The amount of money you can gift in your lifetime without tax implications is about to change, as the Federal Estate and Gift Tax Exemption is sunsetting in 2025. Whether you’re planning to transfer wealth in estate planning or negotiating a high net-worth divorce, here is an overview of the changes from the IRS.

What are federal gift taxes?

Federal gift taxes are taxes on gifts and bequests made by a person when they are alive, or made by an estate after an individual has died. The taxes apply to large transfers of wealth, whether the transfer involves money, property, or another type of asset. The tax is paid by the giver, not the receiver, and the tax law includes an exemption, or credit, that is applied before the gift is taxed. Taxes apply to the amount in excess of the lifetime gift/bequest amount remaining after the credit is given. Gifts greater than the credit but cumulatively lesser than the lifetime amount must be recorded by filing of a tax return even if no tax is then due.

A look back

The IRS established a progressively increasing tax exemption schedule with the exemption set at $2 million in 2008. It rose to $3.5 million in 2009, $5 million in 2010, and continued along that trajectory. Then, the Tax Cuts and Jobs Act of 2017 more than doubled the exclusion of $5,490,000 in 2017 to $11,180,000 in 2018, with progressive increases from and covered the years 2017 to 2025. , with progressive increases. In 2023, the cumulative amount (in excess of the yearly credit) that could be given/bequeathed to heirs in a lifetime without being taxed was $12.92 million per person, or $25 million per married couple. Any unused portion by one spouse in life is “portable” to the other spouse for the remainder of his/her life.

A look ahead

On January 1, 2026, the lifetime exemption will revert back to the 2017 amount of $5 million, adjusted for inflation. This is expected to be about $7 million per person or $14 million for married couples. Federal estate taxes will be applied to anything over that threshold. This change can be a costly one for those of a higher net worth and who do not prepare.

What you can do

A smart first step would be to consult your financial professional, who may guide you to make significant gifts before the exclusion amount drops. While most tax-free gifts you make now won’t create post-2025 tax bills, according to Kiplinger’s Personal Finance, gifts that are included in an estate would be subject to the exclusion in the year of the giver’s death. Kiplinger also shared other options for protecting assets from taxation, including dynasty trusts or a Spousal Lifetime Access Trust. Both, however, come with limitations.

An important note -

This tax change only affects the federal level. Six states, including Pennsylvania, have inheritance taxes, and they vary widely. The bottom line is to stay informed, plan wisely, and seek professional assistance.

Finances can be a complicated part of divorce. If you are seeking the help of a top Bucks County family law firm, contact us at 215-340-2207 or email info@bucksfamilylawyers.com.