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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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This bulletin examines key considerations for estate and wealth planning in light of the scheduled reduction of transfer tax exemptions, volatile markets, and the uncertainty regarding the timing and components of any future tax legislation.

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The federal estate, gift, and generation-skipping transfer (GST) tax exemptions (“exemption amounts”) have increased to unprecedented levels since the enactment of the 2017 Tax Cuts and Jobs Act (“2017 Act”), which doubled the $5 million exemption amounts to $10 million, as adjusted for inflation. In 2025, the exemption amounts are $13.99 million per person ($27.98 million per married couple), meaning that assets valued up to these exemption amounts can be transferred during life and/or at death without incurring transfer taxes.

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These enhanced exemption amounts are scheduled to sunset (expire) at the end of 2025, at which time the exemption amounts will revert to $5 million, adjusted for inflation. The inflation-adjusted amount is estimated to be $7.2 million to $7.4 million per individual ($14.4 million to $14.8 million per married couple) beginning January 1, 2026. In addition to certain income tax implications of the sunset not covered here, the estate, gift, and GST tax rates are scheduled to increase to 45%, up from the current 40%.

These changes will occur unless Congress acts, which is much more likely as a result of the 2024 election, but there is no way to know what will occur or when. The Republicans control the White House and both chambers of Congress, and President Trump has stated he will <a href="https://www.taxnotes.com/tax-notes-today-federal/budgets/trump-plans-act-fast-tcja-extension/2024/12/10/7nz24" target="_blank" rel="noreferrer noopener">“seek an agreement to extend the expiring tax provisions in the [2017 Act] within the first 100 days of reentering the White House”</a> (April 30, 2025). House Speaker Mike Johnson targeted April for the tax law extension and other key priorities in a single bill, with the hope of President Trump <a href="https://www.law360.com/tax-authority/federal/articles/2280113?nl_pk=ac41c2f4-4ffa-4be7-b6bb-186656702974&amp;utm_source=newsletter&amp;utm_medium=email&amp;utm_campaign=tax-authority/federal&amp;utm_content=2025-01-07&amp;read_main=1&amp;nlsidx=0&amp;nlaidx=0" target="_blank" rel="noreferrer noopener">“signing the bill into law by Memorial Day [as] the worst-case scenario,”</a> but we are four months into 2025 with no final agreement. On April 10, the House of Representatives adopted a <a href="https://www.congress.gov/bill/119th-congress/house-concurrent-resolution/14/all-actions" target="_blank" rel="noreferrer noopener">final concurrent budget resolution</a> that the Senate approved on April 5, so the budget reconciliation process will begin after the congressional recess. However, given the sheer volume of priorities slated for this single bill and continued disagreements on terms, path, and funding of any such extensions, <a href="https://www.taxnotes.com/tax-notes-today-federal/tax-reform/tax-world-may-have-wait-big-tax-bill/2024/12/04/7nnwy" target="_blank" rel="noreferrer noopener">substantial uncertainty remains with respect to how, when, and what portions of the 2017 Act may be extended</a>.

Historically, new administrations generally pursue tax legislation goals following inauguration and want to act swiftly, but that doesn’t always come to fruition. In fact, over the past four decades, the first large tax package passed by each new administration came no earlier than June of the administration’s first year and as late as August of the administration’s second year. With history as a guide, the lesson is not to assume the law will change quickly.

We believe it is prudent to conduct planning discussions with your advisors and to be ready if it appears the exemption amounts will actually expire on January 1, 2026, as currently provided by statute. The time for significant planning may also be ripe for other reasons, as financial market volatility creates opportunities (and risks) for increased wealth transfers. Waiting until the third or fourth quarter of 2025 to start the planning process may well be too late. If you have not already begun those discussions, now is a good time to review your current estate plan and evaluate the impact of potential tax law changes with your advisors.

In this bulletin, we look at the financial impact of wealth planning and the enhanced exemption amounts, the specific groups who should be closely monitoring the existing transfer tax laws based on individual net worth, and other non-tax considerations for wealth planning. We also generally highlight a selection of planning techniques for consideration.

