Significant tax changes are on the horizon for high-net-worth (HNW) individuals and families. The current historically high federal estate and gift tax exemptions are set to “sunset” at the end of 2025, which will lead to a substantial increase in estate taxes. HNW individuals need to act now and strategically transfer wealth or risk paying millions more in future estate taxes.
Navigating these upcoming changes requires informed decisions, expert guidance, and proactive strategies customized for your specific situation. By acting now to address the upcoming tax changes, you can mitigate potential tax burdens and ensure a smooth and efficient transfer of wealth to your beneficiaries and chosen charities.
What estate tax changes are coming at the end of 2025?
The lifetime gift and estate tax exemption more than doubled in 2017 due to The Tax Cuts and Jobs Act, it increased from $5.6 million for individuals and $11.8 million for married couples to an inflation-adjusted $13.61 million for individuals and $27.22 million for married couples in 2024. This is due to sunset at the end of 2025.
The sunset will reduce by about half how much wealthy individuals and families doing long-term, multi-generational estate planning can pass on to heirs tax-free during their lifetime or at death. Unless Congress acts before this date, the exemptions will revert to where they were in 2017. With inflation adjustments, this will be approximately $7 million for individuals and $14 million for married couples.
For those with significant wealth, the upcoming changes could significantly impact how much they can pass on to loved ones tax-free — halving the tax exemption threshold by approximately $7 million. That's money that could go to your heirs, to charities, or could be taxed and go to the government if you don't act.
There are two common misconceptions about the upcoming tax changes you should be aware of:
- The first is that the current exemption amount is grandfathered for those who have already used a portion of their exemption. This is not true. Regardless of whether you've already used some of the exemption, the potential tax burden will increase as the exemption shrinks.
- The second misconception is that a taxpayer can choose to apply the exemption amount from the top, first. In other words, someone cannot claim they are using the top $10 million of the exemption amount so that when the amount sunsets, there will still be the bottom $4 million to apply. The exemption applies to the total value of your estate, not specific portions. You can't pick and choose which parts of your estate to exempt. Your entire estate will be subject to tax above the new, lower threshold.
The end of 2025 will be here sooner than you think. Now is the time to start planning for lower exemptions.
How can wealthy families prepare for estate tax changes?
Every HNW individual and family’s situation is different. When considering the best way to prepare for estate tax changes, ensure that plans and strategies are tailored to address your unique needs and assets.
Work with experienced experts to create a wealth transfer plan that maximizes the value passed on to heirs and/or charities. Achieve your financial goals and put your estate in the best possible position before the laws change by reducing your taxable estate, creating liquidity to pay estate taxes, shifting future growth in asset values out of the estate, and transferring the maximum possible before December 31, 2025.
There are a number of avenues through which to transfer wealth, each with varying benefits and value. Estate planning strategies and tactics include:
- Life insurance: This acts as a tax-free wealth transfer vehicle, allowing you to leave a significant death benefit to your loved ones without them incurring estate taxes. (See more details below)
- Irrevocable trust: An irrevocable trust is a legal arrangement where you, the grantor, transfer assets to a trust for the benefit of named beneficiaries. The key aspect is that once the assets are transferred, you generally give up control of them and cannot revoke the trust and take the assets back. This legal arrangement transfers assets out of your estate, potentially reducing your taxable burden. Trust-owned life insurance is a valuable tax-free wealth management strategy that can be incorporated into an irrevocable trust. Revocable trusts, or living trusts, typically do not reduce your taxable estate for tax purposes.
- Spousal Lifetime Access Trust (SLAT): This specialized trust allows you to gift assets to your spouse while still maintaining some access and control for their benefit.
- Charitable trusts/foundations: By establishing a charitable trust or foundation, you can support causes you care about while potentially receiving tax benefits. This allows you to distribute assets to your chosen charities over time or all at once, and depending on the type of trust, you may receive a charitable deduction on your income taxes.
- Annual gifting/lifetime exemption gifts: You can take advantage of the annual gift tax exclusion by gifting a certain amount of money (currently $16,000 per recipient) each year without incurring any gift tax.
Estate planning can be complex, and finding the right structure and strategy is crucial. Working with qualified experts can give you peace of mind throughout the process.
Benefits of trust-owned life insurance as a wealth transfer vehicle
Life insurance is a critical component of a comprehensive strategy for asset protection and estate planning. By strategically transferring assets into a vehicle–like a trust–that funds life insurance premiums, you can leverage those assets to maximize the value passed onto loved ones. This means your beneficiaries can receive a much larger sum than the original assets' value.
Benefits of trust-owned life insurance include:
- Income and estate tax-free: The cash value within the life insurance policy grows tax-free. This means any earnings generated by the policy are not subject to income taxes, unlike other investment vehicles. Additionally, by placing the life insurance policy within a trust, you effectively remove it from your taxable estate. This means the death benefit generally avoids estate taxes entirely. Since your beneficiaries receive the full amount, it maximizes the value they inherit.
