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As you might guess, even at your deathbed, Uncle Sam will be standing with his hand out ready to collect his “fair” share of your estate.
If you’re in the process of planning your estate then you'll want to be aware of the serious tax advantage that’s disappearing in 2025. In a nutshell, you currently have the potential opportunity to pay significantly less in taxes when handing off your estate.
This article will take a look at how you can prepare your estate as well as what happens to estate tax in 2025.
But, it's not a comprehensive guide or advice. We recommend that you schedule a free assessment with an experienced financial advisor at our firm, Covenant Wealth Advisors, to dig deeper into your personal estate situation.
NOTE: As of 2023, federal estate taxes are only levied on estates worth $12,920,000 for individuals and $25,840,000 per married couple.
What is Estate Planning?
Estate planning is the process of creating a plan to ensure that all of your possessions get passed to the correct people or organizations after you pass away. This may sound like morbid and mundane topic. But to the contrary, estate planning is essentially the culmination of your life’s hard work.
Next Steps: Tying your estate plan to your investment plan can be a complicated. We recommend speaking with a financial advisor. This tool will connect you with a fiduciary financial advisor at Covenant Wealth Advisors with over 15 years of experience.
Here's how it works:
Answer these few easy questions, so we can understand your situation.
Schedule a call with a credentialed financial advisor who can help you on the path toward achieving your financial goals. It only takes a few minutes.
Get your free retirement, investment, and tax assessment.
You’ve worked hard your entire life to build your estate and now it’s time to make sure that it falls into the right hands. But, as you might imagine, handing off your estate comes with a tax.
What is Estate Tax?
The Internal Revenue Service defines estate tax as a tax on your right to transfer property at the time of your death. This tax is collected on your estate after you pass away. If you are survived by your spouse then you won’t have to pay any taxes thanks to the Unlimited Marital Deduction.
If you have no spouse – and your estate is worth at least $12,920,000 – then you’ll have to pay estate tax.
First, the government tallies the total value of all your property and possessions at the time of your death. This is known as your “Gross Estate” and it includes the fair market value of assets like:
Cash and securities
Real estate
Insurance
Trusts
Annuities
Business interests
Keep in mind that the government values these assets at their fair market value, not what you originally paid for them. So if you own your home outright then you’ll have to pay taxes on its current market value, not the amount that you paid for it a few decades ago.
Once the value of your Gross Estate has been determined, certain expenses will be deducted to determine your “Taxable Estate.” Common deductions include mortgages, debts, and estate administration expenses. But, it’s best to speak with a professional to determine which expenses can be deducted.
In addition to these deductions, you can also “gift” a total of $12.92 million ($25,840,000 for married couples) as of 2023 over the course of your life to your preferred beneficiaries.
Speaking of which, let’s look at the upcoming changes to the estate tax code in 2025.
Scheduled Changes to Estate Tax in 2025
On January 1, 2026, the current lifetime estate and gift tax exemption of $12.92 million (plus inflation adjustment) per individual is set to be cut roughly in half.
Next Steps: Tying your estate plan to your investment plan can be a complicated. We recommend speaking with a financial advisor. This tool will connect you with a fiduciary financial advisor at Covenant Wealth Advisors with over 15 years of experience.
Here's how it works:
Answer these few easy questions, so we can understand your situation.
Schedule a call with a credentialed financial advisor who can help you on the path toward achieving your financial goals. It only takes a few minutes.
Get your free retirement and investment plan.
Back in 2017, the Tax Cuts and Jobs Act (TCJA) doubled the lifetime estate and gift tax exemption from $5.6 million to $11.18 million for individuals and $22.36 million for couples plus annual inflation adjustments in subsequent years. However, these changes were only implemented through 2025. Without further congressional action, this elevated exemption will sunset at the end of 2025 and return to approximately $7 million in 2026.
There is still a chance that this tax exemption could be made permanent by Congress. But, it’s always best to plan for what is, not what might be. Taking advantage of this existing tax exemption could save you a significant amount in taxes.
So, as far as what happens to estate tax in 2025, this means that in 2023, retirees planning their estate can gift up to $12,920,000 (or $25,840,000 for married couples) to their beneficiaries estate tax-free. In 2024, the lifetime gift and estate exemption will likely increase to $13,610,000 for individuals and $27,220,000 for married couples due to inflation. In 2025, the estate tax exemption will likely increase at a future inflation rate. After 2025, this exemption will be cut in half unless Congress intervenes.
If you are in the process of planning your estate then time is of the essence. By taking advantage of these elevated tax exemptions, you might be able to save a bundle on estate taxes depending upon your personal situation.
How to Minimize Estate Tax Liability
Use the “Gifting” Rules
The easiest way to reduce your estate tax liability is to take advantage of gifting.
