The Tax Cuts and Jobs Act of 2017 (TCJA) was one of the most consequential pieces of tax legislation in decades. Among its many provisions, the TCJA temporarily doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemption — creating an extraordinary window for wealthy individuals and business owners to transfer significant wealth free of transfer tax. That window is closing. Unless Congress acts, the elevated exemption will sunset after December 31, 2025, reverting to roughly half its current level. For business owners, this is one of the most important planning deadlines of the decade.

Background: What the TCJA Did to the Exemption

Before the TCJA, the federal estate and gift tax exemption was set at $5 million per individual, indexed for inflation since 2011. By 2017, inflation adjustments had pushed the exemption to approximately $5.49 million per person. The TCJA doubled the base exemption to $10 million per individual (also indexed for inflation), effectively allowing a married couple to transfer up to $20 million in base exemption, with inflation adjustments pushing that figure higher each year. As of 2024, the inflation-adjusted exemption stands at approximately $13.61 million per individual — meaning a married couple can transfer up to approximately $27.22 million completely free of federal estate and gift tax.

The gift and estate tax exemption is unified, meaning the same lifetime exemption applies to taxable gifts made during life and to transfers at death. Every dollar of exemption used during life reduces the amount available at death. Gifts between spouses who are both U.S. citizens are generally unlimited and do not consume any exemption. Annual exclusion gifts — currently $18,000 per recipient per year (2024) — also do not count against the lifetime exemption. The elevated TCJA exemption is available over and above all of these other mechanisms.

The Sunset: What Happens After December 31, 2025

The TCJA exemption increase was not made permanent. Congress included a sunset provision in the legislation, which provides that after December 31, 2025, the exemption reverts to the pre-TCJA baseline of $5 million per individual, adjusted for inflation from 2011. Based on current inflation projections, the post-sunset exemption is expected to be in the range of $7 million to $7.5 million per individual — roughly half of today’s figure. A married couple would go from a combined exemption of approximately $27 million to approximately $14 to $15 million. That reduction represents a potential increase in taxable estate of over $12 million per couple, with the top federal estate tax rate standing at 40 percent.

The political arithmetic in Congress makes a permanent extension of the elevated exemption uncertain. While there have been legislative proposals to extend or make permanent the TCJA exemption, none have been enacted into law at the time of this writing. Business owners and their advisors cannot rely on Congressional action — they must plan as if the sunset will occur as scheduled.

The Use-It-or-Lose-It Problem — and Its Solution

When the TCJA first passed, sophisticated estate planning attorneys immediately recognized a planning opportunity: individuals could make large taxable gifts now, using the elevated exemption, and permanently reduce their taxable estates. But a critical legal question arose: what happens to those gifts if the exemption later decreases? Could the IRS “claw back” the gift by imposing estate tax at death based on the lower, post-sunset exemption? This fear paralyzed some clients from acting, even when the math clearly favored making gifts.

Treasury and the IRS resolved this uncertainty decisively. In November 2019, the Treasury Department finalized regulations under Treasury Regulation Section 20.2010-1(c) that explicitly protect gifts made using the elevated exemption from clawback. The regulation provides that when computing the estate tax credit available to the decedent’s estate, the applicable credit amount is determined using the higher of (1) the basic exclusion amount in effect at the date of death, or (2) the basic exclusion amount used to compute gift tax on lifetime gifts. In plain English: if you make a $10 million gift today using the elevated exemption, and the exemption later drops to $7 million, your estate will not owe tax on that prior gift. The exemption you used during life is protected, regardless of what happens to the law.

This anti-clawback rule is a critical piece of the planning framework. It means that making large gifts now is essentially a one-way ratchet — you lock in the tax savings permanently, and you are not exposed to retroactive tax if the law changes. The Treasury’s rule effectively gives taxpayers the benefit of the doubt: use the exemption while it is large, and keep the benefit even after it shrinks.

Why Timing Is Especially Critical for Business Owners

Business owners face a unique set of circumstances that make the pre-sunset planning window particularly valuable. Closely held business interests — whether a manufacturing company, a professional practice, a real estate operating company, or a technology startup — are often the largest asset in a business owner’s estate. They also frequently qualify for significant valuation discounts for lack of control and lack of marketability, which can be 20 to 40 percent or more depending on the nature of the interest and the facts and circumstances.

Making gifts of closely held business interests before a significant value increase — a refinancing that raises appraised value, a new financing round that establishes a higher per-share price, a merger or acquisition discussion, or a planned sale — allows the business owner to transfer the maximum amount of future appreciation out of the taxable estate using the minimum amount of exemption. The gift tax system taxes the fair market value of the interest at the time of the gift. If an interest worth $5 million today will be worth $25 million in five years, gifting it now uses $5 million of exemption (or perhaps $3.5 million after applicable discounts) to remove $25 million from the taxable estate. Waiting until after the appreciation occurs wastes exemption on value that has already accrued.

