The impact of 2017 tax cuts on estate tax exemption
The end of the 2017 Tax Cuts and Jobs Act: What You Need to Know
The 2017 Tax Cuts and Jobs Act (TCJA) brought significant changes to the U.S. tax code, including a substantial increase in the estate tax exemption. However, these changes are set to expire at the end of 2025, which could have profound implications for high–net–worth individuals and families.
The estate tax exemption under TCJA
One of the most notable provisions of the TCJA was the near doubling of the federal estate and gift tax exemption. Before the TCJA was enacted, the exemption was $5.6 million per individual. The TCJA increased this amount to $11.18 million per individual, indexed for inflation. As of 2024, this exemption stands at $13.61 million per individual and $27.22 million for married couples.
The sunset provision
Unless Congress acts to extend or make these provisions permanent, the federal estate and gift tax exemption will revert to its pre–TCJA level on January 1, 2026. This means the exemption will drop to approximately $7 million per individual and $14 million for married couples, adjusted for inflation. This reduction could significantly increase the estate tax liability for high–net–worth families.
Impact on a married couple with a $30 million net worth
Consider a married couple with a combined net worth of $30 million. Under the current TCJA provisions, they can shield up to $27.22 million from estate taxes in 2024. This leaves $2.78 million subject to the federal estate tax, which is taxed at a rate of 40%. Therefore, their estate tax liability would be approximately $1.112 million.
However, if the TCJA provisions expire and the exemption reverts to $14 million for married couples, the taxable portion of their estate would increase to $16 million. At the same 40% tax rate, their estate tax liability would rise to $6.4 million. This represents a significant increase in the tax burden, highlighting the importance of proactive estate planning.
| Scenario | Current law (2024) | Scheduled sunset (2026) |
| Estate value | $30,000,000 | $30,000,000 |
| Estate tax exemption (Married couple) | $27,220,000 | $14,000,000 |
| Taxable estate | $2,780,000 | $16,000,000 |
| Estate tax rate | 40% | 40% |
| Estate tax liability | $1,112,000 | $6,400,000 |
| Opportunity cost | $5,288,000 |
Strategies to mitigate the impact
To mitigate the impact of the reduced exemption, high–net–worth individuals and families should consider several strategies:
Lifetime giving
Utilize the current higher exemption to make substantial gifts before the end of 2025. This can reduce the size of the taxable estate and take advantage of the higher exemption while it is still available.
Irrevocable life insurance trusts (ILITs)
These trusts can be used to purchase life insurance policies that provide liquidity to pay estate taxes, ensuring that other estate assets do not need to be sold to cover the tax liability.
Spousal lifetime access trusts (SLATs)
These trusts allow one spouse to make a gift to the trust while the other spouse retains access to the trust assets. This can provide financial security while reducing the taxable estate.
Charitable giving
Making charitable donations can reduce the size of the taxable estate and provide philanthropic benefits.
The expiration of the TCJA provisions, particularly the estate tax exemption, presents a significant challenge for high–net–worth individuals and families. By understanding the potential impact and implementing strategic estate planning measures, it is possible to mitigate the increased tax burden and ensure a smoother transition when the current provisions sunset.
We recommend consulting with your trusted financial, legal and tax advisors for assistance in holistically evaluating your options. Start a conversation with your Fifth Third Private Bank advisor today to learn more.