The Tax Cuts and Jobs Act of 2017 (TCJA) brought about substantial changes to the tax landscape, significantly increasing the lifetime estate and gift-tax exemption amounts ($13.61 million for individuals and $27.22 million for married couples). However, these exemption amounts are set to expire on January 1, 2026, and—absent new legislation before then—will revert to approximately $7 million for individuals and $14 million for married couples, subject to inflation adjustments.

This pending reduction creates a “use it or lose it” scenario for individuals and families with taxable estates, and failing to capitalize on the current exemption could result in a substantial financial impact. Given the federal estate tax rate of 40% and an expected exemption reduction of $7 million, this reversion would result in a tax liability of up to $2.8 million per individual or $5.6 million for a married couple transferring their estate to heirs.

The IRS has clarified that benefits used under the current exemption won’t be subject to future reduction or “claw-back,” meaning that proactive estate planning can lock in a permanent tax advantage, making now an opportune time to act.

Planning For Future Wealth
Contrary to common belief, the benefits of estate planning aren’t exclusive to those with massive amounts of assets above $20 million. A couple that doesn’t seem to warrant estate planning help, who have, say, only $10 million, could see their assets grow well beyond the future exemption thresholds when investment returns are compounded over time. Historically, assets, such as those tracked by the S&P 500, have seen an average annual return of 7.3% over the past 30 years. Such a rate of return could double an estate’s value every decade. So estate planning is imperative for those who may not currently exceed the exemption but may in the future.

Sports fans have no doubt heard the famous quote often attributed to hockey legend Wayne Gretzky: “Skate to where the puck is going to be, not where it has been.” The same philosophy applies to estate planning—don’t plan based on where the estate stands today; create a plan for where the estate will likely be in the future.

Strategic Estate Planning For The Affluent
For your clients in higher wealth brackets, specifically those with estates worth more than $20 million, estate planning becomes even more critical as 2026 approaches. The scheduled reduction of the estate and gift-tax exemption underscores the need for meticulous planning, particularly for those whose assets far exceed the current $27.22 million exemption for married couples.

A nuanced approach for a couple with $30 million in wealth involves one spouse fully using their $13.61 million exemption by transferring assets either directly to beneficiaries or into trusts. This maximizes the current exemption of one spouse, ensuring that a significant portion of the estate is protected from future estate tax. The second spouse retains their exemption, which, even after the anticipated reduction, offers another layer of tax shelter. The second spouse could also use a portion of their exemption, thereby removing future appreciation from their estate. This strategy balances the benefits of current tax law with the need for financial flexibility and security.

Regardless of estate value, there are numerous techniques and account structures available to help your clients minimize estate tax consequences. Here’s a summary of the most common ones:

Lifetime And Annual Gifting
As essential tools in the estate planner’s tool kit, these strategies facilitate the transfer of wealth to the next generation while minimizing the estate’s tax exposure. Lifetime gifting removes assets from the estate, potentially shielding them from estate taxes on future appreciation. Concurrently, annual gifting takes advantage of the IRS’s exclusion amount, which is currently $18,000 per recipient ($36,000 per couple), to systematically reduce an estate’s taxable value. Beyond the annual exclusion gifts, direct payments of tuition or medical expenses have no gift-tax limitation at all. Thus, annual gifting offers a methodical approach to estate reduction that can have a significant financial impact on clients over time.

Spousal Lifetime Access Trusts (SLATs)
Spousal lifetime access trusts, also known as SLATs, offer a strategic avenue for one spouse to support the other while also achieving estate tax savings. In this structure, assets are transferred into an irrevocable trust for the benefit of the spouse and possibly other family members. This move effectively removes the assets from the grantor’s estate, diminishing estate tax exposure. The beneficiary spouse can access the trust’s income—and, in certain situations, the principal for needs such as health, education, maintenance or support—without compromising the tax benefits. The grantor also has the option to pay the tax burden on the grantor trust, allowing the trust to grow tax-free and further reduce their future taxable estate. This trust allows for significant asset protection and growth outside the estate, enhancing future financial security for heirs.

Grantor-Retained Annuity Trusts (GRATs)
Using a grantor-retained annuity trust, or GRAT, involves the grantor transferring assets to a trust and retaining the right to receive annuity payments for a predetermined period, typically two to 10 years. At the end of the trust term, any remaining assets pass to the designated beneficiaries (often family members or heirs).