The combination of the pre-sunset window and pre-appreciation timing creates a compound planning opportunity that simply does not exist at other times. Business owners who are planning a sale, preparing for a financing round, or anticipating a significant increase in the value of their enterprise should consider this the most important planning moment of their careers.

Vehicles for Using the Exemption Efficiently

Spousal Lifetime Access Trusts (SLATs)

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created by one spouse for the benefit of the other spouse and, typically, their children and descendants. The donor spouse makes a taxable gift to the SLAT — using some or all of the available lifetime exemption — and the assets in the trust are removed from both spouses’ taxable estates. The beneficiary spouse can receive distributions from the trust during life, which provides indirect access to the gifted assets. SLATs are particularly popular among business owners because they allow a married couple to remove a large asset from the estate while preserving some access through distributions to the beneficiary spouse.

One important limitation of SLATs is the reciprocal trust doctrine. If both spouses create SLATs for each other at the same time with nearly identical terms, the IRS may argue that the trusts should be “uncrossed” — treating each grantor as if they had created their own trust, which would pull the assets back into each grantor’s taxable estate. To avoid this, the two SLATs should differ in meaningful ways: different terms, different trustees, different funding amounts, or different creation dates. Working with experienced counsel to distinguish the two trusts is essential.

Grantor Retained Annuity Trusts (GRATs)

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust into which the grantor transfers assets and retains the right to receive a fixed annuity payment for a specified term. If the assets in the trust earn more than the IRS Section 7520 hurdle rate during the GRAT term, the excess growth passes to the remainder beneficiaries — typically family members or a trust for their benefit — completely free of gift and estate tax. GRATs are particularly powerful when funded with assets expected to appreciate significantly, such as closely held business interests before a sale or liquidity event.

A properly structured “zeroed-out” GRAT — where the annuity payments are set so that the present value of the retained interest equals the value of the assets transferred — produces a zero or near-zero taxable gift at funding. This means GRATs can be used without consuming any lifetime exemption at all. However, the grantor must survive the GRAT term for the strategy to work: if the grantor dies during the term, the GRAT assets are included back in the taxable estate. Short-term GRATs (two to three years) reduce mortality risk but require the assets to appreciate quickly.

Intentionally Defective Grantor Trusts (IDGTs)

An Intentionally Defective Grantor Trust (IDGT) is a trust that is structured to be outside the grantor’s taxable estate for estate tax purposes but treated as owned by the grantor for income tax purposes. Because the grantor pays income tax on the trust’s earnings, the trust can grow income-tax-free — the grantor’s income tax payments effectively constitute a tax-free gift to the trust’s beneficiaries. IDGTs are commonly used in installment sale transactions: the grantor sells assets to the IDGT in exchange for a promissory note at the applicable federal rate (AFR), and the trust’s appreciation above the AFR passes to the beneficiaries tax-free.

IDGTs typically require a “seed gift” to establish the trust’s creditworthiness — typically 10 to 20 percent of the value of assets to be sold. This seed gift does consume lifetime exemption, making the pre-sunset timing relevant. IDGTs are especially powerful for business owners who want to sell a large block of closely held stock to a trust without triggering capital gains tax on the sale, since sales between a grantor and a grantor trust are disregarded for income tax purposes.

Outright Gifts and Direct Transfers

In some cases, making outright gifts to family members or to trusts for their benefit is the simplest and most direct way to use available exemption. Outright gifts to adult children, for example, can be particularly effective when the donor has a high degree of trust in the recipient’s financial responsibility. Direct gifts to dynasty trusts — irrevocable trusts designed to hold assets across multiple generations — allow the exemption to shelter assets from estate tax not just in the current generation but potentially for decades or centuries, depending on applicable state law.

Quantifying the Cost of Waiting

The financial case for acting before the sunset is straightforward. Suppose a business owner has a taxable estate of $25 million and a remaining lifetime exemption of $13.61 million. If the owner makes a $13.61 million gift before the sunset, the entire estate is sheltered from federal estate tax. The owner pays no transfer tax on any amount. If the owner waits until after the sunset, the available exemption drops to approximately $7 million (inflation-adjusted). The estate above $7 million — approximately $18 million — is subject to federal estate tax at 40 percent, resulting in a tax bill of approximately $7.2 million. The cost of waiting, in this simplified example, is $7.2 million. That is a quantifiable, avoidable loss.

