With 2025 underway, several key tax updates may impact estate and gift planning. The federal estate and gift tax exemption remains at a historic high but is set to decrease after December 31, 2025, making this a critical year for planning. Below are some important changes to keep in mind.

At a Glance Federal estate and gift tax exemption increased to $13,990,000 per person ($27,980,000 for married couples). Federal gift tax annual exclusion increased to $19,000 per donee (or $38,000 for a married couple making joint gifts). Estate tax portability remains available, with a five-year deadline for a late election. Federal exemption amounts set to decrease after December 31, 2025, returning to a base amount of $5 million (adjusted for inflation) unless Congress acts. Required Minimum Distributions (RMDs) updates: Certain beneficiaries of inherited IRAs must begin RMDs in 2025 if the original account holder had reached their required beginning date. Qualified Charitable Distributions (QCDs) limit increased to $108,000. Individuals 73 or over can use QCDs to satisfy RMD requirements. Minnesota estate tax exemption remains at $3 million, and the state does not have a gift tax.

Increased Federal Exemption Amounts

As of January 1, 2025, the federal gift and estate tax exemption, along with the GST tax exemption, has increased from $13,610,000 to $13,990,000 per person—an increase of $380,000. A married couple can combine their exemptions for a total transfer of $27,980,000 free of federal estate tax.

Estate Tax Portability

The ability to transfer a decedent’s unused federal estate tax exemption to a surviving spouse (portability) remains in effect. The deadline for a late portability election is up to five years from the date of death. This election can be an important planning tool, especially considering the scheduled reduction of the exemption amount at the end of this year.

Federal Exemption Amounts Set to Decrease in 2026

Under current law, the increased exemption amounts established by the Tax Cuts and Jobs Act of 2017 will sunset at the end of 2025. Beginning January 1, 2026, the exemption is expected to drop to a base amount of $5 million (adjusted for inflation). If Congress does not extend the higher exemption, individuals who wish to take advantage of the current limits should consider planning opportunities in 2025.

Many high-net-worth individuals are already making use of strategies such as lifetime gifting, irrevocable trusts, and valuation discounts for family business interests to lock in the current exemption before it decreases. These strategies require time to implement, so early planning is key.

Annual Gift Tax Exclusion Increased

The federal gift tax annual exclusion amount has increased to $19,000 per donee (or $38,000 for a married couple making joint gifts). This allows individuals to make tax-free gifts within these limits without using any of their lifetime gift or estate tax exemption. The ability to make direct tuition and medical payments without incurring gift tax remains unchanged.

Estate and Trust Tax Rates

• The federal estate, gift, and GST tax rate remains 40% for 2025.
• The highest federal income tax rate for estates and nongrantor trusts remains 37% on taxable income over $15,200.

Required Minimum Distributions (RMDs) and Retirement Accounts

For those with qualified retirement accounts, the age for required minimum distributions (RMDs) is now 73 for individuals who turned 72 after December 31, 2022. The RMD age will increase to 75 in 2033. Additionally, pre-death RMDs for Roth accounts in 401(k) and 403(b) plans were eliminated starting in 2024.

New for 2025:

• Certain beneficiaries of inherited IRAs must begin taking annual RMDs if the original account holder had already reached their required beginning date. Failing to take these distributions can result in penalties.
• The maximum qualified charitable distribution (QCD) from an IRA has increased to $108,000. Individuals 73 or over can use QCDs to satisfy their RMD requirements. However, QCDs must be made directly to a 501(c)(3) charity—they cannot be contributed to donor-advised funds or private foundations.

State-Specific Considerations

Minnesota

• The Minnesota estate tax exemption remains $3 million. Unlike the federal exemption, Minnesota’s is not portable between spouses.
• Minnesota does not have a state gift tax, but taxable gifts made within three years of death are included in the Minnesota taxable estate.

Planning Considerations

With the scheduled reduction in the federal exemption amounts and evolving tax laws, now is the time to evaluate estate planning strategies. Individuals with significant assets should consider options such as lifetime gifting, trust structures, and charitable giving to optimize tax efficiency.

For a deeper dive into planning strategies, including Spousal Lifetime Access Trusts (SLATs), proactive gifting, and valuation discounts, see our previous article: Seize the Opportunity: Expert Guidance Essential as Estate Tax Exemption Sunset Approaches. With the exemption set to decrease at the end of this year, now is the time to assess whether these tools fit into your estate plan.

The purpose of this article is merely to provide general information and should not be construed as legal advice.