The year 2025 continues to offer historically high federal unified exemption amounts for bequests and lifetime gift-giving in effect since 2018. Because of this significant change from prior years, careful review of tax planning provisions in existing estate planning documents may be warranted ‒ as well as consideration of lifetime gift planning.

   

Federal Estate & Gift Tax (and GST) Exemption Amount for 2025
 

In 2018, the federal exemption (or “exclusion”) amount for federal estate, gift, and generation-skipping tax (“GST”) was nearly doubled   under the Tax Cuts and Jobs Act of 2017 from a planned $5.6 million to $11.18 million per person.  For 2025, after inflation adjustment, the exemption increased to $13.99 million per person (up from $13.61 million in 2024, allowing a combined $27.98 million exemption for a married couple.  This “unified exemption amount” applies to the sum total of a person’s “lifetime gifts” (gifts in excess of the applicable annual exclusion amounts in effect when the gifts were made), together with the property passing to beneficiaries upon the person’s death. This figure also represents the current exemption amount for generating-skipping gifts (e.g., gifts to grandchildren).  Estates (and/or lifetime gifts) in excess of the exemption amount are taxed at a maximum rate of 40%.  Generation-skipping gifts in excess of the exemption amount are taxed at an additional maximum rate of 40%.  For future years, the law provides for continuing annual inflation increases in the exemption amounts through the end of this year.  But, unless new legislation is enacted, this exemption is scheduled to revert on January 1, 2026, to its pre-2018 level of $5.49 million, adjusted for inflation.

 
IRS Confirms No “Clawback” for Prior Use of High Exemption

A key concern surrounding use of the current, high exemption amounts for lifetime gifts was whether the IRS would try to “claw back” taxes on such gifts if a lower exemption amount ended up applying at the time of the donor’s death.  Effective as of late November 2019, final regulations issued by the Internal Revenue Service on this matter (IR-2019-189) eliminated such concern.

 

Income tax basis rules remain unchanged, with inherited property receiving a reset of basis at date-of-death value.

North Carolina Inheritance, Estate or Gift Tax

North Carolina currently has no state inheritance, estate or gift tax.

Annual Gift Tax Exclusion & Spousal Gifts
 

The federal annual gift tax exclusion increases to $19,000 per donee in 2025 (up from $18,000 in 2024).  Donors can make an unlimited number of “annual exclusion gifts,” so long as the amount of each gift does not exceed $19,000 per donee during the 2025 calendar year.  (Generally, married couples can give $38,000 per donee as long as certain measures are taken.)

 

Annual exclusion gifts do not use up any of a person’s lifetime unified exemption amount, and generally no gift tax return is required.  If you make a gift in excess of $19,000 to one donee, you may still avoid paying a gift tax on the excess by filing a gift tax return (IRS Form 709), with an election to use part of your unused unified lifetime estate and gift tax exemption amount to cover the overage. 

 

As in years past, a person may give an unlimited amount to his or her spouse by using the “unlimited gift tax marital deduction,” as long as the donee spouse is a U.S. citizen.  If the donee spouse is not a U.S. citizen, tax-free transfers to the non-citizen spouse are limited to a “super annual exclusion” amount, which increases to $190,000 in 2025 (up from $185,000 in 2024).  As with other gifts in excess of annual exclusion amounts, the donor spouse may still avoid tax by filing a gift tax return and electing to use his or her unused lifetime exemption amount to cover the overage.

 

All annual exclusion gifts and spousal gifts must be gifts of a “present” interest as opposed to a “future” interest, and further qualifications can apply.  It is recommended that you consult your tax advisor prior to making a particular gift.

Lifetime gifts to qualified charities may generally be made in unlimited amounts, free of gift tax.  In addition, certain direct payments made on behalf of others are not considered “gifts,” and may be made in unlimited amounts.  These include direct payments on behalf of another person to educational institutions for tuition and to medical providers for medical care.  These payments must be made directly to the institutions or providers, however, or they will be treated as gifts to the individuals.  Because certain qualifications apply, it is recommended that you consult your tax advisor before making particular charitable gifts or payments on behalf of others.

 
Review of Estate Planning Documents for Outdated Estate Tax Provisions
 

The federal estate and gift tax exemption has changed dramatically in recent decades, from $675,000 in 2001 to nearly $14 million in 2025.  This change has resulted in many outdated estate plans, and much of the tax-avoidance attention in estate planning (for estates less than the exemption amount) has shifted away from estate tax, focusing instead on income tax considerations ‒ including efforts to maximize stepped-up basis of appreciated assets and avoidance of capital gains for heirs.

A review of your estate planning documents as well as your past and future gifting decisions is strongly recommended to ensure they reflect today’s exemption landscape and tax priorities.

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