Estate Planning in Flux: How to Adapt to Possible Gift Tax Exemption Change

When it comes to your estate, careful planning is essential for distributing assets according to your wishes and potentially reducing estate taxes and other expenses.

The recent election has brought attention to the looming expiration of the enhanced estate and gift tax exemption in the Tax Cuts and Jobs Act (TCJA). Individuals and families may still capture its benefits despite a potential reprieve. Even in the light of potential tax policy changes from a new administration, families should explore various strategies that can help protect wealth, provide for loved ones, and achieve long-term financial goals.

Estate planning tips for estates under $14 million

The TCJA doubled the lifetime exemption for estate and gift taxes, but this could expire at the end of 2025. If the exemption drops, more estates will face increased taxes.

Consider these tips for estate planning if you are not expecting to be subject to estate taxes, but would like to plan for appreciation and provide for family members:

Annual gifts

Use the annual exclusion to reduce your taxable estate by making annual gifts. Give up to $18,000 per person each year without tax. Couples can give $36,000. These amounts will increase to $19,000/$38,000 in 2025.

Non-taxable gifts

Pay directly for someone’s education or medical expenses. These payments don’t count against the annual exclusion or lifetime exemption and do not trigger gift tax consequences.

Charitable donations

Donate up to $105,000 (indexed for inflation and increasing to $110,000 in 2025) per year from an IRA to charity without paying tax on it.

Plan for appreciation

Property value growth can considerably increase net worth over time, which may lead to increased estate taxes if not adequately planned. Transfer assets expected to grow in value sooner using trusts or sales methods to help reduce your taxable estate.

Family limited partnerships

These types of entities allow you to pool assets with family members and create different classes of ownership interests. Use these to gift or sell interests in family-held assets at a discount, potentially transferring more wealth.

Cash flow and beneficiaries

Consider your cash needs and beneficiaries’ readiness to manage wealth. Trusts can help protect and guide them.

Stay flexible

Be ready for potential changes in tax laws and adjust your plans as needed.

Estate planning tips for couples with estates valued between $14 million and $28 million

In 2024, each person has a $13.61 million estate and gift tax exemption ($13.99 million in 2025), giving married couples a combined $27.22 million exemption ($27.98 million in 2025). Couples with $14 million to $28 million need careful planning to use these exemptions effectively while maintaining sufficient assets for their lifestyle.

In addition to the strategies below, many planning techniques are the same as those used for other higher-wealth clients, and you should review the discussion of grantor trusts, gift and sale transactions, and insurance in other sections of this article.

Using one spouse’s exemption

One technique that may benefit clients in this wealth range is to have one spouse make all the family gifts before the exemption decreases. For example, a couple with a $25 million estate can reduce their combined taxable estate by making a $10 million gift to a trust for their children. Assuming a cut in the lifetime exemption, if one spouse reports the entire gift, the couple can save on taxes compared to splitting the gift. This is due to the fact that lifetime gifts are subtracted from the bottom up. So if each spouse is deemed to have made gifts of $5 million each, both of them would have used that amount of their lifetime exemption currently and, after sunset if the exemption is reduced. Without splitting one spouse will have used all of their potential future exemption ($7 million less $10 million of gifts = $0) while the other spouse will still have their reduced amount of $7 million, in comparison to them each only having a total of $4 million ($7 million - $5 million = $2 million x 2).

This subset of estates is complicated and very much dependent on the future of estate tax law. The only certainty is Congress must act to prevent the exemption from being reduced on December 31, 2025. This may warrant some consideration and planning now, as things can move fast. This method can also take extra planning time, as assets may need to be transferred between spouses and proper titles may need to be verified.

Lifetime exemption gift recipients

A lifetime exemption gift can go to children, grandchildren, or trusts like irrevocable life insurance trusts (ILITs) and generation-skipping trusts (GSTs). These trusts help keep the assets protected from future taxes. However, once in the trust, the couple can’t access the principal or income, so they need enough remaining resources to support their lifestyle independently.

Spousal Lifetime Access Trusts (SLATs)

A SLAT is an irrevocable trust that allows a spouse to access the trust’s income and principal while keeping assets out of the taxable estate. It's a good tool for reducing estate taxes and enabling a spouse’s financial security. However, if the beneficiary-spouse dies or the couple divorces, the assets remain in the trust and cannot benefit the gifting spouse.

SLATs can be very effective but require careful planning and legal guidance to avoid IRS reciprocal gift rules and help the trust work as intended.

Estate planning strategies for estates over $28 million

Estates above the available exemption should not wait to start planning and should take advantage of increased exemptions and the valuable asset of time. The sooner these ideas are implemented, the greater the potential benefit. In addition to using the current exemptions, the below strategies may remove future appreciation from your taxable estate — reducing the amount exposed to tax under the potentially lower exemption.

Use the current lifetime exemption

Take advantage of the $13.61 million per person lifetime exemption before it potentially halves in 2026. There may be legislative activity regarding this matter, but for an estate of this size, it's not necessary to wait for Congress to take action.

Make taxable gifts to trusts

Making taxable gifts allows taxpayers to decrease the size of their taxable estate and secure the current exemption amount, regardless of potential future reductions. Any future appreciation of these gifted assets will be excluded from the estate and won't incur estate tax at death. Choose between grantor trusts (where you pay the income tax) and non-grantor trusts (treated as a separate entity for tax purposes).

Sell assets to trusts

Sell assets to an irrevocable grantor trust in exchange for a promissory note. This transfers appreciation potential to beneficiaries. The benefit of a grantor trust is a sale to this type of trust is not a taxable transaction. Also, the grantor is taxed on the income generated within a grantor trust, which further reduces the grantor’s estate and benefits the trust beneficiaries. These trusts can be structured specifically according to the grantor’s goals and objectives. An example of this type of trust would be an intentionally “defective” grantor trust, where the defect is desired.

Combine gifts and sales

Mix gifting and selling assets to a trust to utilize the exemption and remove appreciating assets without triggering gift tax liability.

Use a GRAT

A grantor retained annuity trust, or GRAT, is especially useful if you have lots of publicly traded stock or assets likely to appreciate quickly.

With a GRAT, you get an annuity from the trust for at least two years. The annuity amount is set so that, using the IRS's assumed return rate, you get back all the property value you put in by the end of the term. If the assets grow faster than that rate, the extra money goes to your beneficiaries tax-free. But if the assets don’t perform well, they come back to you. In a lower interest rate environment, a GRAT becomes more attractive as the present value of the retained annuity has a higher value, making the gift of the remainder less.

Utilize an ILIT

The main idea behind an irrevocable life insurance trust (ILIT) is basically to keep life insurance money out of the insured person's taxable estate. Once you create the trust and move the life insurance policy into it, you can't change or undo the terms of the trust — which makes sure the insurance money is used as you wish.

One advantage of an ILIT is the life insurance payout isn’t subject to estate tax; the yearly premiums for the policy are paid from cash given to the trust annually. Even if the trust makes money, the grantor still pays the income taxes, but it doesn't count as a gift.

Plan charitable giving

Charitable gifts are effective for reducing estate taxes at death. So long as the gift is made to a qualifying charity, the gift is fully deducted from the taxable estate. Options like charitable remainder trusts and charitable lead trusts can benefit high net worth individuals.

How CLA can help with estate planning

By implementing effective estate planning strategies now, taxpayers can take advantage of the current high exemption rates, transfer substantial wealth to future generations, and secure their financial and charitable legacies.

However, these strategies also involve various tax implications, legal considerations, and potential pitfalls. Consult with a CLA estate and gift professional and an experienced estate planning attorney before implementing any of them.

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