The Clock Is Ticking: Maximizing the Lifetime Gift Exclusion Before It’s Too Late

The Clock Is Ticking: Maximizing the Lifetime Gift Exclusion Before It’s Too Late

The record-high lifetime gift exclusion, established by the Tax Cuts and Jobs Act (“TCJA”) is set to expire at the end of 2025. Under current law, every individual can transfer up to $13.99 million free of federal estate and gift tax in 2025. Combined, a married couple has the opportunity to pass $27.98 million if each takes advantage of his/her full exemption. Without congressional intervention, this amount will be halved on January 1, 2026, reverting to pre-TCJA levels. With uncertainty surrounding potential estate tax changes—new developments are unfolding almost daily—it is prudent to be prepared to act quickly. Delays could result in missed opportunities, as valuations, legal work, and trust funding all require lead time.

The gap between today’s generous exclusion and future thresholds could result in millions of dollars in added tax exposure, making proactive planning essential. It is crucial to evaluate individual circumstances, including the types of assets involved and the time required to execute strategies effectively. This article outlines key strategies to help you navigate possible impending changes and ensure that your estate planning remains effective and beneficial.

Use It or Risk Losing It

The 2017 tax legislation temporarily doubled gift and estate tax exclusions, allowing individuals to transfer significantly more wealth free of federal transfer tax. However, this elevated allowance is scheduled to sunset after 2025, potentially impacting individuals and families whose net worth exceeds the reverted exclusion amount.

“Anti-clawback” regulations ensure that individuals who make large gifts now will not be penalized if the exclusion later decreases. However, proposed rules may limit this protection if assets given away remain tied to the donor’s estate under certain tax provisions. To avoid complications, it is necessary to make completed gifts where you fully relinquish control. Any post-gift appreciation of transferred assets also stays outside your taxable estate, making early action even more advantageous.

Given that assets like real estate, business interests, and securities require valuations and careful structuring, waiting until late 2025 may be too late.

Spousal Lifetime Access Trusts (SLATs)

For many married couples, a Spousal Lifetime Access Trust (SLAT) is a powerful tool. This strategy allows one spouse to use his or her gift tax exclusion to transfer assets out of the estate while still providing indirect access to trust distributions through the beneficiary spouse. When structured properly, these assets remain outside the taxable estate of both spouses.

Because SLATs are irrevocable and family circumstances can change, thoughtful planning is necessary to maintain flexibility while securing tax benefits. Given the potential sunset of current exemptions, starting the process early ensures enough time to finalize an optimal trust structure.

Gift Splitting

A gift splitting election allows married couples to balance the use of their combined exclusions, even when family wealth is unevenly divided. The election treats a gift from one spouse as being made equally by both, maximizing the available combined exclusions. However, improper execution can lead to significant tax consequences, such as unintended estate inclusion or gift tax liabilities, making it crucial to consult a tax advisor.

Portability: A Backup Strategy

Portability allows a surviving spouse to inherit any unused exclusion from a pre-deceased spouse, known as the Deceased Spousal Unused Exclusion Amount (DSUEA). While this provides valuable flexibility, it has limitations: the DSUEA is not inflation-adjusted, does not apply to the Generation-Skipping Transfer (GST) tax exemption, and could be lost if the surviving spouse remarries, and the new spouse dies first with a smaller exclusion. A timely estate tax return must be filed to preserve portability, even if no tax is owed.

Step Transactions: Avoiding IRS Pitfalls

A common pitfall occurs when one spouse gifts assets to the other, who then quickly transfers them again. The IRS may collapse these steps into one transaction, resulting in substantial gift tax liabilities. To mitigate this risk, allow time and events to transpire between steps and document each transaction thoroughly. Working with an experienced tax advisor can help ensure your strategy is structured correctly for your situation.

Practical Takeaways

  • Start now, but stay flexible – Completing valuations, legal agreements, and trust funding takes time, and waiting until late 2025 may be too late. However, keeping an eye on legislative developments allows you to fine-tune your plan as needed.
  • Work with valuation experts and legal counsel. Certain assets require appraisals and legal structuring, which can take months to finalize.
  • Make true lifetime gifts – Fully removing assets from your taxable estate now locks in the current high exemption.
  • Review your plans regularly – Tax laws, state laws, and family circumstances change. Regular check-ins with estate planning professionals ensure plans are still aligned with goals and evolving legislation. Maryland residents, in particular, should also be aware of a current proposal to reduce the state’s estate tax exemption from $5 million to $2 million per individuals ($10 million to $4 million for married couples).

Conclusion

With the elevated gift and estate tax exemptions potentially expiring, the time to plan is now. While the future remains uncertain, failing to prepare could result in missed opportunities and substantial tax liabilities. Some lawmakers are pushing for extensions or expansions, while others advocate for reductions. If no action is taken, the exemption will automatically revert to pre-TCJA levels after this year, cutting it in about half.

