U.S Treasury Issues Rev. Proc. 2024-40 Detailing Changes to Estate, Gift & Generation Skipping Transfer Tax Rates
On October 22, 2024, the U.S. Treasury Department issued Rev. Proc. 2024-40, which outlines inflation-adjusted tax exemptions for estate, gift, and generation-skipping transfers for 2025. These changes include:
The estate and gift tax exemption, currently $13.61 million in 2024, will increase to $13.99 million per individual in 2025 ($27.98 million for married couples).
The annual gift tax exclusion will rise from $18,000 per recipient per year to $19,000 in 2025.
The gift tax exclusion for gifts to non-citizen spouses will increase from $185,000 to $190,000 in 2025.
Additionally, trusts and estates will face the highest marginal fiduciary income tax rate on ordinary income once accumulated, undistributed income reaches $15,650 in 2025. Trustees and estate administrators are advised to consult with a tax professional to mitigate potential tax liabilities, particularly as federal marginal tax rates for estates and trusts can reach up to 37%.
If Taxable Income Is: | The Tax Is: |
Not over $3,150 | 10% of the taxable income |
Over $3,150 but not over 11,450 | $315 plus 24% of the excess over $3,150 |
Over $11,450 but not over $15,650 | $2,307 plus 35% of the excess over $11,450 |
Over $15,650 | $3,777 plus 37% of the excess over $15,650 |
Impending Changes Under the Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily doubled the estate and gift tax exemptions, allowing individuals to transfer significantly more wealth tax-free. However, this provision is set to expire on December 31, 2025, reverting the exemptions to pre-2018 levels unless Congress takes further action. Starting January 1, 2026, the exemption may drop to approximately $6 million per individual.
If the estate tax exemption reverts to pre-TCJA levels, it is expected to be around $6 million per individual ($12 million for married couples) in 2026. Estates exceeding these thresholds would be taxed at a 40% federal estate tax rate.
Example: An estate valued at $15 million in 2026 would be subject to estate taxes on $9 million, resulting in a tax liability of $3.6 million under the reduced exemption, compared to no taxes under the current exemption limits.
Planning Strategies Ahead of the TCJA Sunset
As the 2025 sunset of the TCJA approaches, many individuals are adopting a "use it or lose it" strategy to take full advantage of the current, higher exemptions. By making large gifts before the exemption reduction, individuals can maximize tax-free transfers. The IRS has clarified that there will be no "claw back" on gifts made under the higher exemption, meaning those who gift more before 2026 will not face penalties when the exemption amount decreases.
For more information on how these changes may impact your estate or financial planning, contact North Carolina Estate Planning and Fiduciary Law. Our firm is led by James E. Hickmon, a North Carolina Board Certified Estate Planning & Probate Law Specialist and Certified Financial Planner, who has decades of experience helping individuals and families navigate estate planning, trust administration, and financial strategies.