2025 is an especially good year to start planning your estate, largely due to the federal estate tax exemption that is slated to sunset. Right now, the estate and gift tax exemption—the amount that you can give away tax-free—is $13.99 million. But, this exemption is scheduled to be halved to roughly $7 million in 2026. Time is of the essence if you want to pay less in estate taxes.
Looking for personalized advice related to the estate tax exemption sunset? Be sure to schedule a free consultation with a financial advisor on the ARQ Wealth team. Otherwise, continue reading to learn what the estate tax exemption is and why you should prioritize your estate plan in 2025.
What is Estate Tax?
Estate Tax is a tax on your right to transfer property at your death. They say that the only constant in life is death and taxes. Well, estate taxes are the real-life application of this phrase—even after you die, the government still wants your money.
Estate taxes are taken out of your estate when you pass away so you aren’t personally responsible for paying them. But, failing to create an estate plan can result in a larger-than-necessary tax rate being taken from your estate which means that less of your estate will go to your beneficiaries.
The next section breaks down how estate taxes are calculated.
How to Calculate Estate Tax
The government calculates your estate tax by first considering the fair market value of all your assets. This value is known as your “gross estate” and includes cash, securities, real estate, insurance policies, trusts, annuities, business interests, cars, and other assets. Most people have a bigger estate than they realize since their estate is the value of every single asset they own.
Once your “gross estate” has been calculated, the government accounts for all relevant deductions, which usually include an outstanding mortgage and other debts. These debts are paid first using the value of your estate. Once all outstanding debts have been paid, the remaining value of your assets serves as the basis for your estate tax obligation—known as your “taxable estate.”
Breaking Down the Estate Tax Exemption Sunset
In 2025, individuals can gift up to $13.99 million ($27.98 million for married couples) tax-free to their family or close friends. But, in 2026, this threshold will “sunset” back to its previous level of approximately $7 million.
If you plan to pass down your estate eventually, it’s advisable to start putting your plans into motion to take advantage of the higher estate and gift tax threshold. You could potentially give away twice as much of your estate tax-free in 2025 than you’ll be legally allowed to next year.
This tax change is the result of the Tax Cuts and Jobs Act (TCJA) passed in 2017. A small section of the TCJA roughly doubled the estate and gift tax exemption. But, the provision is set to expire at the end of 2025 unless acted upon by Congress. Technically, Congress can still extend these elevated thresholds or institute an entirely new set of rules. But, as of now, the current estate tax exemption is set to halve at the end of 2025.
That said, we recommend taking advantage of the higher threshold while you can. There is no guarantee that Congress will extend the provision as doing so will require signing new legislation.
Reduce Your Estate Tax Through Gifting
If you’re interested in reducing your estate tax, the simplest strategy is to start gifting cash, securities, and other assets up to the legally allowed gift and estate tax exemption. By giving away parts of your estate as gifts, you’ll reduce the size of your estate and your subsequent tax bill.
In 2025, the IRS allows you to legally gift $19,000 ($38,000 for married couples) each year to as many people as you like. You can theoretically reduce the size of your estate by gifting $19,000 to each of your children/grandchildren, other family members, close friends, or anyone else who you plan on listing as a beneficiary. The total amount that you are allowed to gift in your lifetime is $13.99 million as of 2025. If the size of your estate is under this threshold, then you will not need to pay estate taxes.
Gifting away parts of your estate is a very common estate planning strategy. However, suddenly writing large checks to your children, grandchildren, or close friends can have unexpected consequences or conflicts.
For example, some of your beneficiaries (usually younger grandchildren) may not be emotionally mature enough to receive their inheritance and will likely waste it. To avoid this happening, many people choose to use financial vehicles that allow you to include restrictions on the payments, such as irrevocable trusts.
Using an Irrevocable Trust in Estate Planning
An irrevocable trust is a financial tool that’s designed to move assets from the grantor’s control to their beneficiaries. Similar to gifting, this process helps reduce the value of the grantor’s estate to help them reduce their tax burden or protect assets from creditors.
Irrevocable trusts allow grantors to include specific rules, such as permitting withdrawals based on a pre-determined schedule or set of conditions. This allows you to maintain a level of control over how and when your beneficiaries receive distributions. For example, you can put assets into an irrevocable trust for a young grandchild that they will only be able to access once they turn 18.
However, one thing to note about irrevocable trusts is that they cannot be amended or modified without your beneficiary’s permission once they have been established (although the exact rules vary by state). You, the grantor, essentially transfer all ownership of the assets to the trust, which legally removes your right of ownership to the assets.
If you know that you’ll need to make amendments to your trust, then it may be better to establish a revocable trust, which provides more flexibility than an irrevocable trust. This is where it’s essential to speak with an estate planning professional who can recommend a customized plan that fits your financial goals.
Planning Your Estate With ARQ Wealth
The economic conditions in 2025 are perfect for individuals and families looking to optimize their estate planning strategy. The existing tax laws allow you to gift exorbitant sums of money to your beneficiaries tax-free, which can help ensure that more of your hard-earned dollars go to your friends and family—not the government.
But time is of the essence as these rosy tax conditions are scheduled to fade in 2026. There is technically a chance that Congress will extend the higher estate and gift tax exemption; however, it’s better to take matters into your own hands rather than hoping that Congress can pass new legislation by the end of the year.
Our Arizona-based financial advisors can help you create estate plans that meet your financial goals while minimizing your estate and gift tax. Every professional on our team is held to a fiduciary standard, which means they are legally required to make decisions that are in your best interest.
Additionally, our fee-only approach helps ensure that our estate planning professionals are focused on providing the best possible advice, not selling products to earn a commission.
To start optimizing your estate plan, please contact a member of the ARQ Wealth team today for a free consultation. You can also call us at (480) 214-9572.
Frequently Asked Questions
What is the lifetime gift tax exemption in 2025?
The federal lifetime gift tax exemption in 2025 is $13.99 million for individuals and $27.98 million for couples, according to the IRS.
When does the federal estate tax exemption end?
The estate tax exemption from the Tax Cuts and Jobs Act of 2017 is set to sunset at the end of 2025. However, Congress can still theoretically choose to extend this exemption.
What is the annual gift tax exclusion?
The annual gift tax exclusion is $19,000 ($38,000 for married couples) in 2025. The IRS allows you to give away $19,000 tax-free to as many people as you’d like.
