Estate Tax Planning

What is the federal estate tax?

• The federal estate tax is generally imposed on all property in which you have an interest at the time of your death, including your house, bank and brokerage accounts, life insurance, IRAs and family businesses.
• You can pass an unlimited amount of property to your spouse free of tax under the unlimited marital deduction.
• However, any unconsumed property still in the spouse’s estate upon that spouse’s death will then be subject to the tax.
• The federal estate tax “exclusion amount” is currently $13.61 million, but under current law will drop to approximately $7 million on Jan. 1, 2026.
• Under current law, the federal estate tax rate is 40 percent on property above the estate tax exclusion amount.
• Changes in the estate tax laws can occur rapidly on the federal and state level. It is essential that you seek advice on your specific situation. Good planning can reduce, or, in some cases, eliminate, the federal estate tax.

What is a credit shelter trust? What is portability?

A credit shelter trust (also called an “A-B trust” or a “family trust”) takes advantage of each spouse’s exclusion amount, enabling a couple to pass approximately $27,220,000 ($13,610,000 x 2 people) to children free of federal estate tax while sheltering later appreciation from the tax.

This is how it works. Upon the first spouse’s death, a “credit shelter” trust (the “B” or “Family” or “bypass” trust) is estab­lished for the ultimate benefit of nonspouse beneficiaries (typically, children, nieces or nephews). It is set up in an amount equal to that year’s exclusion amount.

By definition, there is no estate tax on that trust because it is sheltered by the estate tax exclusion amount then in effect. The remainder of the client’s estate goes into a marital (or “A”) trust for the surviving spouse or is distributed directly to him or her. There is no estate tax on that portion of the trust at the first spouse’s death. This is because that trust is covered by the unlimited marital deduction.

The credit shelter trust typically holds the assets for the surviving spouse’s lifetime. He or she can use the assets in the credit shelter trust if needed for support or medical care. Upon the surviving spouse’s death, the assets remaining in the credit shel­ter trust – including all appreciation on them – pass to the children (or other beneficiaries) free of estate tax. In addition, at the second spouse’s death, the second spouse’s own exclusion amount will be used against his or her own assets. Thus, both spouses’ exclusion amounts will be used.

In some circumstances, a client’s need for a credit shelter trust can be reduced. The estate of the second spouse to die is now permitted to use federal estate tax exclusion that was not used in the first spouse’s estate by relying on “portability.” Portabil­ity only applies, however, if the estate of the first spouse timely files a federal estate tax return to elect to preserve or “port” the first spouse’s excess exclusion amount to the surviving spouse for his or her use. If no estate tax return is filed, then porta­bility is not available for the surviving spouse.

Portability would not take full advantage of the exemptions in many cases. Additionally, asset protection for spouse and chil­dren and tax sheltering of appreciation on the first spouse’s assets can be lost by relying on portability. Therefore, whether a credit shelter trust or other potentially tax-advantaged trust makes sense should be analyzed on an individual basis.

What are some other ways to reduce estate tax?

• The federal gift tax is imposed on gifts you make during your lifetime above the current lifetime exemption amount of $13.61 million. However, you can make gifts within the “annual” gift tax exclusion amount ($18,000 in 2024, but indexed to inflation) free of the gift tax and without using your “lifetime” exemption. These gifts remove assets from your estate, saving at least 40 cents on the dollar in estate taxes at current rates. You also can make unlimited payments for tuition or certain medical expenses if you pay the school or medical provider directly.
• Irrevocable Life Insurance Trusts (ILITs) remove life insurance policies from your estate while making the proceeds available for a spouse and children after your death.
• Qualified Personal Residence Trusts (QPRTs), Grantor Retained Annuity Trusts (GRATs) and other gifting techniques enable you to pass an asset, such as a residence or stock in a family business, to your heirs at a value frozen on the day you transfer it. The appreciation escapes estate taxation.

Are there state estate and inheritance taxes?

• Many states impose their own estate or inheritance tax. Ohio, Indiana, Michigan, Minneapolis and Florida do not have estate or inheritance taxes, but other states do, including Illinois and Kentucky. We can work with you to reduce or, in some cases, avoid these taxes.

What are some options for charitable giving?

• Charitable giving can benefit the causes you believe in with no estate tax on amounts you leave to qualifying charities.
• You can even benefit your family and your favorite charities by establishing a Charitable Remainder Trust (CRT), which makes payments to family members for a period of time and the remainder to charities you designate. You can also benefit both family and charities with a Charitable Lead Trust (CLT). A CLT provides payments to a charity for a period of time, with the remainder to your family.
• Foundations — private ones as well as funds established with community foundations — can enable you and your children to come together in making charitable gifts across the generations.