The Internal Revenue Service has announced inflation adjustments for tax year 2025 (Rev. Proc. 2024-40).
Lifetime Exemption Amount
For gift and estate tax purposes, the lifetime exemption amount will increase to $13.99 million per person (up from $13.61 million in 2024). This means a married couple can transfer a combined $27.98 million during life and/or at death without paying any federal gift or estate tax. The lifetime exemption amount, which was temporarily doubled under the Tax Cuts and Jobs Act of 2017 (TCJA), is scheduled to return to its pre-TCJA levels after 2025.
Annual Gift Exclusion
The annual gift exclusion amount will increase to $19,000 per recipient (up from $18,000 in 2024). Gifts that do not exceed the annual gift exclusion amount are not counted as taxable gifts. Gifts made in trust do not qualify for the annual gift exclusion unless the gift recipient has a present interest in the gift, such as a withdrawal power. If a taxpayer makes a gift in excess of the annual gift exclusion amount, a gift tax return will be due on April 15 in the year following the year in which the gift was made.
Annual Gift Exclusion for Non-U.S. Citizen Spouse
Gifts to a spouse typically qualify for the unlimited marital deduction and will not be subject to gift or estate tax; however, gifts to a spouse who is not a U.S. citizen (non-citizen spouse) do not qualify for the unlimited marital deduction. Instead, a taxpayer is allowed a higher annual gift exclusion amount (sometimes referred to as the “super annual exclusion amount”) for gifts to a non-citizen spouse. The super annual exclusion amount will increase to $190,000 (up from $185,000 in 2024). Gifts to a non-citizen spouse that do not exceed the super annual exclusion amount are not counted as taxable gifts. Gifts made in trust do not qualify for the super annual gift exclusion unless the non-citizen spouse has a present interest in the gift, such as a withdrawal power. Alternatively, gifts or bequests made to a “qualified domestic trust” will qualify for the marital deduction.
Generation-Skipping Transfer Tax Exemption
Since 2001, the generation-skipping transfer (GST) tax exemption has been aligned with the lifetime exemption amount. Consequently, the GST tax exemption will increase to $13.99 million in 2025, and is scheduled to return to its pre-TCJA levels after 2025.
While many are optimistic that the incoming Trump administration will extend the higher lifetime exemption amount, there are no guarantees that tax law changes will be enacted before (or after) the scheduled sunset after 2025. Wealthy taxpayers should plan now, creating “placeholder” trusts that are initially funded with small amounts to open bank and brokerage accounts. If it becomes clear the higher lifetime exemption amount will not be extended by the end of 2025, the taxpayer can quickly fund the placeholder trusts with the higher lifetime exemption amount, avoiding the urgency (and possible inaccessibility) of last-minute planning.
If you have interest or questions about these issues, contact the author or another member of Parker Milliken’s Trusts & Estates Group.
