Estate Planning Tips for 2025 and Beyond

At the 59th Annual Heckerling Institute on Estate Planning, Turney P. Berry, Austin Bramwell, and Sarah Moore Johnson presented practical and prudent estate planning pointers for 2025 and beyond.  

Political Landscape and Tax Law Uncertainty  

With the election now over and Republicans in control of the House, Senate, and White House –  it would seem there is a degree of political stability in Washington, at least until the mid-term elections. However, the panelists pointed out that this stability does not necessarily lend itself to certainty regarding the current tax law situation. The Tax Cuts and Jobs Act of 2017 (TCJA) provided sweeping changes to the tax landscape. A number of these changes are set to expire or sunset as of the last day of 2025. The panelists opined whether the law changes will be allowed to expire, be extended, or even modified. They further discussed the timing of these potential changes or extensions. Would there be something earlier in the year or much closer to the date of expiration? With varying opinions, one point of agreement was clear: the current environment is uncertain, and practitioners and clients will have to plan for all contingencies heading into this year. 

The panelists agreed that the timing of a potential resolution close to the year-end, similar to when the TCJA was passed in December of 2017, would create a rush amongst clients and practitioners to have planning done. Ms. Moore Johnson raised the concern that waiting until the last minute may lead to clients having difficulty finding competent representation, as practitioners will become overwhelmed. She emphasized that clients and practitioners will need to position themselves early in the year to leave enough time to address issues and put proper documents in place.  

The “Bonus” Exemption Explained  

A major point of uncertainty is the “bonus” exemption. The lifetime exemption is the statutory amount that can pass estate and gift tax-free at death. There is also a Generation-Skipping Transfer Tax (GST) exemption amount, separate from the estate and gift tax exemption, covering transfers to “skip” generations. Prior to the TCJA, the base exemption was $5 million per person, adjusted annually for inflation.  The TCJA doubled this base amount to $10 million, creating a temporary “bonus” exemption amount. The exemption for 2025 is $13,990,000 for both estate and gift transfers, as well as an equal separate amount for Generation-Skipping Transfer Tax (GST). The bonus GST exemption amount is also set to sunset as of the last day of 2025. The exemptions will revert to the pre-TCJA levels, adjusted for inflation (currently estimated to be around $7 million). 

Strategies for Utilizing the Bonus Exemption  

Mr. Bramwell used the example of a cupcake with icing to describe the bonus exemption. The original exemption amount ($5,000,000 adjusted for inflation) is the cupcake's cake portion, and the bonus (an additional $5,000,000 adjusted for inflation) is the icing on the cupcake. Mr. Bramwell pointed out that clients would need to utilize the original exemption amount before taking advantage of the bonus amount. He noted that one must consume the cake portion of the cupcake before they can get to the icing portion. The order of utilization impacts how clients should plan, raising issues of what strategies should be utilized. 

A key point for clients and practitioners will be how, when, and in what amounts to utilize the bonus exemption. The panelists pointed out that each client's planning will be different based on several factors, including their wealth level, previous planning, and future plans for the assets under consideration.  

Ultra-wealthy clients may have already utilized their full estate/gift and GST exemptions, including bonus amounts, or they may be able to do so without any impact on their lifestyle. These clients still must consider whether they want to gift assets in such a significant amount, giving up a certain degree of control of those assets. There are also substantial income tax implications if the assets under consideration are business interests that could be sold in the future. 

Considerations for Middle-Range Taxpayers  

Middle-range taxpayers may not want to part with substantial assets and control as the lifestyle impact may be too great. If gift amounts are not high enough, the taxpayers may not fully utilize the bonus exemption. If not appropriately structured, taxpayers may end up utilizing the “cake” portion of both spouses’ standard exemption without ever getting to the “icing” or bonus portion, which could go away with the sunsetting law. One strategy to avoid this is to have all the gifts come from one spouse, effectively utilizing the “cake” and “icing” of the one spouse and leaving the “cake” portion of the other spouse intact. This partially mitigates the impact of the elimination of the bonus exemption. 

In this scenario, one spouse may not have enough assets in their individual name to accomplish this type of gifting. Part of the strategy would include gifting from one spouse to the other to have substantial assets owned by the one spouse to effectuate the gifts. The panelists pointed out that this type of transaction needs to be properly structured to avoid potential audit issues. In particular, the panelists stressed the need for independent significance and risk (i.e., time) between transfers, which means clients may run out of time to utilize this strategy.  

While the political landscape seems settled for the short term, uncertainty regarding potential tax law changes remains. The use of the bonus exemption, in particular, will need to be addressed prior to year end. Practitioners should plan for the year-end client rush to address estate planning, while the clients themselves should make arrangements to address their needs with adequate advance timing.