Following our Fall article on the history and outlook of the federal estate tax, this article explores several planning options clients might consider as the historically high federal gift and estate tax exclusion amount, as well as the generation-skipping transfer tax exemption (collectively, the “lifetime exclusion amounts”) are set to expire or “sunset” at the end of 2025 and to revert back to the pre-2018 amount unless legislative action is taken prior to year-end.
As a refresher, the 2017 Tax Cuts and Jobs Act (TCJA) doubled the lifetime exclusion amounts for tax years 2018-2025. Combined with an annual inflation adjustment, the resulting current lifetime exclusion amounts are $13.99 million per individual and $27.98 million per married couple. Without Congressional action, the exemption will reduce to half of its indexed-for-inflation amount – forecasted to be approximately $7 million per individual and $14 million per married couple as of January 1, 2026.
Even though the current law will sunset the lifetime exclusion amounts, uncertainty exists because Congress is working to extend the TCJA, including the current lifetime exclusion amounts. In April 2025, the House and Senate adopted different versions of a budget resolution, which was the first step toward a reconciliation bill that can be used to extend the TCJA tax cuts. As of May 1, the House was moving the Senate version forward, meaning a uniform bill is advancing. While we do not yet know whether a law will pass to prevent the sunset of the elevated lifetime exclusion amounts, many national commentators believe it will occur.
In the meantime, we can only advise clients based on current laws. Rather than waiting for Congress to act, clients can consider several planning opportunities to utilize the current lifetime exclusion amounts to reduce future estate taxes. If the tax sunset happens, the planning and wealth transfer steps need to start immediately in order to be completed prior to year-end. If the tax sunset does not happen, utilizing the lifetime exclusion amounts will remain a prudent decision for many high-net-worth clients. We are here to help during this time of uncertainty; contact a member of Lathrop GPM’s Private Client Services Group to explore the planning opportunities discussed in this article to optimize and achieve your estate planning goals. If you are a resident of or have real estate in a state with its own estate tax, such as Minnesota or Illinois,[1] contact us to discuss the planning opportunities available to mitigate both federal and state level estate taxes.
Planning Opportunities
Several estate planning strategies are available to consider prior to the sunset of the higher estate and gift tax exemption, a few of which are highlighted in this article. These strategies are complex, and it is important to meet with an experienced professional to avoid estate tax inclusion in the event of an IRS challenge.
1. Irrevocable Trusts for Descendants
A client can create an irrevocable trust that names their children and, if they want, future generations as beneficiaries. After creating the trust, the client-grantor gifts assets to the trust, using use the client’s lifetime exclusion amounts. This type of trust is a powerful strategy to remove assets from the grantor’s taxable estate while also ensuring the gifted assets are protected from creditors of a beneficiary, including a divorcing spouse. Additional benefits are available if the assets gifted include closely held business or family-owned business interests, which may receive a discounted valuation. Future appreciation of the gifted assets that stay in trust can avoid estate, gift and generation-skipping transfer tax for multiple generations, depending on how the client wants to structure the trust. When developing the terms of these trusts, clients will consider income tax options, trustee selection options and more.
2. Irrevocable Life Insurance Trust (ILIT)
A client can create an Irrevocable Life Insurance Trust (ILIT) where the trust owns a life insurance policy insuring the client, naming trust beneficiaries consistent with the rest of the estate plan. Life insurance is a valuable tool to provide liquidity to an estate for estate tax payments or other debts of the estate, especially when an estate consists of illiquid assets, such as private equity interests or a closely held or family-owned business. Having increased liquidity available to the estate protects other assets that would otherwise be sold, potentially at a reduced value, to pay estate taxes. To ensure the death benefits of the life insurance policy are outside of the insured’s taxable estate, the ILIT would own the insurance policy with the death benefit proceeds being paid directly to the ILIT. Existing life insurance policies may be gifted to an ILIT established by the grantor, but such life insurance policies will be includible in the grantor’s taxable estate if the grantor dies within three years from the date the life insurance is gifted. The best practice is for the trustee to apply for a new life insurance policy to be issued to and owned by the ILIT from the start. This ensures that the policy remains outside the insured’s taxable estate, even if the grantor passes away within three years.
3. Spousal Lifetime Access Trust (SLAT)
For married couples who have separate marital property,[2] the grantor spouse creates an irrevocable trust, naming the other spouse as the primary beneficiary. Instead of the gifts being eligible for the marital deduction, the grantor spouse will use his or her lifetime exclusion amounts for gifts made to the SLAT. Assets transferred to the SLAT—as well as future growth on those assets—are removed from the grantor spouse’s estate, providing estate tax savings, while still providing the beneficiary spouse access to the trust assets if needed. Depending on the terms of the trust, the beneficiary spouse may serve as a trustee of the SLAT or an independent trustee may be appointed to have broader distribution discretion to the beneficiary spouse. A SLAT often includes descendants as discretionary beneficiaries, allowing distributions to be made for their benefit while avoiding any further gift tax implications. As always, details matter with these trusts, which we discuss with clients as part of assessing whether this type of trust fits a situation.
4. Grantor Retained Annuity Trusts (GRAT)
Although not directly related to the possible sunset, a Grantor Retained Annuity Trust, known as a GRAT, can be useful in uncertain economic times for a client who has already used (or does not want to use) their lifetime exclusion amounts. A GRAT is a specialized irrevocable trust for a fixed time period that transfers asset appreciation to beneficiaries, with the potential to use nearly no lifetime exclusion amounts. After creating a GRAT, the grantor transfers assets to the trust; over the trust’s time period, the grantor receives an annuity back from the trust equal to the value of transferred assets plus a small interest rate. At the end of the trust’s time period, any appreciation in the value of the trust’s assets distributes to the remainder beneficiaries free of gift tax. The grantor retained the original value of assets while the appreciation and future income on the assets are out of the grantor’s taxable estate and will not be subject to federal estate tax at the grantor’s death. GRATs are particularly useful when the assets to be gifted have a low value at the time of transfer to the trust and a high probability of appreciating over the trust’s term. A key caveat to GRATs is that the grantor has to survive the term of the trust for this strategy to work. For that reason, when structuring a GRAT, it is important to determine the term of the GRAT, balancing the asset growth horizon and the goal of surviving the trust’s time period to mitigate the risk of estate tax inclusion.
Conclusion
The strategies outlined in this article to take advantage of the higher lifetime exclusion amounts either due to the possible tax sunset at the end of 2025 or for other wealth planning reasons are just a few options to consider. If you have interest in learning more, please contact a member of our Private Client Services Group to discuss which of these or other strategies are beneficial in achieving your specific estate planning goals and needs.
[1] Thirteen states impose state estate taxes: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington.
[2] Separate marital property can occur based on state law or by agreement of the couple. This is a topic you can discuss with your attorney in determining what planning options would meet your needs.