Contributors

Kerry Ugarte

Managing Director, Wealth Advisor

 

As 2025 dawns, it could be the last year before the sundown of a federal tax law that has been very helpful to wealthy families. Unless the new Congress intervenes, this significant estate planning opportunity will disappear in one year, on January 1, 2026.

If you are planning to bequeath/gift/pass on a large estate and if the scheduled sunsetting occurs – your heirs (or your estate) would face a higher tax burden.1 What’s at stake is nothing less than preserving more of your wealth for future generations.

As things stand now, in 2025, you can transfer up to $13.99 million free of taxes during your lifetime and after your death ($27.98 million for married couples).2 Unless Congress acts, this so called “lifetime gift tax exclusion” will drop dramatically in 2026 to around $7.2 million for an individual.3 That’s a very steep decline in the amount of wealth you can pass to your beneficiaries tax-free.

But there are ways to minimize this tax liability – and we recommend seizing the opportunity while the large exclusion still holds.

Thoughtful lifetime gifting is a powerful tool

The gift tax is a levy imposed on a person’s wealth transfer over their lifetime (typically to family members, but transfers to spouses are generally not subject to gift tax). The estate tax, which is similar, applies to wealth transfers upon death.

After the exclusion, the U.S. estate tax rate is 40% of your estate’s value.4 In addition, a dozen states levy their own estate taxes – the highest runs at around a 10% effective rate. Without proper planning, the drop in the exclusion amount will significantly increase wealthy taxpayers’ estate tax liabilities.

Thoughtful lifetime gifting is a powerful, highly effective estate planning tool for preserving family wealth over multiple generations. Lifetime gifting allows donors to transfer wealth to beneficiaries, to some extent without tax consequence. And if gifting is done properly, it also shrinks the giver’s taxable estate by removing future appreciation from the estate taxes later. That means more wealth for your family and charitable legacy.

Here are three approaches to consider: Conservative, maximal and balanced.

The conservative approach: No gifting

One decision would be not to make gifts during your lifetime. This simple and flexible approach lets you maintain full control of your wealth. You may be uncertain about your future cash flow needs, want to retain control over your assets or have concerns about over-gifting to beneficiaries.

However, no gifting may result in higher estate taxes, leaving less for beneficiaries.

Before locking into this approach, we recommend analyzing your assets, liabilities, income and expenses to determine whether you actually do have sufficient wealth to enjoy the life you want. We’ve seen clients sometimes find after such an analysis that they have more than enough. In such cases, in the spirit of tax efficiency, we encourage gifting, usually by putting in trust for family members any excess capital.

Of course, that only holds if doing so would be consistent with your overall goals.

Maximizing the current opportunity: Full exclusion

If you have sufficient excess capital, we suggest you consider gifting the maximum exclusion amount to an irrevocable trust for your beneficiary.5 A well-designed, prudently invested trust funded by a couple in 2025 with a $27.98 million gift could grow to be worth $85 million in 30 years.

Many well-designed trusts allow the assets to be available for multiple generations without estate or generation-skipping transfer (GST) taxes. By maximizing your use of the current exclusion amount, you can establish a family legacy that endures for many generations.

Balanced gifting tailored to your goals

If your gifting capacity is under $27.98 million, a balanced approach would be to make right-sized gifts, retaining access to sufficient funds while still reducing your taxable estate.

Many tools are available to do so, including:

  • Retaining access with a spousal lifetime access trust (SLAT): SLATs permit distributions to a spouse, and give you some access to the funds, if needed. While flexible, a SLAT may leave the donor at risk in the event of divorce, an unhappy marriage or a spouse’s unexpected death.
  • For couples, using the “one gift strategy” while tax law remains uncertain: In this approach, one spouse gifts the full exclusion amount while the other saves his or her lifetime exclusion. This can be particularly beneficial in times like these, when the tax environment is subject to change.6
  • Using a life insurance trust to meet future liabilities: An irrevocable life insurance trust (ILIT) can be used to buy an insurance policy that would make the necessary cash available to your heirs to meet future estate tax liabilities. That would let them pay what they owe without having to liquidate assets they may want to retain (such as real estate or a business).
  • Gradually making smaller gifts: Each year, taxpayers can gift up to what is called the “annual exclusion amount” (in 2025, $19,000 per donor per recipient; $38,000 for married couples) without incurring the gift tax. Such a gradual transfer of wealth, using gifts below this level each year, can be particularly effective when done consistently over time.
  • Making a gift of appreciation, with little gift tax obligations: You can gift appreciating assets to beneficiaries with minimal – or even no – gift tax consequence by using a grantor retained annuity trust (GRAT). You’d place assets in the trust, receive payments over a set period, and any remaining assets (including growth) would pass to your beneficiaries tax-free.7

These techniques can be combined, too, such as one spouse gifting to a SLAT and also giving annual exclusion gifts to an ILIT to pay life insurance premiums each year.

Wealth transfer takes time: Act now

Unless Congress takes actions, the estate tax sunset will occur on December 31, 2025.8 That’s why we think it’s essential to act now. Estate planning attorneys, accountants and appraisers are already preparing. If you begin strategizing, drafting and implementing your estate plan as soon as possible, you can avoid a last-minute crunch. This is an important and underrated consideration. Our experience shows that rushing leads to mistakes.

To strategize, draft, sign and fund typically takes several months.

Table showing a proposed process and timeline for gifting capacity in 2025.

 

The first step is strategizing. To gift before the scheduled sunset in January 2026, start by thoroughly understanding your financial situation. This includes updating your balance sheet, preparing a cash flow statement and consulting a financial advisor to determine your gifting capacity and align your financial goals with your estate plan.

Seize the moment to gift and secure your future

We encourage all our clients with the capacity and desire to make a gift to allow their J.P. Morgan advisor to prepare a wealth plan. Your advisor can provide projections to ensure your financial well-being. Their expertise can help you balance providing for beneficiaries with securing your future – enabling meaningful gifts without risking your stability or leaving an unwelcome tax burden upon your death.

References

1.

This deep dive into a potential tax law change builds on our previous coverage of the foundations of gifting. For an introductory primer on gifting covering distribution policy, choosing a trustee, investment strategy and other matters that make it more likely your wealth-transfer intentions will be realized: Marc E. Seaverson, “How to successfully gift to heirs,” (May 2024) and “You’ve decided to share your wealth with family. Now what?” (May 2024).

2.

Internal Revenue Service Publication 2024-273.

3.

Internal Revenue Service, “Estate and Gift Tax FAQ,” (September 2024).

4.

Congressional Research Service, “The Estate and Gift Tax: An Overview,” (September 2024).

5.

An irrevocable trust is a legal arrangement in which the grantor permanently transfers assets into a trust, relinquishing control and ownership, and cannot modify or terminate the trust. An irrevocable trust holds gifted assets, including all appreciation, outside your taxable estate.

6.

For example, if a couple can gift $13 million in total, rather that each member of the couple gifting $6.5 million, one spouse gives $13 million and the other nothing. If the exclusion indeed drops to $7.25 million, the spouse with a $7.25 million exclusion remaining can use it later. In that case, they would have transferred $20.25 million free of transfer taxes, rather than just $13 million.

7.

GRATs work best when asset appreciation exceeds the prevailing interest rate at the time the GRAT is funded.

8.

Taxpayers are well advised to be in a position of having sufficient time to act thoughtfully, whatever occurs, including the unexpected – no extension of the TCJA’s transfer tax provision.


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