2025 Estate Planning Moves, the 2026 TCJA Sunset?

Of course, ultra-high-net worth clients with estates in excess of the current exemption levels should be extremely concerned as the December 31 sunset date approaches. For married couples with estates that already exceed the exemption levels, it may be advisable for one spouse to use up their exemption entirely via transfers to trust. The second spouse would then maintain their exemption and, even if the sunset is allowed to occur, 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 impacted by the financial consequences of taking little-to-no action.

For example, assume a couple with a current net worth of $10 million. Over the years, their assets will continue to appreciate in value. It's reasonable to assume that their eventual estate will exceed the exemption amounts in the future if Congress permits today's generous exemption levels to sunset.

Strategies for Reducing the Taxable Estate

The IRS has been clear that no "claw back" provisions will apply in the event that a sunset does occur. That means clients can take steps to fully use up their estate tax exemption at the 2025 levels without worrying about future reductions, thus locking in today's tax advantages permanently.

One common strategy 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 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 (SLAT) is one type of irrevocable trust that can potentially allow a client to remove assets from his or her estate while also maintaining access to those assets during life. To fund a SLAT, a married client transfers assets into the irrevocable trust for the benefit of his or her 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 (GRATs) are particularly useful when an asset's value is expected to appreciate substantially or when a low-interest rate environment exists. A GRAT essentially combines a trust that is 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 his or her estate (the assets funding the GRAT can also be passed into a trust at the end of the GRAT term to delay the beneficiary's receipt for asset protection purposes). The risk, of course, is that the grantor could die within the GRAT term, the remaining assets could be included in their estate.

Intentionally defective grantor trusts (IDGTs) are another tool that is useful for removing appreciating assets (such as real estate or a business) from the grantor's estate. IDGTs 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.

For charitably inclined clients, a charitable remainder trust (CRT) may be desirable. The CRT is an irrevocable trust that will provide income to a beneficiary each year, whether for life or over a predetermined term of years. The amount of income received is based on the value of the assets the client has passed to the CRT (the amount is re-calculated each year). At the end of the term, the remaining account value is paid to a qualified U.S. charity (the CRT 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.

Conclusion

These are all complex estate planning strategies that take time to implement. While it may seem early in the year, now is the time to begin considering options for mid to high-net-worth clients. Every 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.

Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.