Without legislation to prevent it, the sunsetting of current estate tax laws at the end of 2025 will dramatically reduce the federal estate tax exemption from $13.61 million per person in 2024 to approximately $7 million in 2026 (this includes adjustments for inflation). This change would affect many high net-worth individuals and families, likely exposing many more estates to federal estate taxes.
It is impossible to predict whether or not legislation will prevent the sunset. Even so, it is important for advisors to prepare for client discussions and start considering estate planning strategies now, especially techniques that incorporate multi-generational gifts and charitable planning.
Indeed, for a client who is charitably inclined, making larger lifetime charitable gifts and arranging for charitable bequests will help reduce the client’s taxable estate because of the charitable estate and gift tax deduction. Donor Advised Funds, Field of Interest Funds, Designated Funds, and Unrestricted Funds are flexible and effective charitable recipients of both lifetime and estate gifts.
For some clients, you may wish to begin exploring a comprehensive, multi-generational wealth transfer plan, potentially using key tax-planning vehicles:
Charitable lead trust (CLTs)
CLTs may be particularly effective in the current environment. These trusts can provide income to your client’s charitable fund for a set period of time, with the remaining assets passing to family members. Right now, the higher exemption allows for potentially significant initial funding of such trusts because the value of the remainder interest counts toward the client’s estate and gift tax exemption.
Generation-skipping trust
A generation-skipping trust is an irrevocable trust that can benefit a client’s grandchildren and later generations. This trust utilizes a client’s generation-skipping transfer (GST) tax exemption (which parallels the estate and gift tax exemption). This type of trust could allow a client to take advantage of the higher exemption before it potentially decreases in 2026. It is possible under some states’ laws for these trusts to go on for many generations in a “dynasty” format, such that each generation benefits from the trust’s income (and potentially principal for health and education) without the trust’s assets being included in the beneficiaries’ estates for estate tax purposes.
Multi-generational Foundation fund
Alongside a CLT or generation-skipping trust, or as a standalone, a client can establish a Donor Advised Fund at the Foundation that can function much like a family foundation. Successive generations may serve as advisors, or we can step in after the first or second generation to recommend grants from the charitable fund to carry on a tradition of supporting specific causes. Our team looks forward to working with you to achieve your clients’ long-term charitable goals, even in the midst of uncertainty concerning estate tax laws.