Historic Estate Tax Window Closing: Guide to Leveraging Your Exemption

When the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, it was the largest overhaul to the U.S. tax code in decades. And while some of the legislation’s provisions were intended to create permanent changes to the way our tax system works, others were temporary. Unless Congress intervenes, these temporary provisions will sunset on Dec. 31, 2025. Among the expiring provisions is one that doubled the lifetime estate and gift tax exemption. Should this provision sunset as planned, the result will be a substantial tax increase for Americans looking to transfer significant wealth to future generations.

Now for the good news: Your Northwestern Mutual financial advisor can help you build a personalized plan to take advantage of today’s exemption amounts while they’re still on the table. But now is the time to start planning. Here’s what you need to know.

The Political Environment

While the TCJA provision that doubled the lifetime estate and gift tax exemption is scheduled to expire at the end of 2025, there is the possibility that Congress will act to prevent this outcome. Of note, we anticipate that there will be a major debate on Capitol Hill about tax policy in 2025, and lawmakers will likely pass some type of tax bill that year.

That said, lawmakers could go in different directions on the lifetime estate and gift tax exemption levels, and this debate will largely be shaped by which political party controls Congress and/or the White House in 2025. Although preventing the expiration of the TCJA’s lifetime estate and gift tax exemption levels or, alternatively, allowing them to lapse are both distinct possibilities, lawmakers could ultimately do something different. For instance, Congress could decide that these levels should be even lower than they were prior to the TCJA. There’s a wide array of potential outcomes and significant risk that the post-2025 tax policy landscape could be more challenging for transferring wealth.

Given the uncertainty ahead, now is an opportune moment for affluent individuals and couples to lock in today’s historically high exemptions while they’re still available.

How Estate and Gift Taxes Work

Before we get into the planning opportunity, it’s important to understand how estate and gift taxes work. The federal government imposes three types of taxes when transferring wealth. First, you have the estate tax, which applies on wealth transferred at death, and the gift tax, which applies to wealth transferred during your life. Each is effectively a flat tax of 40 percent. Beyond estate and gift taxes, there is an additional 40 percent generation-skipping transfer (GST) tax that gets layered on if you make either type of transfer to a grandchild or further descendant.

How the Lifetime Estate and Gift Tax Exemption Works

Luckily, the law allows you to transfer a certain amount of assets (the exemption amount) without paying any estate and gift taxes. Previously, the amount was $5 million per person, but it doubled to $10 million per person in 2018 under the TCJA. This amount also increases with inflation, so it is already $13.61 million per person for 2024. If you’re married, you get twice this amount—a combined exemption of $27.22 million in 2024.

One thing to keep in mind is this is a unified exemption, which means that any gifts you give during your lifetime can affect your available exemption for the property you transfer at death.

The GST Tax Lifetime Exemption

It’s also worth noting that if you are looking to make a generation-skipping transfer, you have a GST tax lifetime exemption. This exemption functions similarly to the lifetime estate and gift tax exemption. Indeed, the GST tax exemption amount matches the lifetime estate and gift tax exemption amount (and is likewise scheduled to roughly halve at the end of 2025). But it’s important to note that the GST lifetime exemption is separate from the lifetime estate and gift tax exemption. In other words, this is not a unified exemption. This means that if you deplete your lifetime estate and gift tax exemption, you won’t necessarily deplete your GST tax lifetime exemption. That said, when gifting to grandchildren and other future-generation family members (or to a trust for their benefit), these exemptions can be applied concurrently.

What’s Changing at the End of 2025?

At the end of 2025, these increased exemptions are scheduled to sunset. This means they will drop back from today’s all-time historic highs to $5 million plus inflation. With inflation expected to increase between now and 2026, this means your individual exemption in 2025 will likely be around $14 million. But in 2026, it will decrease to approximately half of that amount, or about $7 million. If you’re married, this means that you and your spouse can give away $27 to $28 million without any estate, gift and/or GST tax if you do it before the end of 2025.

Use It or Lose It

There are only two ways to leverage the increased exemptions: Pass away while the TCJA is still in effect, or make large lifetime gifts before the sunset date. If you don’t, you won’t be able to take advantage of the increased exemption (unless it’s extended, which is far from guaranteed). It is literally a case of “use it or lose it.”

Further complicating the situation is the fact that these exemptions are divided into two parts: the base exemption (which is $5 million with inflationary adjustments) and the additional increased exemption of $5 million, which expires at the end of 2025. When making large gifts, you must use up the base exemption first. You can’t start using the increased exemption until you’ve exceeded gifts of $5 million plus inflation.

It’s All About Long-term Estate Tax Savings

If you’re married, you and your spouse could give away as much as $27.22 million in 2024 without paying any gift taxes or using your estate tax exemptions. But if you wait until 2026, the same transfer may end up costing you more than $5.2 million if the law is allowed to sunset as scheduled.

But the immediate gift tax savings are just the tip of the iceberg. With a well-thought-out estate plan, the biggest benefit comes as value grows over time and the growth on assets outside your estate isn’t subject to estate taxes.

