Gifting and Estate Planning: A 2025 Guide Before the Tax Laws Change

URGENT: The 2025 Estate Tax Exemption “Sunset”

The Tax Cuts and Jobs Act of 2017 nearly doubled the federal lifetime gift and estate tax exemption. However, this provision is temporary and is scheduled to “sunset” on January 1, 2026.

• The 2025 exemption amount is over $13 million per person (indexed for inflation).
• In 2026, this amount is scheduled to be cut roughly in half, returning to the pre-2018 level of about $7 million per person (indexed for inflation).

This means the “use it or lose it” window to take advantage of the historically high exemption for making large, tax-free gifts is closing at the end of 2025. This is the single most important factor in senior estate planning today.

The Building Blocks of Wealth Transfer: Key Terms to Know

Annual Gift Tax Exclusion

This is your simplest gifting tool. In 2025, you can give up to $19,000 to any number of individuals completely free of gift tax, without needing to file a gift tax return or dipping into your lifetime exemption. A married couple can combine their exclusions to give up to $38,000 to each person.

Lifetime Gift and Estate Tax Exemption

This is the large, unified amount you can give away during your life or at death before any federal gift or estate tax is due. As mentioned, this amount is currently very high but will be significantly reduced in 2026.

The Critical Decision for Your Heirs: Gifting vs. Inheriting an Asset

Understanding the tax impact on your heirs is crucial. The key difference lies in the “cost basis”—the value used to determine the capital gain when an asset is sold.

Gifting an Asset: “Carryover Basis”

When you gift an appreciated asset (like stock) to an heir during your lifetime, they inherit your original cost basis. If you bought stock for $10,000 and it’s now worth $100,000, their basis is $10,000. If they sell it, they face a $90,000 capital gain.

Inheriting an Asset: The Magic of “Step-Up in Basis”

When an heir inherits that same asset after you pass away, the cost basis is “stepped up” to its fair market value on your date of death. If the stock is worth $100,000 when you pass, their basis becomes $100,000. They can sell it the next day for that amount and pay zero capital gains tax.

The Trade-Off: Gifting now removes future appreciation from your taxable estate, while inheriting provides a massive capital gains tax break for your heirs. This is a central discussion to have with your advisor.

Actionable Strategies for 2025

Given the urgency of the expiring exemption, consider these strategies:

1. Maximize Annual Exclusion Gifts: This is the easiest first step. Use your $19,000 per-person exclusion to reduce your estate and help your family without any tax consequences.
2. Make Large Lifetime Gifts: If your estate is well above the projected 2026 exemption amount (approx. $7 million), 2025 is the year to consider making large gifts to utilize the current high exemption before it’s gone. This can be done with cash, securities, or through advanced trust strategies.
3. Pay Tuition or Medical Expenses Directly: Payments made directly to an educational institution for tuition or to a medical provider for care are not considered taxable gifts. This is an unlimited way to help heirs outside of the annual exclusion.