Navigating the New Tax Landscape: Estate and Income Tax Planning Under the Latest Federal Tax Law
This comprehensive overview detailing the implications of the recent federal tax legislation is essential reading for individuals and estate planners aiming to maximize their estate and income tax planning objectives.
Understanding the New Tax Law
The recent changes in tax law, introduced under President Donald Trump’s administration, have brought about significant updates to estate, gift, and generation-skipping transfer tax exemptions. Individuals are encouraged to engage in sophisticated planning to leverage these exemptions effectively.
Key Insights on Exemptions
Starting January 1, 2026, the federal estate tax exemption will increase to an impressive $15 million per individual. For married couples, the unused exemption of a deceased spouse can be transferred, allowing a combined shelter of $30 million from federal estate and gift taxes. This offers an unprecedented opportunity for families to pass on wealth to future generations without incurring heavy tax liabilities.
Strategic Planning Opportunities
Leveraging Irrevocable Trusts
One of the most effective strategies for wealth transfer involves creating irrevocable trusts. This enables individuals to strategically remove appreciated assets from their taxable estate, allowing both the principal and any future appreciation to pass tax-free to beneficiaries, thanks to elevated exclusion amounts.
Implementing Irrevocable Trust Gifts
Particularly for families with hard-to-value assets, utilizing formula gifts to irrevocable trusts is crucial. A formula gift determines the property value through a formula, safeguarding against IRS audits and limiting gift tax exposure, especially for assets like closely held businesses or real estate.
Reviewing Estate Plans in Light of New Exemptions
Families are urged to revisit their current estate plans. Estate planners should evaluate existing spousal lifetime access trusts (SLATs) to leverage the increased exemption amounts effectively.
Addressing State and Local Tax Concerns
For those residing in states with separate estate or inheritance taxes, it’s vital to examine the language used in wills or revocable trusts related to by-pass trusts. With evolving federal exemptions, planners must ensure the credit shelter amounts are aligned with the highest savings from both federal and state estate taxes.
Enhancing Wealth Transfer for Future Generations
With elevated exemption levels, beneficiaries can inherit significantly more without incurring estate taxes. Establishing lifetime trusts is an effective method to shield assets, ensuring financial security while safeguarding against debt claims or divorce proceedings.
Charitable Contributions and Tax Deductions
The new tax law has also reformulated the landscape for charitable deductions. Taxpayers in the highest income bracket may face limitations due to a 0.5% deduction reduction tied to adjusted gross income levels. High-net-worth individuals should contemplate accelerating charitable contributions before the year ends to fully benefit from the 37% deduction.
Exploring Non-Grantor Trusts
Irrevocable non-grantor trusts enable the inclusion of state and local tax deductions, alongside business income deductions that now stand permanent. Individuals can optimize tax benefits by transferring income to these trusts, taking advantage of the available deductions.
Beneficiary-Specific Trusts
Rather than consolidating beneficiaries into one trust, creating separate irrevocable non-grantor trusts for each can maximize deductions against taxable income. Additionally, reviewing existing irrevocable trusts for modifications can ensure that they utilize available tax deductions effectively.
Reassessing Intentionally Defective Grantor Trusts
Individuals with intentionally defective grantor trusts should consider potentially eliminating administrative provisions to reclassify these trusts as irrevocable non-grantor trusts. This shift allows for the realization of available deductions at the trust level, enhancing tax efficiency.
Conclusion: Seizing Tax Planning Opportunities
The new federal tax law introduces numerous provisions affecting estate, gift, and income tax planning. It is crucial for individuals to assess their financial goals in light of these changes. With proactive and strategic planning, wealth preservation opportunities are more accessible than ever before.
Action Steps for Individuals
- Review and Reassess: Examine your current estate plans and trusts for alignment with new tax exemptions.
- Consider Irrevocable Trusts: Explore the possibilities of incorporating irrevocable trusts into your estate strategy.
- Evaluate Charitable Goals: Rethink your charitable contributions within the framework of new tax deductions.
- Consult an Estate Planner: Work with professionals who understand the nuances of the new tax legislation to ensure optimal estate and income tax strategies.
By taking informed steps now, individuals can ensure a lasting legacy for their families while maximizing tax efficiency.
Reproduced with permission. Published August 6, 2025. Copyright 2025 Bloomberg Industry Group. For further use, please consult Bloomberg’s copyright and usage guidelines.
