As 2024 draws to a close, high-net-worth individuals and families face a planning question of unusual urgency: is this the last realistic opportunity to take advantage of the historically high estate and gift tax exemption before it is cut roughly in half? The TCJA's doubled exemption — $13.61 million per individual in 2024, rising to $13.99 million in 2025 — is scheduled to sunset after December 31, 2025. With the outcome of the November 2024 election now known, the question is whether the new Congress will extend the exemption, allow it to expire, or reach some compromise.^[1]

What Happens If the Exemption Drops

If the TCJA provision sunsets as scheduled, the estate and gift tax exemption would revert to its pre-TCJA level, adjusted for inflation — estimated at approximately $7 million per individual. For a married couple whose combined estate exceeds $14 million but falls below $28 million, the sunset would transform a fully exempt estate into one facing a substantial federal estate tax at the 40 percent rate. The potential tax exposure on the difference between the current exemption and the post-sunset level is significant: for an individual, the tax on approximately $7 million of "lost" exemption would be roughly $2.8 million.

The IRS Anti-Clawback Regulation

One concern that had deterred some taxpayers from making large gifts was the fear that if the exemption later decreased, the IRS might seek to "claw back" the gift — effectively taxing the gift retroactively at the higher rate. The IRS addressed this concern in final regulations, confirming that gifts made while the higher exemption is in effect will not be subject to additional estate tax even if the exemption later decreases. This anti-clawback rule provides important assurance for taxpayers who use their exemption now.^[2]

Planning Strategies to Consider

Spousal Lifetime Access Trusts (SLATs)

A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse and, typically, the couple's descendants. Because the trust is irrevocable and the assets are removed from the grantor's estate, the gift uses the grantor's exemption. But because the non-grantor spouse is a beneficiary, the couple retains indirect access to the trust assets. SLATs are one of the most popular vehicles for utilizing the current exemption because they address the common concern of giving away too much too soon.

Grantor Retained Annuity Trusts (GRATs)

A GRAT allows the grantor to transfer appreciating assets to an irrevocable trust while retaining an annuity payment for a term of years. If the assets outperform the IRS assumed rate of return (the Section 7520 rate), the excess appreciation passes to the beneficiaries free of gift and estate tax. A zeroed-out GRAT — one where the annuity equals the full value of the transferred assets — uses no exemption at all, making it an efficient complement to exemption-based strategies.

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 can sell assets to the IDGT in exchange for a promissory note without recognizing gain (because the grantor and the trust are the same taxpayer for income tax purposes), while the sold assets and all future appreciation are removed from the grantor's estate. This technique is particularly effective for business interests expected to appreciate significantly.^[3]

The Timing Problem

Estate planning transactions require time. A properly structured SLAT, GRAT, or IDGT requires legal drafting, appraisals (for hard-to-value assets like business interests), gift tax return preparation, and sometimes business restructuring. Starting the process in late December is generally too late for the current calendar year, though the planning can be implemented in 2025 to use the final year of the higher exemption.

Taxpayers who have not yet begun this planning should engage with their estate planning team as soon as possible. The planning window is finite, and the complexity of these transactions means that rushed implementation increases the risk of errors that could undermine the tax benefits.

What to Watch in 2025

The new Congress will likely address the TCJA expiration as part of a broader tax package. Possible outcomes range from full extension of the current exemption to full sunset, with various compromises in between (such as extending the exemption at a reduced level, or making the current exemption permanent while modifying other estate tax provisions). Business owners and high-net-worth individuals should monitor legislative developments closely while proceeding with their planning on the assumption that the exemption may well decrease.^[4]