The analysis becomes even more compelling when business appreciation is factored in. If the $25 million estate grows to $35 million by the time of the owner’s death — driven by the continued growth of the closely held business — the estate tax on the excess over the reduced exemption approaches $11.2 million. Every dollar of pre-sunset gifting removes not just current value but all future appreciation from the estate as well.

State Estate Tax Considerations

Federal estate tax planning does not occur in a vacuum. Approximately a dozen states and the District of Columbia impose their own estate or inheritance taxes, often with much lower exemptions than the federal level. States such as Massachusetts and Oregon impose estate tax with exemptions as low as $1 million. Washington State’s estate tax exemption is approximately $2.193 million (2024). Connecticut, Hawaii, Illinois, Maine, Maryland, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington all have state-level estate taxes with varying rates and exemptions.

Business owners who are residents of, or who own business interests in, states with estate taxes should factor state tax into their planning analysis. In many cases, the pre-sunset federal planning strategies described in this article will simultaneously reduce or eliminate state estate tax liability, since removing assets from the taxable estate through gifting affects both federal and state computations. However, not all states follow the federal gift tax rules, and some states have their own gift tax regimes or clawback provisions. Coordination with state-specific counsel is essential.

Practical Steps for Business Owners

The first step for any business owner is to understand where they stand. This means reviewing all prior taxable gifts — gifts in excess of the annual exclusion made in prior years — to determine how much lifetime exemption has already been consumed. A tax advisor or estate planning attorney can prepare a gift tax history analysis using prior-year gift tax returns (Form 709). Once the remaining exemption is known, the owner can determine the maximum amount they could gift before the sunset without paying gift tax.

The second step is to identify the right assets for gifting. The most effective gifts are assets that (1) are expected to appreciate significantly in the near term, (2) qualify for valuation discounts, and (3) do not generate immediate income tax consequences upon transfer. Closely held business interests, partnership interests, and pre-liquidity preferred or common stock are often ideal candidates. Real estate with a low tax basis may be less ideal for gifting due to the loss of the stepped-up basis at death, although in some cases the estate tax savings outweigh the income tax cost.

The third step is to choose the right vehicle. The choice between a SLAT, GRAT, IDGT, outright gift, or other vehicle depends on the owner’s family circumstances, income tax situation, risk tolerance, and the nature of the assets being transferred. There is no one-size-fits-all answer. A business owner who needs continued access to transferred assets may prefer a SLAT. One who is primarily interested in maximizing the transfer of appreciation may prefer a rolling GRAT strategy. One who wants to freeze the value of a large block of stock without using exemption may prefer an installment sale to an IDGT.

Common Mistakes to Avoid

One of the most common mistakes business owners make is waiting too long — until the asset has already appreciated significantly or a deal is already announced. Gifts of business interests made after a letter of intent has been signed, after a term sheet has been issued, or after a sale price has been negotiated are highly susceptible to IRS challenge. Courts have held in cases such as Estate of Strangi v. Commissioner and Estate of Holman v. Commissioner that gifts made on the eve of a liquidity event can be revalued based on the anticipated transaction, collapsing the discount that made the gift attractive in the first place. Timing matters enormously.

Another common mistake is inadequate appraisal. For gifts of closely held business interests, real estate, or other non-publicly traded assets, a qualified appraisal by a qualified appraiser is required to support the valuation reported on the gift tax return. A deficient appraisal can expose the gift to IRS challenge and potentially result in gift tax, penalties, and interest. The appraisal must be conducted as of the valuation date — the date of the gift — and must satisfy the requirements of Treasury Regulation Section 25.2512-2 and related guidance. Cutting corners on appraisals to save cost is a false economy.

A third mistake is poor vehicle selection — for example, funding a GRAT with an asset that does not appreciate, or creating a SLAT without considering the income tax consequences of transferring income-producing assets into an irrevocable trust. Every planning vehicle has trade-offs, and the wrong vehicle for a given situation can produce suboptimal or even counterproductive results. This underscores the importance of working with experienced estate planning counsel who can evaluate the full picture.

The Window May Be Closing — Act Now

The combination of the TCJA sunset, the anti-clawback protections of Treasury Regulation Section 20.2010-1(c), historically significant exemption levels, and the unique circumstances of closely held business ownership creates a planning opportunity that is both time-limited and quantifiably valuable. Business owners who take the time to understand their options and act before December 31, 2025 can permanently lock in transfer tax savings that may be impossible to replicate in the future.

The cost of inaction is not abstract — it is a calculable number measured in millions of dollars of avoidable estate tax. If your estate is large enough to be affected by the exemption reduction, the expected tax cost of waiting significantly exceeds the cost of planning. The question is not whether to act, but how quickly you can structure a plan that fits your family, your business, and your goals. Engaging experienced estate planning counsel now — before the planning window narrows further — is the most important financial decision many business owners will make this decade.