Several changes to federal gift and estate tax rules have taken effect for 2025, creating valuable options for tax savings and strategic planning, particularly for high-net-worth individuals. However, time is of the essence, as the Tax Cuts and Jobs Act (TCJA) is scheduled to expire at the end of the year 2025. Here’s what you need to know to take advantage of the current rules before they potentially change.
It is important to understand the difference between estate and inheritance taxes. Estate tax is the tax assessed on the assets owned by a decedent at the time of his/her death that are considered part of his/her estate. Accordingly, the overall tax liability is the responsibility of the estate. Similarly, inheritance tax is imposed on the assets received by a beneficiary from a deceased person’s estate. Although this tax liability is generally the responsibility of the beneficiaries, it is not unusual for the estate to pay the associated tax.
The federal government imposes an estate tax but does not impose an inheritance tax. In contrast, six states—Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania—have inheritance taxes, and 12 states plus the District of Columbia have their own estate tax rules. These state-level taxes vary widely in both rates and exemptions, with many offering exclusions for spouses or immediate family members.
Gift Tax Exclusion
The annual gift tax exclusion increased to $19,000 per donee in 2025, up from $18,000 in 2024. This means you can give up to $19,000 to as many individuals as you like during the calendar year without triggering gift tax or filing a gift tax return. For married couples, this exclusion doubles to $38,000 per recipient if both spouses choose to split the gift.
2025 Estate and Lifetime Gift Tax Exemption
The federal estate and lifetime gift tax exemption increased to $13.99 million per individual in 2025 (up from $13.61 million in 2024). Married couples can shield nearly $28 million from federal estate and gift taxes under current rules. An additional concept married couples should take into account when planning is portability.
This exemption covers both gifts made during your lifetime, and assets passed on after death. If your total lifetime gifts and estate value fall below the exemption amount, your estate will owe no federal estate tax.
However, these elevated exemption levels will not last forever. Unless Congress intervenes, the exemption is scheduled to drop sharply in 2026, returning to approximately $5 million per person, adjusted for inflation. This potential decrease will subject more estates to federal estate tax, leading to significantly higher tax liabilities.
Planning Strategies to Consider
For those with significant assets, strategic planning can help reduce or eliminate future estate tax liability. Common planning vehicles include:
- Annual Gifting: Making tax-free gifts up to the annual exclusion amount to reduce your taxable estate. These gifts do not count against your lifetime exemption amount, making this strategy especially valuable for those looking to pass on wealth tax-efficiently.
- Irrevocable Life Insurance Trusts (ILITs): These trusts remove life insurance proceeds from your taxable estate while ensuring liquidity for estate expenses or family needs.
- Charitable Remainder Trusts (CRTs): These trusts allow you to convert appreciated assets into income and reduce both income and estate taxes while supporting a charity.
- Charitable Lead Trusts (CLTs): These trusts provide income to a charity for a set period, then distribute remaining assets to heirs, helping to reduce estate size and tax exposure.
Each of these strategies has unique rules and benefits. For example, ILITs must comply with specific IRS requirements to qualify for gift tax exclusions, whereas CRTs and CLTs can offer both tax advantages and have a philanthropic impact.
Capital Gains on Inherited Assets
Heirs who receive appreciated assets, such as stocks or real estate, also benefit from a stepped-up cost basis, meaning the basis of the asset is determined using the fair market value at the time of death. This reduces the capital gains tax owed if the asset is later sold. Although the step-up in basis provides an overall decrease in the gain, capital gains tax is still triggered when the asset is sold.
For most Americans, federal estate tax remains a distant concern due to high exemption levels. However, for affluent families, or those expecting to inherit or pass down significant assets, now is the time to act. With the TCJA scheduled to expire at the end of 2025, the estate tax landscape is expected to change significantly in 2026. Contact your Stephano Slack tax manager or partner at 610-687-1600 or TaxInfo@StephanoSlack.com to discuss your situation.
Author Jessica Parson Gartensleben, Esq., LLM, specializes in helping high-net-worth individuals and families preserve their wealth by reducing their tax burdens. With her expertise in estate and trust planning, generational wealth transfers, and family business succession, she can guide you through every step of securing your financial legacy. Contact Jessica today at 610.235.4400 or jparson@stephanoslack.com for personalized support tailored to your unique needs.
Disclaimer: This content is for informational purposes only and doesn’t constitute professional advice.
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