As of 2023, the IRS will let you “gift” $17,000 per individual ($34,000 for married couples) tax-free without having to file a gift tax return. So, if you are single with three adult children then you can theoretically gift them each $17,000 each in 2023, an estimated $18,000 in 2024, and an estimated $19,000 in 2025.
This would result in an annual gift of $51,000 in 2023, $54,000 in 2024, and $57,000 in 2025 which would help you unload $162,000 tax-free over the next three years. Notably, this may help some investors stay well below the current lifetime estate and gift tax exemption of $12.92 million (per individual).
Additionally, there is no cap on the number of people that you can send gifts to. So, if you have three kids and nine grandkids then you can legally send $17,000 to each of them in 2023 without filing a gift tax return. This would be an annual gift value of $204,000 in 2023 and help you pass down $648,000 over the next three years. Again, this is still well below the current tax exemption limit.
Are you married? If so, just double this amount!
Sending gifts to friends and family can be an easy way to start transferring your estate tax-free.
Remember, planning your estate requires highly-personalized advice. If you have specific questions about your estate then you’ll definitely want to speak with a professional to learn the best way to minimize your estate tax liability.
Use a Credit Shelter Trust
A credit shelter trust (CST) is a popular way for married couples to reduce their tax bill when planning their estate. These trusts are also known as bypass or family trusts.
When one spouse passes, their assets are placed into a trust which can then be accessed by the surviving spouse. Then, once the second spouse passes, the trust’s assets will pass tax-free to the CST beneficiaries. The assets in the trust, and any appreciation of those assets, is "sheltered" from estate taxes at the death of the second spouse.
However, one downside of this option is that the surviving spouse will have limited rights and control over the assets in the trust.
Use a Disclaimer Trust
A disclaimer trust is a trust that comes with embedded provisions which are usually outlined in a will. This trust allows the surviving spouse to put specific assets in the trust by “disclaiming” ownership of them. In other words, the surviving spouse can choose which assets to take control over and which to put directly into the trust. Assets that are put into the trust will be transferred to the beneficiaries tax-free.
Next Steps: Tying your estate plan to your investment plan can be a complicated. We recommend speaking with a financial advisor. This tool will connect you with a fiduciary financial advisor at Covenant Wealth Advisors with over 15 years of experience.
Here's how it works:
Answer these few easy questions, so we can understand your situation.
Schedule a call with one of our credentialed financial advisor who can help you on the path toward achieving your financial goals. It only takes a few minutes.
Get your custom tailored plan for FREE.
This type of trust gives the surviving spouse more flexibility on how to handle the estate. This is important because circumstances may change once a spouse has passed away.
Estate Tax Planning for Couples
If you expect to be survived by your spouse then you can sleep soundly knowing that they will receive the full value of your estate tax-free if you pass away unexpectedly. This is thanks to the Unlimited Marital Deduction. Of course, that’s assuming that you want your spouse to receive the full value of your estate.
Even if you expect your spouse to outlive you, you can still take advantage of the three tools listed above to help plan your estate. In fact, working together can help you build a better plan to pass down your estate. For example, married couples are able to gift double the amount of cash each year when compared to individuals.
What Happens to Estate Tax in 2025?
Starting in 2026, the current lifetime estate and gift tax exemption of $12.92 million per individual will be cut in half if congress does not intervene. This means that you can potentially save a significant sum of money in taxes by starting to gift your estate now, instead of waiting a few more years.
Common Misconceptions About Estate Tax
Estate planning is only for the wealthy: It’s true that taxes are only levied on estates worth $12,920,000. But, estate planning is about much more than just taxes. It’s about putting a concrete plan of action in place to ensure that your estate is passed on to the correct beneficiaries. This can even include decisions about your finances and healthcare later in your life if you become incapacitated.
I don’t need an advisor: Even if you are below the taxable threshold, it’s always wise to have an advisor in your corner. An advisor will be able to recommend the best course of action based on their experience working with other people. Additionally, they can offer advice and solutions that you might not have even known about. This is especially true when you consider how quickly the tax laws change.
I don’t have enough money to worry about estate planning: Depending on your financial situation, the current estate tax limit of $12,920,000 might seem well out of reach. But, remember that this limit will be cut in half to roughly $6,500,000 in 2026. This amount includes the collective value of your home(s), life insurance proceeds, and retirement accounts. If you aren’t careful then you could come in above the threshold and be stuck paying 40% tax rate on your estate!
If you’re interested in learning more about estate tax planning and how to integrate it with your investment and retirement plan, please contact the Covenant Wealth Advisors team.
We hope that you’ve found this article valuable in learning what happens to estate tax in 2025. We frequently post new articles related to estate tax. Subscribe below to get alerted whenever we post a new articles.
Author: Mark Fonville, CFP®
Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money.
Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.
Registration of an investment advisor does not imply a certain level of skill or training.