The Tax Cuts and Jobs Act (TCJA) of 2017 introduced several significant changes to gift and estate tax regulations, which have had profound tax implications for business owners and high-net-worth individuals. As we approach the sunset of these provisions at the end of 2025, it's important to act now to manage changing tax exposure effectively.
One of the most notable changes brought by the TCJA was the doubling of the estate and gift tax exemption. Currently, individuals can gift up to $13.6 million, and couples can gift up to $27.2 million over their lifetime without incurring any gift tax. This historically high exemption has given business owners a unique opportunity to transfer substantial wealth to their heirs with minimal tax implications.
However, this window of opportunity is closing. On January 1, 2026, the exemption levels are set to revert to pre-TCJA levels, adjusted for inflation.
The exact level of the new lifetime gift tax exemption is not known, but it is estimated to be about $7 million for an individual and about $14 million per couple after the inflation adjustment. This reduction significantly impacts estate planning strategies, especially for those with estates exceeding the new lower thresholds.
Now is the time for business owners to take advantage of the current high exemptions. By gifting minority interests in their companies, they can benefit from discounts for lack of control and marketability, thereby reducing the taxable value of the gift.
This means you can gift more of company’s ownership before exceeding the current lifetime exemption. For example, gifting a 10% interest in a privately held company, which is not freely traded and has restrictions on the minority interest, can result in substantial discounts that further minimize the gift tax exposure.
Valuation plays a critical role in this process. Accurate valuations are needed to determine the fair market value of the gifted interests and to apply the appropriate discounts. Engaging a qualified valuation expert can ensure that the valuations are defensible and compliant with IRS regulations.
As the deadline approaches, business owners and high-net-worth individuals need to review their estate plans and consider making significant gifts before the exemption limits decrease. The potential tax savings and the ability to transfer more wealth to the next generation make it a time-sensitive and strategic move.
The sunsetting of the TCJA's gift and estate tax provisions marks a crucial period for estate planning. It’s important to act now to help mitigate future tax liabilities and preserve wealth for future generations.