In 2017, the Tax Cuts and Jobs Act (“TCJA”) almost doubled the federal estate and lifetime gift tax exemption (the “Unified Exemption”) allowing individuals to transfer tax free during his or her lifetime and at death up to $10 million in assets. The Unified Exemption was indexed for inflation so that in 2025, an individual can transfer up to $13.99 million in assets tax free. The caveat to these higher Unified Exemption amounts is that the higher Unified Exemption amounts sunset and return to pre-TCJA levels at the end of 2025. Unless Congress acts, the Unified Exemption will be approximately $7 million for 2026.
In 2021, there were significant efforts to roll back the Unified Exemption to pre-TCJA levels. When the IRS confirmed that those taking advantage of the higher exemption amount between 2018 and 2025 would not be penalized if the exemption decreased, there was a flurry of gifting to lock in the tax-free status of assets prior to the rollback. Ultimately, no changes were made to the Unified Exemption.
Now, almost midway through 2025, the sunset of the higher Unified Exemption amount is on the horizon and a provision to make it permanent (the “Exemption Provision”) is included in the One Big Beautiful Bill Act (“OBBBA”) recently passed by the House of Representatives. The Exemption Provisions set the Unified Exemption at $15 million for 2026 and indexes it for inflation thereafter. However, passage of the OBBBA in the Senate is up in the air after the Congressional Budget Office reported that passage of the OBBBA would increase the deficit by $2.4 trillion and debt by $3 trillion.
If the OBBBA is not passed or is passed without the Exemption Provision, gifting is an excellent estate and tax planning strategy for those with estates valued over $7 million. While there is a trade off in that gifts do not receive a step up in basis, the IRS has clarified that individuals who take advantage of the higher Unified Exemption amount between 2018 and 2025 will not be penalized if the amount decreases.
We will continue to watch closely legislative developments regarding the OBBBA to see if the proposed changes to the Unified Exemption become law. To begin discussions regarding your estate and gift planning strategy, contact the attorneys at Cavitch Familo & Durkin today.