Case Studies

In the following case studies, we look at how three fictional couples approached estate planning in the current environment and the resulting impact on their ability to transfer wealth to future generations over the long term.

In 2024 Emily and Richard had a net worth of $50 million growing annually at 5 percent. And while they knew they should implement an estate plan, they never prioritized doing so before they passed in 2044. Thanks to those 5 percent annual returns, by 2044 their net worth had ballooned to more than $132 million. With all their assets inside their estate, just over $20 million was able to be transferred to heirs tax-free based on their combined lifetime estate tax exemption in 2044. This means most of their estate (about $112 million) was subject to an estate tax of 40 percent, resulting in a sizeable tax bill of nearly $45 million. Despite a net worth of more than $132 million at death, their heirs received under $88 million. 

While their heirs were incredibly grateful for the wealth passed on to them, Emily and Richard’s complete lack of an estate plan left their heirs wondering if the family wealth could have been transferred in a more tax-efficient manner, further benefiting future generations. 

Another couple, Vivian and Phillip, also had an estate worth $50 million in 2024 that was growing annually at 5 percent. When their financial advisor informed them about the potential to save millions in estate and gift taxes, they thought it was a smart move and acted immediately by transferring $27.22 million out of their estate in 2024. Like Emily and Richard, they also passed in 2044, by which time these assets had likewise grown to more than $132 million. But thanks to acting before the TCJA sunset, more than half of those assets were already outside their estate, leaving about $60 million subject to estate tax. And while the resulting estate tax bill was still significant at more than $24 million, it was substantially less than the amount paid by Richard and Emily’s estate in our first case study. As a result, Vivian and Phillip were able to pass more than $108 million on to future generations, or about $20 million more than they would have without a plan at all.

Like our other two couples, Moira and John also had a net worth of $50 million in 2024 that was growing at 5 percent annually. But they had strong convictions about legacy planning and were determined to pass as much wealth on to future generations as possible. After an in-depth review with their Northwestern Mutual financial advisor and her team of tax and estate planning consultants, they discovered that the best way to provide for future generations was not just to act quickly, transferring the maximum amount into an irrevocable trust, but to also instruct their trustee to purchase permanent life insurance with some of the gifted assets¹  to provide liquidity the estate can use to help pay the estate tax.

Moira and John acted on their advisor’s advice and instructed the trustee to buy a permanent life insurance policy with a $15 million death benefit. Aside from the life insurance policy, Moira and John’s results were similar to what Vivian and Phillip achieved in terms of overall asset growth and taxable estate; however, they were able to pass on even more of their wealth, or about $118 million, to future generations thanks to the addition of permanent life insurance to their estate plan. That’s more than $30 million than they would have transferred without a plan at all, or an extra $9.54 million when compared to a similar plan not using permanent life insurance.

4 Strategies to Maximize Your Exemption

As you consider the financial benefits this planning opportunity may yield for future generations, rest assured that Northwestern Mutual financial advisors recognize the uniqueness of your situation. In fact, this is where our advisors really shine. With access to proprietary financial modeling software and a team of estate, tax and business planning experts, our advisors are well equipped to educate you on how to balance your needs today with your long-term wealth transfer goals.

Here are four select estate planning strategies that may play a role in enabling you to get the most from this historic planning opportunity.

Why Now Is the Time to Act

If you have significant wealth, today’s historically high lifetime estate and gift tax exemptions may offer a unique opportunity to maximize your wealth transfer and leave an even more impactful legacy of generational wealth. If you haven’t already, now is the time to start planning.

With the sunset scheduled for the end of 2025, it may seem like time is on your side. It’s not. Americans with substantial wealth have sophisticated planning needs, and figuring out how much of your wealth you can transfer to whom and in what form is difficult. And even after the big decisions are made, getting analyses done and documents drafted by attorneys, accountants and others takes time. From start to finish, it’s not unreasonable to expect a 12- to 18-month planning horizon for this kind of work.

What’s more, the estate planning attorneys and tax accountants who handle these matters are already busy helping clients get plans in place. As the sunset nears and even more of your peers want to take advantage of this use-it-or-lose-it opportunity, law firms and CPA firms could see a “traffic jam” that forces them to turn prospective clients away as demand for services exceeds the professional time available to serve them. By acting now, you can avoid any eleventh-hour rush and ensure your plans are already in place by the time the clock strikes midnight on Dec. 31, 2025.

Your Northwestern Mutual Financial Advisor Can Help You Get Started

At Northwestern Mutual, we believe the best solutions start with your goals and plans as a guide, and then we take a team approach to devising and implementing solutions. Your Northwestern Mutual financial advisor can help you lead a team of legal, financial and accounting professionals who work together collaboratively to ensure the best results for you and your family for generations to come.

This publication is not intended as legal or tax advice. This information was compiled by The Northwestern Mutual Life Insurance Company. It is intended for the information and education of Northwestern Mutual’s financial representatives, their customers, and the legal and tax advisors of those customers. It must not be used as a basis for legal or tax advice, and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting, or tax advisor. Tax and other planning developments after the original date of publication may affect these discussions.