The past several years have been a great time for people with large estates to make strategic gifts without incurring big tax burdens. That may be about to change.

Since 2018, the exemption on estate taxes has been at its highest level ever. Because of a temporary provision in the Tax Cuts and Jobs Act (TCJA) of 2017, individuals can currently gift or leave up to $13.99 million¹ to family or friends without paying federal estate tax.

The $13.99 million limit for individuals represents 2025’s basic exclusion amount (BEA), the lifetime amount of assets that are exempt from federal estate taxes² when they are transferred as gifts or passed on as an inheritance. BEA is regularly adjusted for inflation, and its value is set by Congress. Since 2018, BEA has been roughly twice what it was before the TCJA took effect — and the change was not intended to be permanent.

It's important to note that the BEA limit³ applies to the total of all estate gifts over the giver’s lifetime. Any remaining credit toward the BEA applies to the estate tax after the individual’s death. For example, a couple that gifted $10 million from their estate during their lifetimes would still be eligible to leave about $17 million tax-free to their heirs.

» Insight: There are also separate annual limits on the value of gifts that individuals can give tax-free. In 2025, the annual exclusion⁴ per recipient was $19,000 from an individual (or $38,000 from a couple). These gifts do not count⁵ toward your lifetime federal estate tax threshold.

When does the estate tax change take effect?

When it passed in 2017, the TCJA was designed to end in 2025.⁶ This means that unless Congress takes action to extend the estate tax break, it will end on January 1, 2026.

According to the IRS, at that time, the BEA will drop⁷ to $5 million per individual — or $10 million per couple. This reflects the 2017 limit adjusted for inflation. Families whose estate planning will be affected by this change may want to act now to understand the potential impact.

Who will be affected by the estate tax change?

Those individuals and couples with large estates currently valued at more than $5 million may be most impacted initially.

However, individuals with smaller estates but long investment horizons — and individuals who expect financial windfalls or other one-time increases to their estates’ value — should also be aware of how the BEA change could shape their long-range gifting and inheritance plans.

» Insight: Given the complexity of this issue, it may be wise to schedule a conversation with your tax attorney, accountant or CPA.

If you are not already working with a tax professional, you may reach out to RBFCU Wealth Management, The Garner Davis Group for a referral. Although our financial advisors do not provide tax guidance, they do work alongside professionals who do.

Is this drop in the basic exclusion amount (BEA) retroactive?

One pressing question for people with estates valued at more than $5 million, who’ve been taking advantage of the increased taxation threshold since 2018, is whether the upcoming lower threshold might penalize them for gifts they’ve already made.

In other words, if you’ve made large gifts that were tax-exempt under the current rules, could those gifts push you over the new, lower tax-free limits for gifts?

According to a special rule⁸ created by the IRS in 2019, “people planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases.”

Again, working with a tax professional can prove helpful.

What does the estate tax change mean for gifting now?

Before making any gifts and changing your gifting strategy, it may be a smart idea to discuss your retirement lifestyle goals, plans for major purchases and the optimal legal and financial structures for any gifts you make from your estate during your lifetime.

You may also want to consider carefully the potential impact a major financial gift from your estate may have on the recipient. In other words, will the gift improve their quality of life, or does it have the potential to create difficulties? And while tax professionals can assist with the nitty gritty of these issues, a financial advisor well versed in your wealth management plan and personal objectives can be a useful sounding board, too.

The takeaway

A proactive approach to estate tax management may help you make the most of your assets to help benefit your family, others close to you, and charitable organizations that you support. The upcoming federal estate tax rule change presents an opportunity to have conversations with your wealth management team and your family about your retirement goals and gifting objectives — and the ways that can help achieve both.

Ready to assess your current estate tax position and develop a strategy that can help meet the needs of you and your family? The team at RBFCU Wealth Management, The Garner Davis Group can provide custom, comprehensive advice and investment portfolio strategies to help build, manage, preserve and transition significant wealth and assets.