As we approach the end of 2025, it’s important to consider how the upcoming changes to federal estate tax exemptions may affect your wealth transfer plans. Right now, individuals can transfer up to $13.99 million, while married couples can move up to $27.98 million out of their taxable estate without incurring any federal estate taxes. However, these exemptions will be reduced after December 31, 2025, so it’s wise to take advantage of the current limits before they expire.

Understanding the Lifetime Estate Tax Exemption

Under the current federal law, individuals and couples can transfer assets up to the exemption limits—either during their lifetime or after they pass away—without facing tax on those amounts. However, any amount exceeding these thresholds will be taxed at a hefty rate of 40%. The change coming in 2025 will cut these exemptions in half, potentially limiting the amount you can pass on tax-free.

The Generation-Skipping Tax

In addition to the estate tax exemption, there is also a federal generation-skipping tax exemption, which is currently set at $13.99 million. This tax applies to transfers made to grandchildren, great-grandchildren, or even unrelated individuals who are at least 37.5 years younger than you. As with the estate tax exemption, any amount exceeding the generation-skipping tax exemption will be taxed at 40%.

To ensure you can maximize the current exemptions, here are five wealth transfer strategies you should consider before the law changes in 2025.

1. Make Direct Gifts

One of the simplest ways to reduce your taxable estate is by making direct gifts to your beneficiaries. This strategy allows you to see the benefits of your gifts during your lifetime and gives you the opportunity to decide exactly who will receive them. However, the recipient has the freedom to use the gifts as they see fit, which may not align with your intentions. Keep in mind that the annual gift tax exclusion is $19,000 per recipient in 2025 (or $38,000 for gifts made jointly by married couples). Any gifts exceeding this amount count toward your lifetime exemption.

2. Set Up an Irrevocable Trust

Assets transferred to an irrevocable trust are no longer considered part of your estate, which can significantly reduce your taxable estate. Additionally, these assets are protected from creditors. The terms of the trust allow you to specify how and when the assets are distributed. One common type of irrevocable trust is the Grantor Retained Annuity Trust (GRAT), which allows you to transfer property to a trust in exchange for an annuity. After the annuity term ends, any remaining assets pass to your beneficiaries without incurring gift taxes. Another strategy involves using an intentionally defective grantor trust, where you pay the income taxes during the trust’s term, allowing the trust’s assets to grow more efficiently for your beneficiaries.

3. Make Gifts “Upstream”

While wealth transfer is often associated with giving to younger generations, another strategy involves “upstream gifting.” This refers to gifting assets to members of an older generation, such as parents or grandparents. This can help reduce your estate while also allowing the recipient to benefit from a potentially lower tax bracket. In some cases, the assets can later be passed on to your grandchildren without incurring additional taxes. Upstream gifting can be a powerful tool, particularly when combined with the higher exemptions of the older generation.

4. Maximize the Generation-Skipping Tax Exemption

The generation-skipping tax exemption can be an effective way to preserve wealth across multiple generations. For example, if you have a $30 million estate and wish to pass on as much as possible to your grandchildren without incurring estate taxes, you can use the generation-skipping tax exemption. By transferring up to $13.99 million (or your remaining exemption) to a properly structured generation-skipping trust, you can exclude those assets from estate taxes. This strategy ensures that your grandchildren will inherit the assets without the same tax burdens that would apply if the assets were passed directly to your children first.

However, it’s important to note that the generation-skipping tax exemption cannot be transferred to a surviving spouse if it remains unused at the time of the first spouse’s death. This provision is set to expire at the end of 2025 unless Congress takes action.

5. Don’t Overlook Portability

The portability feature of current tax law allows a surviving spouse to use any unused portion of their deceased spouse’s estate tax exemption. This can significantly increase the amount of wealth that can be transferred tax-free. By taking advantage of portability, you can potentially add millions of dollars to your available exemption, making it a valuable tool for wealth transfer.

Conclusion

With the federal estate tax exemption set to decrease at the end of 2025, now is the time to consider your wealth transfer options. By utilizing these strategies, you can ensure that your wealth is passed on efficiently and with minimal tax consequences. Consult with a financial advisor to develop a plan that takes advantage of the current exemptions and helps you preserve your legacy for future generations.