- Creates flexibility for estate: A variety of life insurance policies cater to different needs and budgets. You can choose a policy with a guaranteed death benefit or explore options that allow for growth potential through cash value accumulation.
- Creates liquidity for heirs: The death benefit from a life insurance policy provides immediate cash flow to your beneficiaries. Particularly in a down market, this can be crucial for covering expenses like estate taxes, funeral costs, or outstanding debts, without forcing them to sell other assets. This is especially relevant for those with significant real estate assets, closely held business interests, and art or collectibles.
- Probate avoidance (typically): Probate is a lengthy and potentially public court process that can delay the distribution of assets to your beneficiaries. By placing the life insurance policy within a trust, you effectively remove it from your estate. The trust, not you, owns the policy. This means the death benefit bypasses probate entirely.
- Leverage: Life insurance allows you to leverage a relatively small premium payment into a much larger death benefit for your beneficiaries. This is a significant advantage. You can transfer a substantial amount of wealth without having to tie up a large portion of your current assets in a less liquid form. This is particularly attractive with higher tax rates and lower exemption thresholds on the horizon.
- Appreciation and growth: Another key benefit lies in the tax-free growth of the cash value within the life insurance policy. This is especially valuable for grantor-retained trusts, where the grantor initially funds the trust but retains certain powers. Since trust income is typically taxed back to the grantor, the tax-free growth inside the life insurance policy becomes even more advantageous. The cash value can accumulate and compound over time, further increasing the overall death benefit for your beneficiaries.
Private Placement Life Insurance (PPLI): A rising tool
Recently, another life insurance policy has been growing in popularity and use: private placement life insurance (PPLI). PPLI is only accessible to ultra-high-net-worth individuals and offers significant advantages. PPLI takes the benefits of trust-owned life insurance to new levels, with additional functionality and market access.
What is private placement life insurance?
Private Placement Life Insurance (PPLI) is a life insurance policy for high-net-worth individuals that offers a unique and powerful solution. It has the potential to supercharge wealth transfer strategies. PPLI combines life insurance protection with sophisticated investment options and tax advantages, making it a powerful tool for building and efficiently transferring your wealth.
PPLI unlocks a range of investment opportunities, allowing you to invest your premiums in assets like hedge funds, private equity, private credit, and real estate. This opens doors for potentially higher returns to grow your wealth over time. This growth remains tax-free, meaning the cash value within your PPLI policy accumulates without being subject to taxes, allowing your wealth to compound faster compared to traditional taxable investments. PPLI also offers options for accessing your funds in a tax-smart way.
Of course, PPLI retains the core benefit of life insurance: a death benefit that provides financial security for your loved ones after you're gone. Talk to your insurance broker and advisor to determine whether PPLI is right for your estate planning and wealth transfer structure.
Life insurance considerations
The life insurance landscape is far more complex than it seems on the surface, especially for high-net-worth individuals. With the tax exemptions sunsetting, there are more factors at play influencing decisions and guidance. When working to secure the right life insurance policies and portfolio for you and your family, take the following considerations into account:
- Capacity: If you are trying to acquire large amounts of life insurance, carrier capacity may be limited. The process may have to be staged out in layers with different carriers in order to secure the necessary coverage.
- Policy structure: Small changes within your policy and/or premium funding can make a significant difference in how your coverage performs over time. Experts can advise you on the right policy structure and premium funding to meet your goals.
- Independent advisors: Independence from specific carriers is important. With access to more carriers, you are more likely to get the limits and coverage you need. Be sure to work with independent brokers and consultants.
Act now. Talk to experts today.
The clock is ticking. Wealth transfers and estate planning take time, and the gift and estate tax exemption sunsetting deadline will be here before you know it. Don't wait until the deadline arrives to discover the potentially multi-million dollar impact the change will have on your wealth transfer plans.
Stay informed about the implications of these changes and navigate the complexities through a holistic approach.
Work with your planners and advisors to develop a coordinated effort tailored to meet the specific needs for your estate and family. Build an advisory team that includes life insurance experts, financial planners and advisors, family office representatives, accountants with expertise in personal and business valuation, and trust and estate attorneys.
Risk Strategies has a deep bench of life insurance experts with comprehensive experience and tax code knowledge. We are fully and uniquely equipped to help you through the tax changes and find ideal solutions for your situation.
Do not risk losing a significant portion of your assets due to a lack of planning. Build a comprehensive estate plan that ensures a smooth and tax-efficient wealth transfer for generations to come.
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DISCLOSURE: Securities offered through Lion Street Financial, LLC. (LSF), member FINRA & SIPC. LSF are not affiliated with RSC Insurance Brokerage, Inc DBA Risk Strategies.
