing a trust. 

4. Waiting a Year

If you are already close to hitting the $13.99 million estate tax exemption for 2025, it might be worth waiting a year. Wait before giving any gifts that exceed your exemption. Future changes to estate tax laws could lower the tax rate or increase the exemption value, making it worth waiting till 2026.

The Aligned Perspective: Estate Planning Today

No matter what changes the future may hold for estate tax exemptions—whether a decrease, an increase, or even a complete repeal of the tax—it’s crucial to prepare now for the legacy you want to leave behind. By consulting with a financial advisor, you can create an estate plan that clearly outlines your final wishes. It helps manage potential estate taxes, and ensures your wealth is passed on to future generations. Don’t wait till 2026, start planning now.