Financial Impact of Enhanced Exemption Amounts

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The exemption amounts allow assets to be transferred during life or at death without incurring estate, gift, or GST taxes. Any gift/GST exemption amounts used during life reduce the estate/GST exemption amounts available at death.

Since the tax rate on transfers in excess of the exemption amounts is currently 40%, the enhanced exemption amounts result in a savings of 40 cents on every dollar transferred above the amounts for which the exemption amounts will sunset. Additionally, a lifetime wealth transfer removes the present value of the transferred assets from the donor’s estate and shifts all appreciation and income to the recipient, often resulting in the total impact and value of the transfer being much higher over the long run.

<a>As the sunset approaches, </a>it is necessary to transfer assets with a total value higher than the post-sunset exemption amounts to capture the benefits of the enhanced exemption amounts. This means that to achieve the maximum benefit, each person would need to transfer $13.99 million in 2025 (and to use the GST exemption, those transfers would also need to contemplate the considerations required to effectively use that exemption).

Transferring assets valued at less than (or equal to) the post-sunset exemption amounts does not capture any of the enhanced exemption amounts scheduled to sunset – the enhanced level is “use it or lose it.” For example, under current law, if an individual uses $6 million of their $13.99 million gift exemption by December 31, 2025, as of January 1, 2026, they would have approximately $1.2 million to $1.4 million of exemption remaining (including the estimated 2026 inflation adjustment). However, if they use $7.2 million to $13.99 million through 2025, as of January 2026, they would have zero exemption remaining (or a few hundred thousand, depending on the inflation adjustments for 2026).

However, if an individual receives a gift/estate exemption amount from a predeceased spouse (deceased spouse unused exclusion) as a result of a valid “portability” election, that “ported” exemption amount will not sunset, meaning it will not be reduced in 2026 even if the enhanced exemption amounts are not extended (note that portability is not available for the GST exemption). However, the ported exemption amount must be applied first to any transfer of lifetime gifts, and only after the ported exemption amount is exhausted will gifts reduce an individual’s own exemption amounts. As a result, if a ported exemption amount is available, one must transfer assets with a value higher than the total of the available ported exemption amount and their separate individual exemption amount to yield the benefit of the enhanced exemption amounts prior to the scheduled sunset. For example, if a $12 million gift/estate exemption is ported to an individual from a predeceased spouse and that individual has $13.99&nbsp;million of their own exemption amount available in 2025, the first $12 million of gifts consume the ported exemption amount and only after the ported exemption amount is used do gifts utilize the individual’s exemption amount ($13.99 million in 2025). In this example, the individual must transfer $25.99 million before January 1, 2026, to fully maximize gift tax exemptions prior to the sunset.

Scheduled Sunset’s Impact Will Differ Based on Current Wealth

The potential financial impact of the scheduled sunset of the exemption amounts at the end of 2025 varies based on individual/family wealth. That wealth level may already be fluctuating for those heavily invested in the public market and it may take longer to see the impact on valuations of private companies.

Net Worth Below Current Exemption Amounts

For single individuals with a net worth of less than approximately $7.2 million and married couples with a combined net worth of less than about $14.4 million, a sunset of the exemption amounts would have little to no current financial impact, as the reduced exemption amounts would still allow all assets to be transferred during life or at death without incurring transfer taxes. For those who fall within this category, there would seem be no rush to make gifts that aren’t otherwise planned, other than to proactively remove appreciating assets from one’s taxable estate to reduce exposure going forward after ensuring this doesn’t limit lifestyle or other cash needs during life.

