Navigating the New Estate Tax Landscape: Key Insights for Individuals
By Thomas J. Taricani, CPA/ABV, CVA, CEPA
The recent changes in estate tax laws present opportunities and challenges for clients. This article aims to provide actionable advice to help you navigate the evolving estate tax landscape. For personalized guidance, consult with your Boyer & Ritter advisor.
What is an “Exemption” and what changed with the 2025 Tax Bill?
An estate “exemption” is generally referred to as the amount of assets that an individual can gift during their lifetime or pass to heirs after their death. Starting in 2026, the estate tax exemption will increase to $15 million per person and $30 million per couple, up from just under $14 million per person in 2025. This change, enacted by a bill passed in July, averted a planned sunset that would have reduced the exemption back to about $7 million per person. The new exemption levels will be indexed for inflation and provide some needed predictability for planning which has been uncertain with the 2016 Tax Bill due to expire.
Long-Term Planning Considerations
While the increased exemption levels may be more than an individual’s net worth, it is crucial to think long-term. Particularly with the strong securities market growth observed in recent history, an individual’s estate growth can outpace inflation adjustments to the exemption, potentially resulting in taxable estates. Disciplined estate strategies, including lifetime gifting, are often used to ensure that your estate remains below the exclusion.
Example: Consider a client with a $12 million estate that grows at an annual rate of 8%. In five years, the estate could be worth over $17.6 million, potentially subjecting it to estate taxes. Regular reviews and adjustments to your estate plan can help mitigate this risk.
Potential for Legislative Reversal
It is important to note that future Congresses could reverse the current exemption increases. Therefore, clients should not assume that the higher limits are permanent. Many clients are proactively implementing lifetime gifting plans to mitigate the risk of future legislative changes and lock in current benefits.
Impact on Dated Estate Plans
Many older estate plans may unintentionally disinherit spouses or become suboptimal under the new exemption levels. It is essential to review and possibly revise existing documents to ensure they align with the new exemption levels and continue to meet your estate planning goals.
Example: Many older plans were executed when the exclusion was $5 million and funded trusts with the exclusion at death that benefited their family and not necessarily their spouse. With the exclusion at $15 million, that same plan could push most of the decedent’s assets to a trust and create challenges for a spouse. Reviewing and updating older plans can ensure it remains effective and aligned with your goals.
Portability of Deceased Spousal Unused Exclusion (DSUE)
A critical aspect of the current planning can be the portability of the deceased spouse's unused estate tax exemption (DSUE). “Portability” allows a surviving spouse to use the unused estate tax exemption of their deceased spouse by making an election on a timely filed federal estate tax return, even if no tax is due.
Example: If a spouse passes away with an estate valued at $3 million, the surviving spouse can elect to transfer the unused $12 million exemption to their estate. This could potentially allow the surviving spouse to shield up to $27million ($15m + $12m) from estate taxes. If the election is not made in a timely manner at the first spouses passing, the $12 million would be lost.
To prevent such issues, it is essential to initiate and document proactive discussions with clients when a spouse dies, regardless of whether the estate appears to be under the exemption threshold.
Income Tax Considerations in Estate Planning
The importance of income tax basis step-up at death cannot be overstated. Section 1014 provides that most assets passing through a decedent's estate receive a step-up in basis to fair market value at death, eliminating built-in capital gains for heirs if the assets are sold immediately after death. Especially with rental real estate, the step up can also bring beneficial depreciation benefits. Note that many deferred tax accounts (ex. Annuities, IRAs and retirements) do not enjoy similar step-ups.
Example: If a client owns stock purchased for $1 million that is worth $5 million at death, the heirs receive a step-up in basis to $5 million, eliminating the $4 million capital gain if the stock is sold immediately.
If assets are gifted during life, the recipient generally receives the donor's basis, potentially passing significant build in gains (and related income tax obligations) to the heirs. It is crucial to consider the impact of income taxes on lifetime gifts versus bequests. Existing trust and estate structures need to be revisited to identify opportunities to enhance both estate and income tax outcomes with the higher exemption amounts.
Roth IRA Conversions: Strategies and Cautions
Roth IRA conversions involve moving funds from a pre-tax retirement account to a Roth IRA, triggering current income tax but allowing future tax-free growth and withdrawals, and eliminating required minimum distributions. Financial advisors often recommend Roth conversions to high-net-worth clients who can benefit from accelerating income tax liability and satisfying the tax obligation with non-IRA assets. It is essential to consider the potential downsides of accelerating income taxes, such as the risk of future legislative changes and possibility that future medical costs could shelter income.
Additionally, a new rule allows for the conversion of unused 529 plan funds to a Roth IRA for the same beneficiary, providing an additional planning tool for clients with leftover education savings.
Advanced Trust Structures and Gifting Strategies
Various advanced estate planning tools, including grantor trusts, irrevocable trusts, spousal lifetime access trusts (SLATs), grantor retained annuity trusts (GRATs) and charitable trusts can be utilized to leverage and expand the exclusion and to provide intended benefits to a spouse or heirs.
Conclusion
Effective estate planning requires a comprehensive approach that integrates income tax considerations, strategic gifting, and advanced trust structures. By evaluating current laws and potential future changes, you can create a plan that maximizes benefits for your heirs and adapts to evolving circumstances. Our team is here to help you navigate these changes and optimize your estate planning strategies.
Thomas J. Taricani, CPA/ABV, CVA, CEPA, is a principal of Boyer & Ritter. His specializations include formulation and implementation of succession and estate plans, and preparation of business valuations of closely held businesses for use in succession, estate planning, and various litigation engagements. Contact Tom at 814-234-6919 or ttaricani@cpabr.com.