The federal government taxes the gratuitous transfer of property (transfers made without receiving compensation or value in return) made by a person during their life or as a result of their death. Most individuals in the United States will never pay federal gift or estate tax because these transfer taxes, for all practical purposes, only apply when the value of wealth transferred by a taxpayer exceeds the federal Unified Credit—currently $13.99 million. However, the current exemptions are scheduled to sunset after 2025, which could dramatically increase future gift and estate tax exposure for affluent families. In this article, we break down what the current exemption means, why it’s scheduled to expire, and strategic moves that families should consider now to lock in benefits before the law changes.
The Current Unified Credit is Set to Expire After 2025
Under current law, each person can transfer a very substantial amount of wealth to others free of federal transfer tax. For 2025, this lifetime exemption stands at $13.99 million per individual ($27.98 million for a married couple). This means that a person can give away property valued up to those amounts, during life or at death combined, without incurring federal gift or estate taxes. The exemption is “unified” across lifetime gifts and testamentary bequests at death. If a person makes taxable gifts while alive, the gifts count against his or her exemption and thus reduces the amount of property that can pass tax-free at death.
The federal transfer taxes apply at a flat rate of forty percent (40%) on the value of all property transferred in excess of a person’s available Unified Credit. This generous exemption has vastly reduced the number of estates that owe federal estate tax—less than one percent of estates pay estate tax.
Why is the exemption so high right now? It’s largely due to the Tax Cut and Jobs Act of 2017 (the “TCJA”), which doubled the pre-2018 exemption. In 2017 the exemption was about $5.49 million, and TCJA raised it to $11.18 million in 2018, subject to further inflation adjustments. Without further action by Congress, on January 1, 2026, the current exemption will be reduced from $13.99 million to about $7 million per person. The pending reduction is often referred to as the “2025 sunset.” The consequence of a lower exemption is that more estates will become subject to federal transfer taxes. For example, an estate valued at $10 million would owe $1.2 million in federal estate tax. Although this article focuses on the federal Unified Credit, it is important to note that the estate of a Minnesota resident valued at $10 million would owe $1,339,800 in Minnesota estate tax (Minnesota’s estate tax exemption is currently $3 million). The combined federal and Minnesota estate tax equals fifty-six (56%) at the highest marginal rate.
An Extension of the Current Unified Credit Amount Is Unlikely
Could Congress act to preserve the current generous exemption? In theory, yes—but it’s unlikely as of this writing. Most legislation needs 51 votes to pass the Senate; however, the Senate has a tradition of unlimited debate. The filibuster rule is sometimes used by the opposition to prevent ending debate on a piece of legislation so that a vote will not be held. While the Senate needs 60 votes to override a filibuster, legislation passed via the budget reconciliation process is not subject to filibuster.
Congress can pass tax and spending legislation through the budget reconciliation process with a simple majority, but the new laws cannot increase the deficit (a necessity of the Senate’s “Byrd Rule” to avoid long-term deficits). While some lawmakers have floated using reconciliation again to extend tax cuts, the political and procedural hurdles are significant. Even members of the majority have expressed skepticism about large tax cut packages given concerns over deficits. Without bipartisan support or a compromise, a new law to maintain the exemptions faces an uphill battle. In short, relying on Congress to bail out this tax break at the last minute is risky. The safe assumption for estate planning purposes is that the exemption will fall back to around $7 million per person in 2026. Prudent families are planning under the expectation that the higher exemption will sunset as scheduled.
Using Lifetime Gifting and Trusts to Lock In Today’s Exemption
The good news is that you don’t have to wait and hope—you can take action now to secure the benefit of the current high exemption. The IRS issued regulations with a generous “anti-clawback” rule; any exemption you use (consume) with lifetime gifts while the exemption is high will not be taxed if the exemption later decreases. In other words, if you “use it before you lose it,” you lock in the tax benefit. By making gifts to persons or trusts before 2026, you can utilize the $13.99 million exemption per person and permanently shield those assets (and their future growth) from estate tax.
One of the most effective strategies is gifting assets to irrevocable trusts for your beneficiaries (children, grandchildren, or other heirs). You, as the grantor, gift assets (cash, securities, business interests, etc.) up to your available exemption into the trust. The trust can be designed to last for the lifetime of the beneficiaries (or even be perpetual in states that allow dynasty trusts), keeping assets out of the beneficiaries’ estates as well. All the future income and appreciation on the gifted assets accrue in the trust, free of estate tax when you pass away. Properly drafted, such trusts can also provide creditor protection for the beneficiaries. By using a trust rather than giving assets outright, you maintain control via the trust’s terms and trustee and protect the inheritance, while still achieving the tax benefits.
Spousal Lifetime Access Trusts (“SLATs”) have become a popular tax planning vehicle, especially for married couples who want to utilize both spouses’ exemptions but still maintain flexibility. A SLAT is an irrevocable trust that one spouse (the “Settlor”) creates for the benefit of the other spouse (and often children as secondary beneficiaries). The donor spouse makes a gift to the SLAT, using up part of their exemption. The beneficiary spouse can receive distributions from the trust during their lifetime for health, education, maintenance, or support, and additional distributions at the discretion of an independent trustee. The donor spouse will indirectly benefit from distributions to the beneficiary spouse, which makes this strategy more palatable than giving assets completely away.
