John E. Chapman
Chief Executive Officer
As the year progresses, the future of the federal estate tax remains in flux. Key provisions enacted under the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025, and Congress has yet to agree on a path forward. Whether lawmakers allow the current law to sunset, move to extend the elevated exemptions, or eliminate the tax altogether, the outcome will have significant consequences for wealth transfer planning.
Where Things Stand Today: High Exemptions, but a Clock Ticking
The TCJA temporarily doubled the estate and gift tax exemption, which now stands at $13.99 million per individual (or $27.98 million for married couples) in 2025. Transfers exceeding those thresholds are subject to a 40% federal estate tax. These exemption amounts represent historically high levels, but they were never meant to be permanent.
Unless Congress intervenes, these provisions will expire on December 31, 2025. Starting January 1, 2026, the exemption is scheduled to revert to its pre-TCJA level, roughly $5 million per individual, indexed for inflation, effectively halving the current threshold. This shift could bring many more estates into taxable territory.
What’s on the Table: Three Legislative Paths
Lawmakers are considering several approaches:
- Extension of TCJA Provisions: With Republicans controlling both chambers, there’s strong political momentum to preserve the current exemption levels. Both the House and Senate have advanced budget frameworks that include room for extending these provisions, but at a significant cost. Advocates argue that maintaining higher exemptions protects family businesses and farms from being dismantled to pay taxes. Still, fiscal conservatives remain concerned about the broader budget impact.
- Full Repeal of the Estate Tax: Some lawmakers are pushing for a complete repeal of the estate tax, through measures like the proposed “Death Tax Repeal Act.” This would eliminate both the estate and generation-skipping transfer (GST) taxes but likely retain the gift tax, potentially with changes. Importantly, most repeal proposals would preserve the step-up in basis for inherited assets, easing capital gains exposure for heirs. Supporters view the estate tax as double taxation that penalizes saving and investment. Critics warn that repeal could accelerate wealth concentration and reduce critical federal revenue.
- Inaction (Sunset Occurs): If Congress fails to act, the default outcome is a return to pre-TCJA law. This would lower the exemption and subject many previously exempt estates to federal tax starting in 2026.
Planning Amid the Uncertainty
Given the stakes, 2025 will be a pivotal year for strategic planning. The IRS has confirmed that gifts made under the current exemption will not be retroactively taxed if the exemption decreases in 2026, a reassurance that has prompted many wealthy individuals to consider making large lifetime transfers before year-end.
Still, the possibility of a full repeal creates a planning paradox. Should clients rush to use the exemption now, or wait and see if the tax disappears? A repeal would likely simplify planning in some areas but shift the focus toward income tax considerations, particularly around basis step-up and capital gains for heirs. It also remains unclear how existing trust structures would interact with this potential new legislation. Bypass trusts and GST-exempt trusts specifically will need to be reviewed and possibly adjusted to ensure they still accomplish their purpose.
A full repeal also raises concerns about the potential for a future “repeal of the repeal.” Under current law, the federal estate tax exemption is portable between spouses, allowing the surviving spouse to use the unused exemption of the first spouse to die, effectively doubling the available exemption. But what happens if one spouse passes in 2026, during a repeal period, and the second passes in 2040, after a new administration reinstates the estate tax? Could this couple be disadvantaged by having passed away during a temporary window of repeal and lose the ability to preserve the first spouse’s exemption?
And while federal law may change, state-level estate and inheritance taxes remain a factor. As of 2025, twelve states and the District of Columbia impose their own estate or inheritance taxes, which are unaffected by federal developments.
Final Thoughts
Lawmakers may wait until late 2025 (or longer) to finalize estate tax legislation. In the meantime, individuals with potentially taxable estates should stay informed and consult with estate planning professionals. Whether the exemption is extended, repealed, or allowed to sunset, proactive planning now can help avoid unnecessary tax exposure and preserve flexibility for the future.
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