Net Worth Above Current Exemption Amounts

On the other hand, single individuals with a net worth of more than $13.99 million and married couples with a combined net worth of more than $27.98 million should likely already be employing and/or considering certain planning options to take advantage of the enhanced exemption amounts and reduce the cumulative amount of transfer taxes incurred. While the reduction of the exemption amounts will materially impact this group, even without a reduction they would likely still incur transfer taxes on some level of assets. Additionally, those who fall in this category are naturally more able to part with significant assets on a current basis without materially impacting their standard of living. As a result, this group will likely be less tempted by some of the more aggressive planning options to transfer wealth, often utilizing more traditional options such as outright gifts or gifts to an irrevocable trust (described below) and should be considering wealth transfers regardless of the looming sunset.

Net Worth Between Current Exemption Amounts and Scheduled Reduced Exemption Amounts

Individuals and couples somewhere between these two wealth bands may be particularly motivated to implement certain planning options now – before the sunset of the exemption amounts. Individuals with a net worth of between approximately $7.2 million and $13.99 million and married couples with a combined net worth between about $14.4 million and $27.98 million must decide whether transferring assets now to take advantage of the enhanced exemption amounts before the sunset will impact their standard of living or overall financial security. As noted above, transferring assets valued at less than (or equal to) the post-sunset exemption amounts would not capture the benefits of the enhanced exemption amounts. It is necessary to transfer assets with a total value that is higher than the post-sunset exemption amounts, meaning that to achieve the maximum benefit, an individual would need to transfer assets valued at $13.99 million in 2025. Doing so using traditional planning techniques would likely have a significant impact on the standard of living of the transferring individual(s). As a result, individuals in this wealth band might consider more aggressive planning techniques to transfer a large amount of their wealth to take advantage of the enhanced exemption amounts while minimizing the impact on their standard of living (via carefully structured trusts, etc.); in some families this means one spouse using all of their enhanced exemption amount and the other retaining their entire exemption amount. These individuals should consult qualified professional advisors and carefully consider their options, along with all associated pros and cons.

Non-Tax Considerations for Wealth Planning

Given the substantial amount of assets that must be transferred in the short term to take advantage of the enhanced exemption amounts, use of the exemption amounts should not be the only consideration in deciding whether to implement one or more estate planning strategies, including those described below. Other guiding principles should include consideration of the income tax aspects of planning (including tax basis-related considerations), short- and long-term estate and succession planning objectives, the impact of removing substantial assets from one’s taxable estate, the need or desire for governance or control over the transferred wealth (or assets), cash flow and lifestyle, family harmony, target wealth objectives for younger generations, flexibility to handle and manage unforeseen future events, charitable goals, special needs, the importance of tax efficiency to the overall estate plan, and many others. Your wealth planning attorney should have these more personalized discussions with you.

High-Level Primer on Select Planning Options to Utilize Exemption Amounts

There are a variety of estate planning strategies that may be used to transfer wealth out of an individual’s taxable estate for federal estate tax purposes. The following summarizes a few examples.

Perhaps the most traditional estate planning technique to take advantage of the enhanced exemption amounts is to make an outright transfer of assets to a person other than a spouse (e.g., children or grandchildren). Outright gifts of assets effectively remove assets and future appreciation thereon from an individual’s taxable estate for federal estate tax purposes. The enhanced exemption amounts can be used to avoid paying transfer taxes on such gifts.

Outright gifts carry with them their original cost basis (no step up) in the hands of the donor, so outright gifts of highly appreciated property should be carefully evaluated to determine the potential income tax consequences of a future transfer or sale.

In addition, outright transfers convey immediate use and control on the recipient without any direct oversight and can subject assets to creditors and divorce proceedings.

Rather than making outright gifts, gifts can be made to one or more irrevocable trusts for the benefit of others (e.g., children, grandchildren, or more remote descendants). There are many different trust structures, but some common themes include potential creditor protection, use of GST exemption amounts to remove the assets from beneficiaries’ taxable estates, slower and/or more controlled access to wealth, flexible mechanisms to manage future uncertainties, additional income tax structuring possibilities (e.g., grantor trusts that provide the opportunity for the transferor to pay income taxes on trust income going forward without being deemed to have made additional gifts by reason of the payment of same), and more. Trusts funded with meaningful gifts can also provide a vehicle for additional wealth transfers in the future, even if an individual has no remaining exemption amounts (e.g., a sale of an asset to an existing trust can often yield great benefits by removing the future appreciation on the asset sold from the donor’s estate, while also providing cash flow in payment of the transfer that can serve as funding for lifestyle needs later in life; this is one example of a “freeze” transaction).

