New Laws for a New Year: Year-End Estate Planning in Preparation for 2025

As 2024 quickly comes to a close, the new year will bring a change in the presidency, a new Congress, and potential changes to policies and laws that could impact individuals of all wealth levels. Going into the election, estate tax laws were expected to be in a state of flux for 2025. After the election, they continue to be unpredictable, making now a great time to consider estate planning updates that take into consideration the current laws and future uncertainty.

Changes to the Estate and Gift Tax Exemption

In 2024, an individual may gift up to $18,000 per person ($36,000 for a married couple) per year without any gift tax consequences. In 2025, this annual exclusion will rise to $19,000 per person ($38,000 for a married couple) per year. The use of annual exclusion gifting in 2024 and into 2025 will continue to provide a simple planning tool for individuals looking to maximize transfer tax savings.

In 2025, the federal estate, gift, and Generation Skipping Transfer (GST) tax exemptions will increase from $13,610,000 to $13,990,000. The increase will provide individuals an additional $380,000 of exemption and married couples an additional $760,000 of exemption. The increase also applies to the GST tax exemption, which provides individuals greater opportunities to pass assets to their grandchildren and even younger generations without any GST tax consequences. Individuals should be considering whether to use all or any portion of this exemption and, if so, the most effective and efficient way to do so in the context of their overall estate plan. 

Due to the scheduled expiration of certain provisions of the Tax Cuts and Jobs Act on January 1, 2026, the estate, gift, and GST tax exemptions are set to drop by half, resulting in each individual having a federal estate, gift, and GST tax exemption of approximately $7 million. While it is possible, and perhaps expected, that a Republican-controlled government might extend the Tax Cuts and Jobs Act or introduce a new tax bill to address these expiring provisions, it is not a certainty. The only certainty is that we currently have historically high exemptions, which provides a unique opportunity for individuals to pass significant wealth to lower generations on a tax efficient basis. As a result, now is a good time to reach out to Ballard Spahr and make a plan to maximize these exemptions.

Interest Rate Fluctuations

Despite the Federal Reserve’s recent reduction of interest rates, the applicable federal rate is increasing again in December and could further increase into 2025, thereby increasing the cost of borrowing. Before these rates rise, now is a great time to make intra-family loans or create grantor retained annuity trusts – two techniques that are more beneficial in a lower interest rate environment. Individuals should therefore consider implementing these transactions whose success is aided by lower interest rates.

Corporate Transparency Act Deadline

While there have been many court cases over the past year challenging the constitutionality of the Corporate Transparency Act (CTA), it does not currently appear that any relief is forthcoming. The CTA imposes a reporting requirement on certain U.S. legal entities and foreign entities registered to do business in the United States. Starting on January 1, 2024, entities were required to report information about themselves, their beneficial owners, and their company applicants with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). Entities created in 2024 that are required to do so should have filed reports with FinCEN within 90 days of formation, but all entities created prior to January 1, 2024 must file their beneficial owner information reports by January 1, 2025. 

In addition to these federal requirements, states such as Pennsylvania, New York, and Massachusetts are implementing their own. Individuals living in Pennsylvania should be aware that as of January 1, 2025, they are required to file annual reports disclosing, among other items, the names of all principal officers and at least one governor (i.e., director, manager, member, partner, etc.).

While there are exemptions to the reporting requirements of the CTA, owners of entities, trustees of trusts owning entities, and, in some cases, the sole beneficiary of trust owning entities should be consulting their advisors as to whether they have a filing requirement. There are significant penalties for those who fail to file by January 1, 2025, so it is crucial that individuals act now.

Pennsylvania Recognizes Grantor Trusts

Starting on January 1, 2025, Pennsylvania will no longer be the state that does not recognize grantor trust status for irrevocable trusts. A grantor trust is where the creator of the trust (i.e., the grantor) is treated as the owner of the trust's assets for income tax purposes and is obligated to pay the income taxes attributable to the trust. Grantor trusts create estate planning opportunities in that they allow the trust to grow undiminished by its income tax liability while the grantor’s estate is reduced in value by the taxes he or she is required to pay. Pennsylvania’s historical position on grantor trusts had three disadvantages:

1. Trusts were responsible for the payment of the Pennsylvania income tax attributable thereto;
2. Transactions between the grantor and the trust were recognition events for Pennsylvania income tax purposes, and;
3. When the grantor of a Pennsylvania trust moved to another state that recognizes grantor trusts, two states could collect tax on the same income.

The recognition of grantor trusts in Pennsylvania on January 1, 2025, simplifies the tax issues associated with grantor trusts and creates better planning opportunities for individuals who created, or are planning to create, Pennsylvania grantor trusts.

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With the changing political and legal landscape of 2025, there is uncertainty in tax policy outcomes. As always, it is best for individuals to be proactive in their planning as it takes time to coordinate impactful and nuanced estate plans. Now is an advantageous time to speak with your estate planning attorney and tax advisors about the anticipated impact on your specific situation so that you are best prepared for the new year, new laws, and a new political environment.

Attorneys in Ballard Spahr’s Private Client Services Group are closely monitoring developments and look forward to working with you before the year ends.

To learn more about the Corporate Transparency Act visit our CTA Resource Center.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.