Protecting Your Estate From Future Transfer Taxes

Since 2017, individuals and married couples in the U.S. have been able to make extremely generous gifts of wealth to loved ones. However, today’s historically high lifetime federal estate and gift tax exemption could “sunset,” or revert back to much lower former levels, starting in 2026. It’s important to consider how this potential change might affect your estate and gifting intentions—and plan accordingly. 

What is the lifetime estate and gift tax exemption?

Under the 2017 Tax Cuts and Jobs Act, the lifetime federal estate and gift tax exemption amount applicable for 2024, allows a person to transfer $13.61 million of wealth to others and married couples to transfer $27.22 million without being subject to federal gift or estate tax.¹ If the sunset takes place, however, those amounts could be halved in 2026 to approximately $7.5 million for an individual and $15 million for a married couple.

While new tax legislation may be passed before 2026, the exemption’s potential sunset, means that more people may end up being subject to the lifetime federal estate and gift tax.

Will the potential sunset affect you? And, if so, how should you prepare? Here are some options and considerations you may want to discuss with your Morgan Stanley Financial Advisor or Private Wealth Advisor. 

Consider Early Gifting

Consider transferring assets to your loved ones before the sunset potentially takes effect. The IRS has confirmed that people planning to make large gifts before 2026 can do so without being concerned that they will lose the tax benefit of the higher exemption level once it decreases.² In other words, you won’t be adversely affected if you begin gifting now, at today’s higher exemption limits. In addition, assets gifted now can potentially grow in value for longer under your loved ones’ ownership, potentially reducing your overall taxable estate. What’s more, giving today means you’ll have more time to see your loved ones enjoying the benefits of the gift.

If you do plan to give before the sunset potentially kicks in, it’s key to consider how the size of your gift today may affect potential future tax liabilities.³ To understand why, consider two hypothetical scenarios in which the exemption for individuals reverts to $7.5 million in 2026:

1.    Assume you have total taxable assets worth $15 million. If you give $5 million to loved ones today and you die in 2026, $7.5 million of your remaining $10 million estate would be subject to a 40% estate tax.⁴ The remaining $2.5 million of your estate tax exemption amount would pass to your loved ones free of estate tax and the estate would owe $3 million of federal estate tax. In this scenario, the only benefit of making the gift now, rather than after 2025, is that you’d be removing from your estate one or two years of potential appreciation on the $5 million gift.

2.    On the other hand, if you take advantage of today’s higher exemption amounts by giving $10 million today and die in 2026, your entire remaining $5 million estate would be subject to the lifetime federal estate and gift tax. You would have no remaining lifetime federal estate and gift tax exemption at your death, because you already gifted $2.5 million more than what would later be available post-sunset—but your smaller estate would face a smaller lifetime federal estate and gift tax liability as a result. In this case, you would have benefited from both today’s higher lifetime federal estate and gift tax exemption amounts as well as the removal from your estate of any appreciation of the gifted assets.

Just remember, not all gifts are taxable or count toward your lifetime federal estate and gift tax exemption. For example, gifts to a 529 Education Plan only count toward your lifetime exemption if they exceed $18,000 in 2024, or for married couples, if the gifts exceed $36,000 if you “split” gift.^5,6 Gifts in the form of payment of tuition directly to an educational institution such as a private school or college, or payments directly to a medical provider like a hospital, do not count as part of your federal exemption. Therefore, gifts that do not use your lifetime federal estate and gift tax exemption can be an important part of the planning process. Your Morgan Stanley Financial Advisor or Private Wealth Advisor can help you navigate different gifting options for specific lifetime goals or charities of your choosing.   

Working with your Morgan Stanley Financial Advisor

After working hard to build your wealth, it’s important to consider how this wealth will be passed on to loved ones. But if you anticipate that you might have an estate tax burden in the future, is there a need for you to act before the end of 2025?

To determine the answer, ask yourself if you’re willing to make gifts now in order to take advantage of the current lifetime exemption amount. If not, there is likely no urgency in early strategic gifting. But if the answer is yes, you may want to review your estate plan and consider your options. Your Morgan Stanley Financial Advisor or Private Wealth Advisor can discuss ways that you may be able to make use of the exemption as well as other techniques such as life insurance trusts and so-called estate freezing techniques (e.g., grantor-retained annuity trusts and sales of assets on credit to irrevocable trusts).

Your Morgan Stanley Financial Advisor or Private Wealth Advisor can also help you understand the projected value of your estate at any point in time and create a plan that makes sense for your circumstances.