Please note that SLATs must be carefully drafted when each spouse creates a SLAT for the other spouse to avoid the “reciprocal trust” doctrine. The reciprocal trust doctrine is a judicially created doctrine developed in response to estate tax abuse situations where each settlor makes a completed gift to a trust for the benefit of their spouse. In reality, each settlor continues to benefit from property they had access to during marriage, albeit in the trust created by the other spouse. The IRS will attempt to “uncross” the trusts so that the assets in each of the trusts are included in the respective settlor’s taxable estate.
Valuation Discounts: Reducing Taxable Value of Transfers with LLCs and Entities
Valuation discounts, sometimes referred to as entity discounts, are another powerful technique to mitigate transfer taxes. In this scenario, the taxpayer contributes land, equipment, stock, or other assets to a closely-held business entity in exchange for ownership interests therein. Assets are generally valued for gift tax and estate tax purposes at their fair market value on the date of transfer or the date of a taxpayer’s death. However, ownership interests in a closely-held, non-public company are valued differently than the underlying assets owned by the entity. Unlike shares in a public corporation, there is no readily available market for the sale of interests in closely-held business entities. The sale of such interests can be expensive, uncertain, and time-consuming. Consequently, you may be able to discount the value of the ownership interest for this lack of marketability, even though the underlying value of the assets have not changed. Discounts may also be applied for non-controlling or minority interests. Simply put, minority owners don’t have the same control or valuable rights that are afforded majority owners. For example, a majority owner can select board members, dictate strategic policy, and often set salaries. The combined discount for transfers of closely-held business interests can reach as high as forty-four percent (44%).
For estate planning, such discounts mean you can “squeeze” down the reported value of gifts or transfers, allowing you to fit more assets under your existing exemption limit or reduce the taxable estate value. For example, suppose a couple has $10 million of real estate held inside an LLC. If they simply owned the real estate outright and gave away 100% of it, it would be valued at $10 million for gift tax purposes. Alternatively, the couple can contribute the real estate to LLC with 2 voting Membership Units and 98 non-voting Membership Units (similar to stock). The voting units and non-voting units have the same economic rights to profits from the company. By gifting 35 non-voting Membership Units in that LLC to each of their two children, an appraiser might determine the fair market value of that 70% ownership interest is only $4.55 million after applying discounts, not $7 million (which would be 70% of $10 million).
In effect, through careful planning, a person with excess assets may be able to compress the taxable value of their estate into their available Unified Credit. It’s important to emphasize that these discount strategies must be done properly and ahead of time. The IRS is aware of such techniques and can challenge them under the step transaction doctrine, where the IRS attempts to collapse a series of steps into a single transaction if they see it as prearranged. For instance, if you form an LLC, fund it with assets, and immediately gift ownership interests to your children, the IRS could argue that, in substance, you gifted the underlying assets (denying the discount). To defend against this, the LLC or FLP should have a legitimate non-tax purpose (asset management, asset protection, etc.) and you should respect all corporate formalities. Additionally, the transfers should be separated in time: fund the LLC, let it operate for a period, and only then make transfers, so that there is tax-independent significance to each step.
By setting up the structure early, well before you execute gifting transactions, you greatly increase the likelihood that the discounts will be respected. Think of this technique as “squeeze, then freeze”: first, use entities to squeeze down the value of an asset and then implement your gifting/freezing plan to remove those assets from your estate. When done right, valuation discounts combined with trusts or other transfers can stretch your exemption. This can mean millions of extra dollars kept in the family. Just be sure to work with qualified appraisers and attorneys, follow formalities, and don’t try to rush a discounted transfer at the last minute in 2025—planning now will avoid pitfalls and IRS pushback.
Conclusion: Time to Review Your Estate Plan and Act
The pending 2025 sunset of the TCJA exemption presents both a challenge and a narrow window of opportunity. On one hand, the prospect of the exemption dropping by about half means many families who never thought they’d face estate tax could be looking at a substantial tax bill in a few years. On the other hand, the current law still allows those who plan ahead to “use it or lose it.” High-net-worth individuals in the $20–50 million range should treat the next year or two as a critical period to re-evaluate and update estate plans.
Consider consulting your estate planning attorney and tax advisors sooner rather than later. The complexity of these strategies (and the possibility of a rush of others trying to do the same as 2025 draws to a close) means that executing a plan takes time. By starting now, you can thoughtfully tailor a plan that suits your legacy goals and secure the maximum tax benefits under current law.
This article is intended to provide a general overview of the subject matter and is not intended nor should the information in this article be construed as legal advice. There are many exceptions to the rules described above and new regulations are being proposed all the time. Consequently, it is important to discuss your specific situation with professional advisors, such as your attorney or accountant.
