1. Use It or Lose It
For 2024, the estate and gift tax exclusion amount is $13.61 million. Unless Congress acts, on January 1, 2026, the exclusion amount will be approximately 50% of that amount (indexed for inflation). Published estimates suggest that the 2026 exclusion amount will be between $6.4 and $8.4 million. In 2012, the last time the exclusion amount was set to decrease, attorneys found it difficult to accommodate all requests for new plan documents. Therefore, if you intend to take advantage of the increased exclusion amount, consider avoiding the year-end 2025 rush. Take steps now that will allow you to use the increased exclusion amount. Prepare documents today to receive gifts in the future. Then, monitor Congress’ actions. If it looks like the exclusion amount will decrease, you will be prepared to make the necessary transfers without having to compete for your attorney’s attention in 2025. Of course, if you are able, it makes sense to use your exclusion now, as appreciation from the date of the gift will be removed from your gross estate and escape federal estate tax.
2. Annual Giving
For 2024, the gift tax annual exclusion is $18,000. You can give this amount to any number of people and the gift will be entirely excluded from the gift tax. Together, you and your spouse can give $36,000 in 2024. These gifts entirely remove the assets (not just the appreciation thereon) from your gross estate (and the federal estate tax). Make these gifts early in the year because (to state the obvious) you can’t make them after you die. Remember, to qualify for the annual exclusion, the gift must be immediately available to the recipient. When making gifts in trust, be sure the beneficiary can immediately access the gift (for example, by using a Crummey demand power). In addition to annual exclusion gifts, also consider paying tuition for your children and grandchildren directly to educational institutions, as well as paying their medical expenses directly to health care providers. Those payments would also be excluded from the gift tax and also from your gross estate.
3. Life Insurance Policy Review
Like any financial asset, you should review your life insurance policies regularly to see if they are performing as expected. This is particularly true of policies that invest their internal value in mutual fund type investments or index fund type investments. Review traditional whole life policies, too, as there may be significant cash build up in the policy that is not being used efficiently. For underperforming policies or whole life policies with excess cash build up, consider exchanging the policy for a new policy using a tax-free exchange. Also, review term life policies so that you know when the term ends, and when conversion rights (if any) will expire. A PNC Private Bank® Insurance Strategist can help you review your policies.
4. Higher Interest Rates, Other Plans
Interest rates have increased over the last two years, yet they remain close to historic norms and far from historic highs. Certain planning techniques work better in a high interest rate environment, while others work better in a low interest rate environment. When preparing an estate plan, consider that Charitable Remainder Trusts and Qualified Personal Residence Trusts perform better while interest rates are high, while Grantor Retained Annuity Trusts, Charitable Lead Trusts and Sales to Defective Trusts perform better when interest rates are low.
5. Estate Freezes Still Work
Even though interest rates have increased over the last two years, they are not so high as to automatically rule out using a Grantor Retained Annuity Trust or a Sale to a Defective Trust. Interest rates are far from historic highs. For a freezing transaction to succeed (passing wealth to beneficiaries with little or no gift tax or exclusion use), asset growth need only exceed the required interest rate. Doing an estate freeze with assets having depressed values or that are likely to experience rapid growth (such as pre-IPO or pre-sale stock) may still provide tremendous estate and gift tax savings to your family.
6. Basis Planning – Part 1
Generally, subject to exceptions, the basis of an asset owned by a decedent or included in the value of a decedent’s gross estate for federal estate tax purposes (and subject to the federal estate tax) receives a new basis equal to the fair market value of the asset on the decedent’s date of death or the alternate valuation date. (Income in respect of a decedent, such as IRAs and qualified plans do not receive a new basis.) Assets owned by an irrevocable trust, the value of which is not included in a decedent’s gross estate, would (generally) not receive a new basis. Assets that have been held in trust for some time may have very low bases compared to their market values, resulting in large unrealized capital gains. If a trust beneficiary has unused estate tax exclusion, consider modifying the trust so that its value up to the beneficiary’s unused exclusion amount is included in that beneficiary’s gross estate when the beneficiary dies (also, select the lowest basis assets for this inclusion). This can be done by giving the beneficiary a general power of appointment over that portion of the trust. By doing this, some (or all) of the unrealized gain inside a trust can be eliminated, with no additional estate tax cost to the beneficiary.
7. Basis Planning – Part 2
Basis Planning – Part 1 describes how an asset’s basis can change when its owner dies, and why it can be beneficial to include some (or all) of the value of an irrevocable trust in its beneficiary’s gross estate. A similar principle can apply to grantor trusts. The grantor of an intentionally defective grantor trust (IDGT) pays federal (and possibly state) income tax on the trust’s income, but the value of the trust is excluded from the grantor’s gross estate (and is not subject to estate tax). Often, to create a grantor trust, the person who created and funded the trust retains the power to exchange assets in the trust for other assets of equivalent value. If a grantor trust has appreciated assets, before the grantor dies, consider exchanging the trust’s appreciated assets for the grantor’s cash or other high basis assets. When the grantor dies, the unrealized capital gains in the assets owned by the grantor will be eliminated as the assets receive a new basis equal to their market value. If the grantor lacks sufficient cash to swapassets, consider borrowing to fund the exchange.
8. Review Your Documents
Change is the only constant in life. Accordingly, it is prudent to review your plan documents from time to time to see if circumstances have changed in a way that would impact your plan. Perhaps a family member has been born, or one has died. Perhaps a child or grandchild has developed health or other issues. Perhaps the person you asked to serve as executor or trustee has moved away or no longer has the capacity to do the job. These and other changes in circumstance too numerous to mention here should cause you to consider updating your plan documents. Even if you have created an irrevocable trust, some state laws allow them to be modified. Be sure your documents are up-to-date so that your wishes are fulfilled.
9. State Law Matters
Laws can vary greatly from state-to-state. For example, some states have high personal income tax (New York, California, New Jersey), while some have no personal income tax (Florida, Texas). Some require trusts to have an ending date (New York), while others allow trusts to last “forever” (Delaware, New Jersey). When planning, consider which state’s law would help you best accomplish your goals. For example, even if you live in a state with a high tax rate, it may be possible to reduce state income tax by creating and funding trusts in a state with favorable trust laws, like Delaware. Be sure to seek legal advice in both your home state and the state where you intend to create the trust to understand how both states’ laws would apply to your specific circumstances. The PNC Delaware Trust Company and the PNC Ohio Trust Company can help you access the favorable trust laws of those states by serving as trustee of your Delaware or Ohio trust.
10. Don't Go It Alone
Successful people have support networks, groups of professionals, friends, business associates and others with whom they can discuss ideas, plans and goals. Estate and financial planning are no different. PNC Private Bank has professionals who can work with your legal, tax and other advisors to help you achieve your personal and financial goals. To access any of PNC’s resources, contact any member of your PNC team.
