The federal estate and gift tax exemption stands at $12.92 million per person in 2023—an amount that effectively shields all but the wealthiest estates from federal transfer taxes. But this historically high exemption is not permanent. The Tax Cuts and Jobs Act of 2017 doubled the exemption amount, but that doubling is scheduled to sunset after December 31, 2025. Unless Congress acts, the exemption will revert to approximately $6 to $7 million per person (adjusted for inflation) beginning January 1, 2026. For high-net-worth individuals and families, the window for taking advantage of the current exemption is closing, and the time to implement planning strategies is now.^[1]

Understanding the Sunset

The TCJA doubled the basic exclusion amount from $5 million (inflation-adjusted) to $10 million (inflation-adjusted) for tax years 2018 through 2025. With inflation adjustments, the 2023 exemption is $12.92 million per individual, or $25.84 million for a married couple. After December 31, 2025, the exemption reverts to the pre-TCJA amount, which will be approximately $6.8 million per person based on current inflation projections. This means that an individual who has not used any exemption could see their available exemption cut nearly in half overnight.

Importantly, the IRS has confirmed that it will not apply a "clawback" to gifts made during the period of the higher exemption. Treasury Regulation § 20.2010-1(c) provides that if an individual makes gifts using the enhanced exemption and the exemption later decreases, the estate will receive the benefit of the higher exemption amount that was available when the gifts were made. This anti-clawback rule is critical: it means that gifts made before the sunset are permanently protected, even if the exemption drops after 2025.^[2]

Planning Strategies to Lock In the Exemption

Spousal Lifetime Access Trusts (SLATs)

A Spousal Lifetime Access Trust is an irrevocable trust established by one spouse for the benefit of the other spouse and, typically, the couple's descendants. The grantor spouse uses a portion of their gift tax exemption to fund the SLAT, removing the transferred assets from both spouses' taxable estates while maintaining indirect access to the assets through the beneficiary spouse. For married couples who are reluctant to make large irrevocable gifts because they may need access to the assets in the future, a SLAT offers a way to use the exemption while preserving a degree of flexibility.

There are important limitations. The grantor spouse cannot be a beneficiary of the trust. If both spouses create SLATs for each other (so-called "reciprocal SLATs"), the trusts must be sufficiently different to avoid the reciprocal trust doctrine, which could cause the trusts to be disregarded and the assets included in the grantors' estates. Additionally, if the beneficiary spouse predeceases the grantor or the couple divorces, the grantor loses access to the trust assets entirely. Despite these risks, SLATs remain one of the most popular estate planning vehicles for married couples seeking to use the enhanced exemption.

Grantor Retained Annuity Trusts (GRATs)

A GRAT is an irrevocable trust to which the grantor transfers assets and retains the right to receive annuity payments for a specified term. At the end of the term, the remaining assets pass to the beneficiaries—typically children or a dynasty trust—free of gift and estate tax to the extent the GRAT has been "zeroed out" using the applicable Section 7520 rate. GRATs are particularly effective when interest rates are low and the transferred assets are expected to appreciate significantly during the annuity term.^[3]

The risk of a GRAT is that if the grantor dies during the annuity term, the trust assets are included in the grantor's estate, negating the transfer tax benefit. For this reason, shorter-term GRATs (two to three years) are generally preferred, and "rolling" GRATs—where the annuity payments from one GRAT are used to fund the next—can be used to manage mortality risk while capturing appreciation over time.

Intentionally Defective Grantor Trusts (IDGTs)

An IDGT is an irrevocable trust that is treated as a separate entity for estate and gift tax purposes but as a grantor trust for income tax purposes. The grantor typically "seeds" the trust with a gift using a portion of the gift tax exemption, and then sells additional assets to the trust in exchange for an installment note. Because the trust is a grantor trust for income tax purposes, the sale is disregarded for income tax, resulting in no capital gains recognition on the transfer. The assets transferred to the trust grow outside the grantor's estate, while the grantor's payment of the trust's income taxes further reduces the grantor's taxable estate without constituting an additional gift.^[4]

IDGTs are particularly effective for transferring closely held business interests, real estate, and other assets with significant appreciation potential. The combination of exemption usage, income tax-free sale treatment, and ongoing tax payment by the grantor makes the IDGT one of the most tax-efficient transfer planning vehicles available. For business owners considering tax-efficient succession planning, the IDGT deserves serious consideration before the exemption sunset.

Practical Considerations

The decision to make large gifts before the sunset involves considerations beyond tax efficiency. Donors must be comfortable parting with the transferred assets irrevocably. They must have sufficient assets outside the trust to maintain their lifestyle and meet their financial obligations. They must also consider the state-level implications—Mississippi does not impose a state estate tax, but gifts to trusts may have state income tax consequences depending on the trust's situs and the residency of the beneficiaries.

The current political environment adds uncertainty. Congress could extend the enhanced exemption, allow it to sunset as scheduled, or reduce the exemption even before 2026. While no one can predict the legislative outcome with certainty, the anti-clawback regulation provides assurance that gifts made now will be protected regardless of future changes. For individuals and families with estates that may be affected by a reduced exemption, the prudent course is to act before the window closes rather than hoping for a legislative extension that may not materialize.

We encourage clients with estates approaching or exceeding the projected post-sunset exemption amount to consult with their estate planning advisors promptly. The planning vehicles described above require time to design, implement, and fund—and the 2025 deadline will arrive sooner than many expect.