How Proposed Estate Tax Law Changes Could Impact Your Plan

Estate tax laws are complex and ever-changing. With proposed changes on the horizon, staying informed is essential for those aiming to leave a legacy or minimize tax burdens.

Understand the proposed changes

The federal estate tax applies to the transfer of wealth after death. Proposed changes could significantly alter its impact. While details are still evolving, some key proposals could affect many families and their financial plans.

The federal estate tax exemption is the amount of wealth an individual can transfer to heirs tax-free. As of 2025, the exemption is set at $13.99 million per individual, allowing a married couple to shield up to $27.98 million from estate taxes.

The increased exemption under the Tax Cuts and Jobs Act (TCJA) is scheduled to expire at the end of 2025. If no legislative action is taken, the exemption will revert to pre-2018 levels, approximately $5.49 million per individual, adjusted for inflation. This decrease could lead to more estates being subject to taxation.

Wealth previously passed tax-free could be exposed to a 40% federal estate tax rate on amounts above the exemption limit. This shift underscores the importance of proactive estate planning to protect assets and reduce tax burdens.

Here are some potential changes to estate taxation (in addition to those mentioned above) that could significantly impact wealth transfer and necessitate careful estate planning.

Increasing estate tax rates : Some proposals suggest raising the tax rate, which could mean higher taxes on wealth transfers. If this happens, careful estate planning will be even more crucial.

Eliminating or restricting step-up in basis : Currently, heirs benefit from a step-up in basis, which reduces capital gains taxes on inherited assets. Proposed changes could modify or eliminate this benefit, potentially increasing tax burdens on inherited property.

Who could be most affected?

Not everyone will feel the effects of these changes equally. If you have significant assets or plan to pass down property, these changes could directly impact your estate plan.

High-net-worth individuals : Those with sizable estates could face new tax burdens if the exemption is lowered and tax rates increase. Proper planning can help mitigate potential liabilities.

Small business owners and farmers : Many small businesses and family farms are passed down through generations. Changes to the step-up in basis or exemption limits could make this transition more challenging and costly.

Families with appreciated assets : If you plan to pass on real estate, stocks, or other investments that have grown in value, changes to capital gains taxes and the step-up in basis could impact your heirs’ tax bills.

Strategies to consider

While these proposals have yet to become law, proactive planning can help you prepare for potential changes and protect your legacy.

Gifting assets before the exemption changes : If the exemption is lowered, making lifetime gifts now could be a smart strategy. Transferring assets under the current exemption rules might help reduce future estate taxes.

As of 2025, the federal gift tax rules have been adjusted for inflation. Here’s a summary of the current exemption limits:

Annual gift tax exclusion:

• Per recipient : You can gift up to $19,000 per individual without incurring federal gift tax or using any of your lifetime estate and gift tax exemption.
• Married couples : If you’re married, you can jointly gift up to $38,000 to each recipient without triggering gift taxes.

Lifetime estate and gift tax exemption:

• Per individual : The lifetime exemption amount has increased to $13.99 million in 2025. You can transfer up to this amount during your lifetime or at death without incurring federal estate or gift taxes.
• Married couples : Married couples can shield up to $27.98 million from these increased exemption amounts, which are scheduled to revert to pre-2018 levels (approximately $5 million per individual, adjusted for inflation) after December 31, 2025, unless Congress enacts new legislation.

Certain payments are excluded from gift tax considerations, regardless of the amount:

• Educational expenses : Tuition payments made directly to an educational institution on behalf of someone else are not subject to gift tax.
• Medical expenses : Payments made directly to medical providers for someone else’s medical expenses are also excluded.

These exclusions allow for additional tax-free transfers beyond the annual and lifetime limits.

Utilize trusts for estate planning : Trusts can be powerful tools for managing wealth transfers. Irrevocable trusts, charitable remainder trusts, and other structures can provide tax advantages and control over asset distribution.

Consider life insurance as a tax-planning tool : Life insurance can help provide liquidity to cover estate taxes, ensuring that heirs receive their inheritance without selling valuable assets.

Explore business succession planning : If you own a business, developing a succession plan can help minimize tax burdens and ensure a smooth transition to the next generation.

Common mistakes

With potential tax law changes, missteps in estate planning could be costly. Being aware of common mistakes can help you avoid unnecessary complications.

Failing to update your estate plan : If laws change, your existing estate plan may no longer be optimized. Regular reviews with a financial professional can help ensure your plan remains effective.

Overlooking state estate taxes : Some states have levied estate taxes, which may not align with federal rules.

Considering both state and federal implications is important for a well-rounded strategy.

Not planning for liquidity needs : If estate taxes are due, your heirs may need liquid assets to cover them. Without proper planning, they may be forced to sell assets quickly, which could lead to financial losses.

Final thoughts

Estate tax laws are complex, and proposed changes could significantly impact your financial legacy. Staying informed and taking proactive steps can help ensure your wealth is passed on according to your wishes.

If you’re uncertain about how these changes could affect you, consulting with a financial or legal professional can clarify and help you create a plan that aligns with your goals.