The outlook for 2025 tax policy in the U.S. can be characterized as a series of “known unknowns.” We are only a few weeks into President Trump’s second term, and these weeks have felt like an eternity for those of us paying attention to the happenings and discourse coming out of Washington. After these first few weeks, we undoubtedly know that 2025 will be a year of sweeping policy changes.

What is unknown, though, is what those policy changes will be, along with their duration (permanent or temporary), magnitude (marginal changes or wholesale reform to existing policy regimes), and direction (enhancement or the pulling back or repeal entirely of certain policies, deductions, and credits).

There are no policies for which this more aptly applies than the changes to tax policies enacted under the Tax Cuts and Jobs Act of 2017 (TCJA). Many of the TCJA’s tax cuts, including key changes to federal estate and gift tax laws, are set to sunset after Dec. 31, 2025, absent Congressional action.

Wisconsin has not had an estate tax since Dec. 31, 2007. Thus, this blog focuses solely on the federal estate tax.

What is the Federal Estate Tax?

Before undertaking to predict the implications of the potential sunset of the TCJA’s provisions on federal estate and gift taxation, it is first critical to understand what the federal estate tax is and how it works.

As a very brief overview, the federal estate tax (sometimes referred to as the “death tax”) is a levy on the transfer of a deceased individual’s assets at death. To prevent circumvention of the estate tax, Congress also imposed a tax on lifetime gifts meeting certain criteria. In recognition that the estate and gift taxes were really one and the same, Congress unified the federal estate and gift tax in 1976 under the Tax Reform Act, and today we still operate under this unified estate and gift tax structure.

In enacting the estate and gift tax, a primary goal of Congress was to tax the wealthiest individuals’ estates while allowing the majority of Americans to transfer their assets at death tax-free. The means to this end was the implementation of the lifetime exemption amount ($13,990,000 for 2025), which is the aggregate value that an individual’s estate, after adding all gifts made during lifetime exceeding the annual gift tax exclusion amount applicable in any given year ($19,000 for 2025), must exceed before such individual’s estate becomes subject to federal estate tax.

Why the Federal Estate Tax Matters Now

We have known since the passage of the TCJA that, unless action is taken by Congress to extend, modify, or enhance the tax cuts enacted under it, a majority of its provisions are set to automatically expire at the end of fiscal year 2025.

This is commonly referred to as the “TCJA sunset,” although its current prominence among estate planners and tax attorneys is so profound that you can simply mention “the sunset” and they’ll know that you’re talking taxes and not about the beautiful view from your corner office window.

One such provision set to “sunset” is the current lifetime exemption amount of $13,990,000 for 2025, which, under the “sunset” will be reduced to $5 million as of Jan. 1, 2026, adjusted for inflation (anticipated to be approx. $7 million). Unless action is taken by Congress before the end of 2025, the lifetime exemption amount – currently at an all-time high – will revert back to the pre-TCJA inflation adjusted levels of approximately $7 million per individual.

Under current policy, the federal estate tax only applies to a very small number of individuals. This could all change, however, if the TCJA sunsets are allowed to transpire. Through the first few weeks of President Trump’s term, Congress still has not taken action, nor set a clear path as to how, to extend or modify the TCJA’s provisions set to sunset at year-end.

The Future of the Federal Estate Tax

Initially, following the federal elections that led to a second Trump presidential term and Republican control of the House and Senate, analysts predicted a sure-fire extension of the TCJA’s provisions.

This initial excitement has subsided and been replaced with a more uncertain tone. There is still a consensus that Congress will take action to extend the TCJA tax cuts. However, consensus as to the particulars: the “what,” “how,” and “when” remains to be seen. The incredibly narrow Republican majority in the House means that any tax bill will most likely occur through a process known as budget reconciliation, and any bill will need unanimous Republican support absent bipartisan cooperation.

Further, the budget reconciliation procedure is subject to additional limitations that make it more difficult to cut federal revenues without offsetting the resulting budget deficit by either cutting spending or increasing revenues elsewhere.

There may not be room in Congress’ new tax bill for extending all the TCJA’s provisions, in addition to any new tax cuts to be enacted (think no tax on tips and overtime, both campaign promises made by Trump).

Of all potential tax cuts, enacting or continuing a tax policy that impacts a very small portion of society (i.e., high net-worth individuals) may not be at the top of the list of priorities.

In addition, the estate tax is responsible for such a small percentage of federal revenues, extending the higher lifetime exemption amounts, or repealing the tax entirely, wouldn’t have much of an impact on the federal budget. According to a January 2025 report from Proskauer Tax Talks, the House Budget Committee has actively proposed repealing the estate tax entirely. Regarding the estate tax, something will be done even if that “something” is nothing at all.

Despite the recent rhetoric of the possibilities, the most likely options seem to be the extension of the current lifetime exemption amount or allowing the lifetime exemption amount to revert to pre-TCJA levels.

The political landscape playing out over the next 10 months will have a crucial role in determining the future of the federal estate tax for years to come.

Preparing for an Uncertain Future

Given the current state of uncertainty, estate planning attorneys should continue to consider utilizing tools that allow clients to take advantage of the historically high lifetime exemption amounts while they are still in place. Regardless of whether the estate tax is reduced, eliminated, or modified, the priority for estate planners over the next several months should be to craft plans for their clients (and ensure existing clients’ plans) to take this uncertainty into account.

If nothing else, it is an estate planner’s responsibility to communicate this uncertainty and its potential ramifications to clients. Individuals with estates near or exceeding the pre-TCJA lifetime exemption amounts should consider strategic planning prior to the end of 2025. Lifetime gifting, whether outright or in irrevocable trusts for the benefit of clients’ intended beneficiaries (including spousal lifetime access trusts [SLATs]), are among the most effective tools for maximizing the current available exemption amounts and ensuring tax-efficient wealth transfers.

These estate tax planning strategies allow individuals to take advantage of both the annual gift tax exclusion amount and higher lifetime exemption amount, while they are still at all-time highs.

This Needs Careful Thought

As a word of caution, however, in light of the continued uncertainty, consideration should be given to flexible planning techniques at death, including disclaimer or Clayton QTIP plans. Many planning techniques that allow clients to capture the higher lifetime exemption amounts are irrevocable by their nature, and cannot be undone if the higher lifetime exemption amount is extended, increased, or the estate tax is repealed entirely.

For those types of irrevocable trusts, careful thought should be given to providing a trust protector with the authority to unwind an irrevocable trust, if need be. Clients should be made aware of all the legal and tax consequences of their planning techniques.

Conclusion

We do not yet know where 2025 will take us with respect to the federal estate tax, and the current lifetime exemption amount. What we do know for certain, though, is that we’re going somewhere.

It is important to ensure that estate-planning attorneys stay abreast of the current news coming out of Washington, and equip ourselves with the tools necessary to assist our clients regardless of what comes next.

This article was originally published on the State Bar of Wisconsin’s Solo/Small Firm & General Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section web pages to learn more about the benefits of section membership.