With the divides and disagreements in Congress becoming even more apparent since the new administration took office, many clients should be advised on estate tax planning strategies related to the deadline for extending the 2017 tax cuts being less than a year away.
For 2025, the generous estate tax exemption amounts allow each taxpayer to exclude up to $13.99 million ($27.98 million per married couple) from the 40% federal estate tax. Absent congressional action, those amounts will fall by roughly $7 million ($14 million per married couple), considering inflation adjustments to the pre-2017 $5 million base amount.
While it may seem early in the year, now is the time to begin considering options for mid- to high-net-worth clients. Each client has different goals and a different risk tolerance, so it’s important to present the options and explain the implications of any given choice as 2026 approaches.
Wide Net Around the Exemption’s Sunset
Ultra-high-net worth clients with estates in excess of the current exemption levels should be extremely concerned as the Dec. 31 sunset date approaches. For married couples with estates that already exceed the exemption levels, it may be advisable for one spouse to use their exemption entirely via transfers to trust. The second spouse would then maintain their exemption and, even if the sunset occurs, would still be able to shelter roughly $7 million from estate tax.
Estate planning in today’s environment is not just for the ultra-wealthy. Even mid-affluent clients can be affected by the financial consequences of taking little to no action.
For a couple with a current net worth of $10 million, their assets would likely continue to appreciate in value. It’s reasonable to assume that their eventual estate will exceed future exemption amounts if Congress permits today’s generous exemption levels to sunset.
Strategies for Reducing the Taxable Estate
The Internal Revenue Service has been clear that no claw-back provisions will apply in the event that a sunset does occur. Clients, then, can take steps to fully use their estate tax exemption at the 2025 levels without worrying about future reductions.
One common approach is a lifetime gifting strategy. In 2025, each taxpayer can gift $19,000 to a donee ($38,000 per married couple) without incurring gift tax liability. This exclusion is applied on a per-donee basis, meaning that the taxpayer can make multiple gifts to different beneficiaries. The gifts are counted against the taxpayer’s lifetime exemption amount.
A spousal lifetime access trust can potentially allow a client to remove assets from an estate while also maintaining access to those assets during life. To fund the irrevocable trust, a married client transfers assets into the irrevocable trust for the benefit of their spouse. An independent trustee is appointed to oversee the trust. Adult children may serve as trustee so long as a concrete, ascertainable standard exists for trust distributions.
Grantor retained annuity trusts are particularly useful when an asset’s value is expected to appreciate substantially or when a low-interest rate environment exists. These irrevocable trusts essentially combine a trust established for a certain predetermined period of time with an annuity that pays the client, as trust creator (the grantor), a set value each year of the trust’s existence. This annuity payout is the client’s retained interest. The remaining value passes to the client’s beneficiaries and, thus, out of the estate.
Assets funding the trust can also be passed into a trust at the end of the term to delay the beneficiary’s receipt for asset protection purposes. The risk, of course, is that the grantor could die within the term, and the remaining assets could be included in the estate.
Intentionally defective grantor trusts are a particularly useful tool for removing appreciating assets, such as real estate or a business, from the grantor’s estate. These irrevocable trusts are “defective” because the grantor separates responsibility for income taxes from the estate implications. The assets in the trust will grow tax-free because the grantor pays the associated income taxes. Income tax payment also further serves to reduce the grantor’s estate.
Charitable remainder trusts are irrevocable trusts that will provide income to a beneficiary each year, whether for life or over a predetermined term. The amount of income received is based on the value of the assets that the client has passed to the trust, re-calculated each year, At the end of the term, the remaining account value is paid to a qualified U.S. charity.
The trust must be structured so that the charity receives at least 10% of the donor’s contribution. The client then receives an estate tax deduction for the donated amount.
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