High-Net-Worth Clients Should Consider Gift Trusts By Year-End

The all-time-high gift and estate tax exemptions which are set to expire on January 1, 2026, may be extended, but preemptive actions are recommended to protect against the risk of the exemptions not being extended.

The current lifetime gift tax and estate tax exemptions (approximately $14M per individual and $28M per married couple) are 20 times greater than the historic exemption. For perspective, just 25 years ago, the federal exemption was approximately $600k with a 55% gift and estate tax rate. Since then, the exemption has ballooned to the current $13.99M exemption, largely due to the temporary doubling of the exemption under the 2017 Tax Cuts & Jobs Act. In 2025, an individual can make aggregate gifts totaling $13.99M, during life or at death, without tax, but if aggregate gifts exceed $13.99M, there is a 40% gift and estate tax on the excess.

Political Challenges & Need for Bipartisan Support

On January 1, 2026, the 2017 TCJA is scheduled to “sunset.” Among other changes, the gift and estate tax exemption will be reduced from approximately $14M to an estimated $7-8M, absent Congressional action.

The risk that Congress will not extend the exemption is extremely high, for reasons explained below.

First, Republicans enjoy an extremely slim majority in the House (220-215) and a slim majority in the Senate (53-47). This means that House Republicans cannot afford to lose more than two GOP votes to unilaterally pass tax reform without Democrat votes.

Second, in recent years, House Republicans have not been unified, especially when it comes to government spending. Notably, during the 2022-2024 legislative cycle, the GOP-controlled House evidenced disunity, including the failure to timely elect a Speaker and several near-shutdowns, primarily due to budget-conscious members balking at spending and Freedom Caucus members hesitating to make concessions with Democrats.

Third, the cost of extending the 2017 TCJA could be as high as $7.5T, and there are many House Republicans that strongly oppose any increase to the federal deficit. The 2017 TCJA cost an estimated $4.5T. Moreover, some House Republicans from California, New Jersey, and California are vehemently demanding the termination of the $10,000 “SALT cap” that was included as a revenue raiser in the 2017 TJCA — this would cost an additional $3T. Given the $7.5M price tag, it is almost certain that at least two budget-conscious House Republicans will veto tax reform. This means that the House GOP will need to negotiate with House Democrats to enact a bipartisan tax bill.

Policy Projections & Potential Delays

There will also not be much time for protracted tax negotiations, which may not even commence until the second half of 2025.

Although Speaker of the House Mike Johnson and President Trump favor an “all in one” package, the Senate majority leader John Thune wants to prioritize an immigration and energy bill under a separate reconciliation bill before addressing tax reform due to the narrow majority in the House. The budget reconciliation rules likely do not allow for both bills to be passed in the same Congressional fiscal year.

This sequencing reduces the legislative calendar available for negotiation and risks delaying or derailing tax reform.

Extension of Gift & Estate Tax Exemption Might Be Left Out

Assuming for the moment that Republicans and Democrats are able to agree within a short time frame and tax reform is passed, it is possible that the extension of the heightened gift and estate tax exemption might not make it into the package. This is a real risk on both sides of the aisle. For Republicans, the cost of the tax reform package will need to be reduced to satisfy budget-conscious members. For Democrats, reducing exemptions might be viewed as one solution to curtail the socioeconomic disparities associated with multi-generational wealth.

Gift & Estate Tax Exemption Likely Will Not Be Known Until December 2025

Finally, due to the timing considerations discussed above, we likely will not know what is in the tax reform package until December 2025. Historically, federal gift and estate tax changes are usually included as a last minute “bargaining chip” (for example, in the 2010 Tax Relief Act, the updated gift and estate tax exemption was not agreed upon until mid-December 2010). As explained below, this would not give clients (and especially their attorneys) enough time to take action.

Removing Legislative Risks by Funding Irrevocable Gift Trust

The good news is that, even if exemptions are not extended, the IRS famously ruled in Treas. Reg. §20.2010-1(c) that the heightened exemption can be “locked in” by gifting assets to an irrevocable gift trust.

In other words, the exemption is “use it or lose it” — if you gift assets in 2025, you secure the exemption, even if the exemption is reduced in 2026.

Thus, to protect against the risk of exemptions being forfeited, individuals with net worths in excess of approximately $10M and married couples with net worths in excess of approximately $15M (including businesses, life insurance, IRAs, and real estate) should fund a gift trust before 12/31/2025 to lock-in the exemption, regardless of whether Congress extends it.

Act Fast

However, there is a timing concern: although clients will ideally want to “wait and see” for more clarity regarding tax law changes before making the gift to the trust, the problem is that qualified attorneys specializing in high-net-worth estate planning will be at full capacity by Q3/Q4 2025. This is the reality we experienced in prior years when exemptions were at risk of expiring (i.e., 2012, 2020, and 2021). By Q3, many law firms had “closed their doors” to new clients and/or were charging “surge premiums” to reflect their limited supply/time that was insufficient to meet the high demand.

Thus, the gift trust receptacle should be created as soon as possible. Once the “heavy lifting” is over and the gift trust is open, the client can wait until late 2025 to transfer assets into the trust. For example, if it looks like exemptions will be forfeited, the gift trust account could be funded by December 2025. On the other hand, if it looks like exemptions will be extended, the client could forgo funding the trust (the only downside is the payment of fees to set up the trust, which effectively served as “tax reform insurance”).

Recommendations for Tax Planning Practitioners

Not all gift trusts are created equal—given the size of the gifts and required irrevocable nature of the gift trust, it is important that the gift trust be “optimized” to ensure the client can control the trust and access the assets, if needed, or even cancel the gift via a “disclaimer.” Gift trusts should be designed for the purpose of locking-in exemptions, and with an eye on maximizing the tax benefits of the trust. Additional considerations should be to maximize the donor’s flexibility, maximize access and control over the assets gifted to the trust, and minimize IRS scrutiny by adhering to peer-reviewed designs that are firmly supported in IRS rulings and the tax Code.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jonathon M. Morrison is a senior partner in the Family Wealth & Tax Planning division of Frazer, Ryan, Goldberg & Arnold, LLP, with offices on the West Coast.