2025 Estate Tax Exemptions and Planning Considerations

At a Glance

• The federal gift and estate tax exemption and the generation-skipping transfer tax exemption increased to $13,990,000 per person.
• The federal gift tax annual exclusion amount increased to $19,000 per donee per donor.
• The period for a late election of portability for a decedent’s unused federal estate tax exemption remains at five years after the decedent’s date of death.
• It may be advisable to take advantage of the increased federal exemption amounts prior to the sunset at the end of 2025.
• For qualified retirement plan accounts, the applicable age for starting required minimum distributions is now 73 for individuals who attained age 72 after December 31, 2022.

Federal Exemption Amounts Increased to $13,990,000

As of January 1, 2025, the federal gift and estate tax exemption amount, as well as the exemption from generation-skipping transfer (GST) tax, (collectively, the “federal exemption amounts”) have increased from $13,610,000 to $13,990,000, an increase of $380,000 per person. A married couple can combine their exemptions to transfer twice this amount, or a total of $27,980,000.

Federal Estate Tax Portability

The ability to transfer a decedent’s unused federal estate tax exemption amount to the decedent’s surviving spouse by filing a federal estate tax return (referred to as “portability”) remains in effect for 2025. The period for a late portability election remains five years after the decedent’s date of death. Making this election following a married individual’s death is prudent if the surviving spouse’s estate might exceed the survivor’s available federal estate tax exemption amount (including considering the pending decrease in such amount as of January 1, 2026, as discussed further below).

Sunset of Federal Exemption Amounts at the End of 2025

The federal exemption amounts under the Tax Cuts and Jobs Act of 2017 are scheduled to sunset at the end of 2025, decreasing on January 1, 2026, to a base amount of $5,000,000 (plus an inflation adjustment.) If Congress does not act to alter the pending sunset, the ability to use the increased exemption expires on December 31, 2025. If it is advisable to take advantage of the increased exemption amount(s), particularly the difference between the current federal exemption amount and the lower base amount, we strongly encourage pursuit of planning opportunities as soon as possible to allow adequate time to consider all options and successfully implement any desired gifting strategies.

Annual Exclusion Amount Increased to $19,000

As of January 1, 2025, the federal gift tax annual exclusion amount has increased to $19,000 per donee per donor (or a combined $38,000 per donee for a married couple). This is an increase of $1,000 per donee compared to calendar year 2024. The annual gift tax exclusion is the amount an individual can gift to any person per calendar year without using any of the donor’s federal exclusion amounts or paying any gift tax. The ability to pay tuition directly to educational institutions and certain medical expenses directly to medical providers without such payment being considered a taxable gift remains an option. Such payments would not count against the federal gift tax annual exclusion amount for a donee.

Federal Tax Rates for Estates & Trusts

• The highest federal estate tax, gift tax and GST tax rate remains unchanged at 40% for calendar year 2025.
• The highest federal income tax rate for estates and nongrantor trusts remains unchanged at 37% for 2025. This tax rate applies to taxable income over $15,200 earned in tax year 2025.

Required Minimum Distributions

For your qualified retirement plan accounts, the applicable age for starting required minimum distributions (RMDs) is now age 73 for individuals who attained age 72 after December 31, 2022, and will change to age 75 as of 2033 for individuals who attain age 74 after December 31, 2032. The current law also has eliminated pre-death RMDs from Roth accounts in 401(k) and 403(b) plans starting in 2024. You also should confirm what options you may have for catch-up contributions allowed for some participants; the rules change starting in 2025, but some contribution rules have been adjusted due to inflation as well. You should also confirm whether RMDs should be paid from certain inherited qualified retirement plan accounts, as well as whether Roth conversions or rollover options might accomplish your estate and tax planning goals.

State Estate Tax Exemptions, State Inheritance Tax & State Gift Tax Considerations

Florida

• Florida does not currently have a state estate or inheritance tax.

Illinois

• As of January 1, 2025, the Illinois estate tax exclusion amount is $4,000,000, which is a taxable threshold and not a credit against tax. Unlike the federal estate tax exemption, the Illinois estate tax exemption is not portable.
• Illinois does not currently have a state gift tax; however, any federal adjusted taxable gifts made during the decedent’s lifetime are included in the decedent’s taxable estate for purposes of the Illinois estate tax.

Indiana

• Indiana does not currently have a state estate or inheritance tax.

Minnesota

• The Minnesota estate tax exemption amount is $3,000,000. Unlike the federal estate tax exemption, the Minnesota estate tax exemption is not portable.
• Minnesota does not currently have a state gift tax; however, any federal adjusted taxable gifts made within three years of the decedent’s date of death are included in the Minnesota taxable estate.

New Jersey

• Since January 1, 2018, New Jersey no longer has a state estate tax.
• A New Jersey inheritance tax may be imposed on property transferred from a decedent to a beneficiary, depending on the relationship between the decedent and the beneficiary, the value and kinds of the property transferred, and whether the decedent died as a New Jersey resident or a resident of another state.
• New Jersey does not currently have a state gift tax; however, any federal adjusted taxable gifts made within three years of the decedent’s date of death may be subject to New Jersey inheritance tax (as presumed to be made in contemplation of death).

New York

• As of January 1, 2025, the New York estate tax exemption amount is $7,160,000. Unlike the federal estate tax exemption, the New York estate tax exemption is not portable.
• The New York estate tax rate is graduated, meaning that the amount in a New York taxable estate exceeding $7,160,000 will be taxed at increasing rates depending on the value of the amount in excess. Once the value of a New York taxable estate exceeds 105% of the New York estate tax exemption amount, the New York estate tax is assessed on the full value of such New York taxable estate at a rate of 16%. This is referred to as the New York estate “tax cliff.”
• New York does not currently have a state gift tax; however, any federal adjusted taxable gifts made within three years of the decedent’s date of death are included in the decedent’s taxable estate for purposes of the New York estate tax.

Pennsylvania

• Pennsylvania does not currently have a state estate tax.
• Property transferred from a decedent to a beneficiary (unless he or she is a surviving spouse or a child aged 21 or younger of the decedent, or such beneficiary is a charity) is subject to a Pennsylvania inheritance tax. The tax rates for this inheritance tax vary depending on the relationship between the decedent and the beneficiary.
• Pennsylvania does not currently have a state gift tax; however, any federal adjusted taxable gifts made within 12 months of the decedent’s date of death may be subject to Pennsylvania inheritance tax.
• As of January 1, 2025, for calendar year 2025 and future calendar years, Pennsylvania recognizes the federal grantor trust rules for trusts established in, or governed by, the laws of the commonwealth.

For More Information

For further information, you may contact any of the attorneys in Faegre Drinker’s private client group.