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