Given this uncertainty, a proactive yet flexible approach is key. Planning now ensures that the necessary valuations, legal structures, and strategies are in place to act quickly if needed. The estate planning landscape is shifting, and timely action could make a significant financial difference. Our team at Snyder Cohn is ready to guide you through this evolving environment, helping to develop a strategy that preserves and protects wealth for generations to come.

by: Zane Sanchez

SECURE 2.0 Provisions Effective in 2025 for 401(k) and 403(b) Plans

The SECURE 2.0 Act of 2022 includes more than 100 separate provisions focused on updating and reforming the U.S. retirement plan system. It expands on the Setting Every Community Up for Retirement Enhancement Act of 2019 (commonly known as SECURE). Although SECURE 2.0 became law in 2022, its provisions are being phased in over several years.  Many already took effect in 2023 and 2024, but there are a number of key provisions going into effect for 2025, including:

  • Automatic Enrollment
  • Enhanced Catch-up Contributions
  • Coverage for Part-time Employees
  • Creation of a New Retirement Savings Database

 

Automatic Enrollment

As of January 1, 2025, all 401(k) and 403(b) plans established after December 29, 2022, must automatically enroll eligible employees in the plan through an eligible automatic contribution arrangement (EACA). Employees must be initially enrolled at a contribution rate between 3% and 10% of their compensation. That contribution rate is also required to automatically increase by 1% annually until it reaches at least 10%, but not more than 15%. Companies with 10 or fewer employees, plans established before December 29, 2022, and those operating for less than three years are exempt from this requirement.

 

EACAs must allow employees to withdraw automatic contributions (and any earnings) within 90 days of the first contribution without facing the standard 10% penalty on early withdrawals. Employers must also provide plan details to employees, including contribution rates, opt-out procedures, and investment options.

 

Enhanced Catch-up Contributions

The SECURE 2.0 Act allows 401(k), 403(b), and governmental 457(b) plans to offer higher catch-up contributions for participants aged 60 to 63. While not mandatory, plan sponsors may opt to amend their plans to include this enhanced catch-up option, in addition to the existing catch-up contributions for participants ages 50 or older.

 

For plans adopting this provision beginning in 2025, eligible individuals may contribute the greater of $10,000 or 150% of the regular catch-up limit, adjusted each year for inflation. For 2025, this means those ages 60-63 may make catch-up contributions up to $11,250, which is 150% of the regular catch-up limit of $7,500 for those under age 60, for a total maximum contribution of $34,750.

 

Coverage for Part-time Employees

Historically, employers were allowed to exclude employees who worked less than 1,000 hours during the plan year from being eligible to participate in their 401(k) plan.  Under the terms of the SECURE Act of 2019, starting with 401(k) Plan years beginning on or after January 1, 2021, part-time employees who completed at least 500 hours of service in three consecutive years and had reached age 21 by the end of the third year were required to be given the opportunity to participate in the Plan.  For example, a part-time employee who worked at least 500 hours in each of 2021, 2022 and 2023 must have been given the opportunity to participate in the Plan as of January 1, 2024.

 

Under the terms of the SECURE 2.0 Act, effective January 1, 2025, the service requirement for part-time employees is reduced from three years to two years. Therefore, a part-time employee who worked at least 500 hours in each of 2023 and 2024 must be given the opportunity to participate in the Plan as of January 1, 2025. SECURE 2.0 also extended this benefit to ERISA-covered 403(b) plans.

 

Creation of a New Retirement Savings Database

As the modern-day workforce has become more mobile, Congress recognized that it is not uncommon for workplace retirement accounts to be left behind when workers change jobs, or when companies go out of business or are merged into other companies. To try to give workers more tools for tracking down their retirement benefits that may be held by former employers or their successors, SECURE 2.0 requires the U.S. Department of Labor (DOL) to create an online, searchable database that participants and beneficiaries can use to locate retirement plan administrators who may owe them benefits. The secure database will include details about the plan, administrator, and separated vested participants ages 65 and older, including deceased beneficiaries who are entitled to benefits.

 

The DOL faced a statutory deadline of December 29, 2024, to roll out this database.  It was launched slightly ahead of schedule on December 27, but continues to be built-out and populated as additional plan information becomes available.

 

Deadline for SECURE 2.0 Amendments

The deadline for amending retirement plans to comply with SECURE 2.0 has been extended so that most plans now have until December 31, 2026, to incorporate SECURE 2.0-related changes, with collectively bargained plans and governmental plans having longer. That extension does not alleviate plan sponsors and their third-party administrators from implementing the required operational changes currently.

 

As the provisions of SECURE 2.0 continue to roll out, they represent a significant shift toward improving retirement savings accessibility and flexibility for American workers. The changes set to take effect in 2025, including automatic enrollment, enhanced catch-up contributions, expanded coverage for part-time employees, and the creation of a retirement savings database, are poised to make retirement planning more inclusive and efficient. Employers and plan sponsors will need to stay informed about these changes to ensure compliance and provide their employees with the most up-to-date retirement benefits. With the deadline for plan amendments set for December 31, 2026, businesses still have time to adjust their plans, but it is essential to begin making necessary operational changes sooner rather than later to fully take advantage of the SECURE 2.0 Act’s provisions.

By: Barbara Murphy Kromer