In U.S. finance, talk of a ‘sunset’ is less about scenic views and more about a potentially ominous cloud. With the Lifetime Estate and Gift Tax Exemption due to expire, this shift could mean millions more in taxes for estates above the exemption threshold. We don’t yet know what Trump’s U.S. Presidential Election victory has in store, so plan for sunsetting now, rather than wait until you’re in the dark.

Why is the Lifetime Estate Tax Exemption sunsetting?

The Lifetime Estate Tax Exemption is a U.S. provision that shields a certain amount of a person’s assets from federal estate and gift taxes. Any individual can pass up to $13.61 million (double that for married couples) in assets tax-free to beneficiaries. After this threshold, the estate faces a 40% federal tax on any amount above the exemption.

The exemption, now at its highest, originated with the 2017 Tax Cuts and Jobs Act (TCJA) during Trump’s last term, which doubled the previous exemption amount. Its purpose was to boost economic growth temporarily but included the expiration date to prevent a longer-term drain on federal revenues. The 2017 TCJA raised the limit substantially, allowing more families to shield their wealth from federal estate taxes. However, this law wasn’t designed to last indefinitely; it included a ‘sunset’ provision set for January 1, 2026. Then, the exemption level reverts to the 2017 threshold, which is expected to be around $7 million per individual. ‍

Why is it a pivotal point for tax planning?

With Republican leadership in place, there is speculation about their extension of the 2017 TCJA changes. However, with other policy decisions fighting for priority, and an enormous National Debt to reduce, there are no guarantees. 

While estate planning under the TCJA might seem reserved for ultra-high-net-worth families, the potential change would impact many more Amercians if the sunset settles. Diana Vinder, Ascend Advisor’s Senior Tax Manager, encourages people to stay informed and work closely with their tax team. 

“Keep an eye on news and predictions throughout 2025 because we're going to know the outcome either way next year,” says Diana. “Meet with your tax advisor and lawyer and work out a strategy bespoke to you. But don’t wait until the end of 2025 to start planning; do it now.”‍

How will the tax sunset affect you?

If you’re concerned about how a lower exemption could affect your family’s financial security, think of this: waiting until after the exemption sunsets to transfer assets might unintentionally create a heavier tax load for your heirs and reduce the wealth you intend to leave behind. This is particularly relevant if you expect your assets to grow in the coming years. ‍

Smart steps towards the sunset 

To prepare for the sunsetting exemption, take these steps now to maximize savings under current rules.

Step 1: Review Your Estate Plan

An estate plan created years ago might not align with today’s laws or reflect your current goals. Ensure your plan considers the projected exemption decrease and identifies opportunities for making tax-free transfers before 2026.

Step 2: Gifting

Gifting is one of the most effective ways to reduce the taxable value of an estate. Individuals can gift up to the current exemption amount to family members or trusts without triggering the 40% federal estate tax. Additionally, the IRS allows an annual gift exclusion of $18,000 per recipient (increasing to $19,000 in 2025) to as many individuals as you like, enabling you to transfer more assets tax-free each year. Accelerating this strategy before 2026 ensures you maximize the current exemption.

Step 3: Consider DLOM and DLOC

A valuable strategy for high-net-worth estates is applying discounted valuations, such as the Discount for Lack of Marketability (DLOM) and the Discount for Lack of Control (DLOC). 

DLOM accounts for the challenges of selling specific assets, like private business interests, by reducing their appraised value based on things like illiquidity and limited market appeal. DLOC, on the other hand, considers the reduced value of a non-controlling interest within a business, which lacks decision-making power.

Using both DLOM and DLOC can significantly lower the taxable value of your estate, helping you stay within exemption limits. For example, if you own a family business, appraising it with these discounts could reduce its value on paper and potentially minimize the estate tax burden on your heirs.

Securing your legacy

There are currently many unpredictabilities in the world, and U.S. tax is just one of them. Estate planning under today’s rules could save millions in future taxes. Connect with your financial advisor now to protect what matters most for the generations to come, no matter what laws come your way.