The Unified Credit Sunset for Gift and Estate Taxes

The unified credit is a lifetime allowance that permits individuals to transfer a specific amount of assets to others, either during their life or at death, without incurring federal gift or estate tax. This credit combines the exemptions for both taxes. Any portion of the credit used to offset gift taxes on lifetime transfers reduces the amount available to shelter an estate from tax upon death.

A significant change to this credit is scheduled for the end of 2025. The current, historically high exemption amount is set to be drastically reduced. This impending “sunset” of the higher credit presents a limited window for high-net-worth individuals to engage in strategic financial planning before the opportunity diminishes.

The TCJA Exemption Increase and 2025 Sunset

The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the basic exclusion amount for federal estate and gift taxes. This substantially increased the value of assets that individuals could transfer without being subject to federal transfer taxes, which can be as high as 40%. For 2025, this exemption is $13.99 million per individual, allowing a married couple to shield a combined $27.98 million.

This expanded exemption is temporary and will “sunset” on December 31, 2025. On January 1, 2026, the exemption will revert to its pre-TCJA level of $5 million, adjusted for inflation, which is projected to be about $7 million per person. This reduction means that estates valued above this lower threshold could face a substantial tax liability. In May 2025, the U.S. House of Representatives passed a bill to make the higher exemption permanent, but its future in the Senate is uncertain.

The following table illustrates the difference between the current exemption and the projected amount after the sunset:

| Year | Per Individual Exemption | Married Couple Exemption |
| — | — | — |
| 2025 | $13.99 million | $27.98 million |
| 2026 (Projected) | ~$7 million | ~$14 million |

This change also affects the Generation-Skipping Transfer (GST) tax exemption, which for 2025 is also $13.99 million. The GST tax is designed to prevent families from avoiding estate taxes for a generation by gifting assets directly to grandchildren. The exemption for this tax is linked to the unified credit amount, so it will also be reduced in 2026.

Understanding the IRS Anti-Clawback Rule

A concern that arose from the temporary exemption increase was whether the IRS could retroactively penalize estates, an issue termed “clawback.” Individuals worried that if they used the high exemption for a large gift before 2026 and died after the exemption reverted to a lower amount, their estate might be taxed as if the higher exemption had never existed.

The Treasury Department and the IRS issued the “anti-clawback” rule in November 2019 to address this. This rule states that individuals who use the increased gift tax exclusion during their lifetime will not be adversely impacted at death if the exclusion amount is lower. The regulation allows an estate to calculate its tax credit using the higher of the exclusion amount in effect when the gifts were made or the amount available at the date of death.

Consider an individual who gifts $12 million in 2025, when the exemption is $13.99 million, and therefore pays no gift tax. If this person dies in 2026 after the exemption has dropped to $7 million, the anti-clawback rule ensures the estate is not penalized. The estate will receive a credit for the full $12 million of exemption used, preventing the IRS from “clawing back” the tax benefit.

This protection applies to completed lifetime gifts where the donor relinquishes control of the asset. However, the IRS has issued proposed regulations that would limit this safeguard for certain transfers where the donor retains an interest or control over the property. These rules include a provision that could “claw back” such transfers if made within 18 months of the donor’s death.

Strategic Gifting to Utilize the Current Exemption

With the exemption amount scheduled to decrease, individuals with assets exceeding the projected 2026 levels may consider making significant gifts before the end of 2025. The most direct method is making outright gifts of cash, securities, or other property to heirs. These transfers remove the assets, and any future appreciation, from the donor’s taxable estate.

A more structured approach involves transferring assets to an irrevocable trust. When a gift is made to a properly structured trust, the assets are legally removed from the donor’s ownership and estate. This strategy uses the current high exemption and allows the assets to grow outside of the estate, shielding wealth from future transfer taxes.

One popular type of trust is a Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust created by one spouse for the benefit of the other. This allows the donor spouse to remove assets from their estate while the beneficiary spouse can still receive distributions from the trust, providing indirect access to the gifted funds if needed.

It is beneficial to transfer assets expected to appreciate significantly in value. By gifting such assets now, all future growth occurs outside the taxable estate, maximizing the benefit of the current exemption. A careful evaluation of assets is a necessary first step in deciding what to gift.

Filing the Federal Gift Tax Return

After making a gift that exceeds the annual gift tax exclusion amount, which is $19,000 per recipient for 2025, a donor must report the transfer to the IRS by filing Form 709. This form reports all taxable gifts made during a calendar year and tracks the donor’s remaining lifetime unified credit. To complete it, the donor must provide the donor’s and donee’s names and addresses, a description of the gifted property, the date of the gift, and its fair market value. Each individual must file their own Form 709, as joint returns are not permitted, though spouses can elect to “split” gifts.

The deadline for filing Form 709 is April 15th of the year following the gift. An extension to file one’s federal income tax return automatically extends the deadline for Form 709. While Form 709 has historically been a paper-only filing, the IRS is expected to begin accepting electronic filing in mid-2025.