However, trusts also require administration, tax returns, and investment management services, which can mean ongoing fees and expenses, complexity, and continued involvement of lawyers, accountants, and professional advisors. Additionally, as with outright gifts, property gifted to an irrevocable trust does not receive a step-up in basis upon the donor’s death, so transfers of highly appreciated assets should be carefully evaluated in the context of potential income tax consequences.

Since the enactment of the 2017 Act, the Spousal Limited/ Lifetime Access Trust (SLAT) and the Lifetime Qualified Terminable Interest Property Trust (Lifetime QTIP) have become popular estate planning techniques to take advantage of the enhanced exemption amounts, as they allow the spouse of a transferor to have access to such assets (thereby potentially retaining indirect access to such assets for the transferor spouse). Both of these trusts are irrevocable (see above) but have additional features. These techniques include a transfer of assets to an irrevocable trust for (or that can be used for) the benefit of a spouse. Other individuals (such as children, grandchildren, etc.) can also be current beneficiaries of a SLAT, but not of a Lifetime QTIP.

In implementing these estate planning techniques as part of an overall estate plan, sometimes each spouse will create a SLAT or Lifetime QTIP benefitting the other. Each trust is funded with the transferor spouse’s individual assets. This allows a married couple to utilize their full exemption amounts while still maintaining some access to their collective assets. However, it is extremely vital that these trusts are not so similar (in several ways) that they are treated as reciprocal and, therefore, ignored by the IRS – meaning the planning fails for tax purposes, but the legal restrictions on the assets and uses remain. Additionally, even after traversing the reciprocal hurdle, care must be taken to avoid any implication of a retained interest that would cause the SLAT or Lifetime QTIP access to be included in the taxable estate of the transferring spouse.

The impact and possibility of divorce or a spouse’s untimely death should also be considered before implementing either of these estate planning strategies. In these circumstances, the transferor spouse loses indirect (through the former spouse) access to the assets that he or she transferred to the SLAT or Lifetime QTIP. Additionally, the potential income tax consequences of the loss of a step-up in income tax basis at death should be carefully considered.

The prevalence of use and potential estate tax savings of these types of estate planning strategies, as well as potential accompanying IRS scrutiny, increase the potential for additional legislation in this area that could impact the effectiveness of such strategies. Before implementing any of these strategies, the impact of current laws, income tax basis, risks of future unforeseen events and lifestyle needs, risk of future IRS challenge, and future tax laws should be carefully considered and discussed with professional advisors.

Plan as if the Scheduled Sunset Will Occur

To take advantage of the enhanced exemption amounts, any chosen planning structure and associated gift must be irrevocably completed by December 31, 2025. With the current uncertainties in the tax laws, now is the time to start planning for the sunset of the estate, gift, and GST tax exemption amounts.

It takes time to discuss planning options, develop the appropriate strategy, complete all necessary requirements, and execute the plan. This process could be further delayed by an expected influx of families wishing to explore this type of planning – lawyers, accountants, financial advisors, valuation and appraisal experts, bankers, and clients are all going to be very busy, and December 31, 2025, will be here soon. We think it is prudent to avoid relying on the hope that the 2017 Act will be extended promptly or that any tax law change made in 2026 or beyond will be retroactive… until it actually occurs. Now is the time to discuss estate planning options and wealth transfer objectives with an attorney and other advisors, particularly if you are an individual with a net worth of more than approximately $7.2 million or a married couple with a combined net worth of more than about $14.4 million.

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<em>This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.</em>

<em>This document may be considered attorney advertising in some jurisdictions.</em>

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Wealth Planning in an Uncertain Time

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