GRATs are particularly effective in low-interest-rate environments or when assets are expected to appreciate substantially. The key advantage of this type of trust is the potential for asset appreciation that exceeds the IRS’s assumed interest rate (found under Section 7520 of the tax code), allowing the excess to pass to beneficiaries free of additional taxes. However, it’s also crucial to note that if the grantor passes away during the trust term, the remaining assets might be included in their estate, potentially negating some of the GRAT’s benefits.

Intentionally Defective Grantor Trusts (IDGTs)
Intentionally defective grantor trusts are very effective tools for transferring wealth, especially for appreciating assets like family businesses or real estate. By designating a trust as “intentionally defective,” the grantor separates the income tax responsibility from the estate and gift-tax implications. This allows the assets within the trust to grow tax-free because of the grantor’s payment of the income taxes, which further reduces the estate size indirectly.

Transferring business or real estate assets to this type of trust in exchange for a promissory note allows the assets to grow outside the grantor’s estate while the trust repays the note with business income. This method effectively moves appreciable assets out of the estate without immediate tax consequences.

Another advantage of the IDGT, like other irrevocable gift trusts, is its “swap power,” which lets grantors swap assets of equivalent value between their personal estates and the trusts. By swapping non-appreciated assets to the trust for appreciated assets, the grantor can actively manage the trust’s holdings to ensure they receive a step-up in basis upon the grantor’s death, which will minimize the capital gains taxes for heirs.

Charitable Remainder Trusts (CRTs)
Charitable remainder trusts are excellent vehicles for supporting charitable causes while providing income and tax benefits for the grantor or other named beneficiaries. By transferring assets into a CRT, the grantor secures an income stream for a term of years (not to exceed 20 years) or for life, with the remainder interest designated to charity at the end of the trust term or at the death of the last beneficiary. Additionally, these trusts offer immediate income tax deductions based on the present value of the remainder interest and potential savings on capital gains taxes, making them attractive options for those with appreciated assets.

Notably, there are two types of charitable remainder trust: the charitable remainder annuity trust (or CRAT) and the charitable remainder unitrust (or CRUT). The CRAT provides beneficiaries with a fixed annual income based on a predetermined percentage (e.g., 7%) of the initial fair market value of the assets. A CRUT provides beneficiaries with a variable annual income based on a predetermined percentage of the trust’s assets, which are revalued annually.

Dynasty Trusts
Dynasty trusts, also known as generation-skipping tax (GST) trusts, are designed for long-term preservation of assets across multiple generations, with the benefit of avoiding 40% estate and generation-skipping transfer taxes with each generational transfer. For example, a grantor establishes an irrevocable trust and transfers assets into it, removing these from his or her taxable estate and taking advantage of the $13.61 million exemption in 2024 (the generation-skipping transfer tax exemption amount is the same as the estate and gift-tax exemption). By electing to use the $13.61 million generation-skipping transfer exemption on the gift, the assets avoid estate taxes that would otherwise be incurred when the assets pass to each future generation. However, special rules apply to the inclusion ratios and applicable fraction formulas, depending on the type of trust receiving the generation-skipping transfer.

Additionally, a dynasty trust can provide income and support to the grantor’s children during their lifetime, while the remaining assets pass to the grandchildren or other beneficiaries upon the children’s deaths. The grantor can impose certain restrictions, such as limiting access to the funds until a beneficiary graduates from college. Beyond tax benefits, generation-skipping tax trusts provide a shield for assets against potential future liabilities, such as divorce settlements among beneficiaries, ensuring that the wealth remains within the family.

Irrevocable Life Insurance Trusts (ILITs)
Irrevocable life insurance trusts serve as a crucial tool for estate liquidity and preserving family wealth. When a life insurance policy is owned within an irrevocable trust, the proceeds from the policy aren’t included in the estate, and thus they’re not subject to estate taxes. This ensures beneficiaries receive the full amount of the life insurance benefit tax-free, which provides essential liquidity for estate obligations without diminishing an estate’s value.

Typically, ILITs are funded with new life insurance policies so clients can avoid the three-year look-back period associated with the transfer of existing policies. For couples, second-to-die policies within an ILIT offer lower premiums and/or higher coverage given a couple’s longer joint life expectancy. Premiums can be paid through gifts to the trust, typically classified as “present interests” to qualify for the annual $18,000 gift-tax exclusion.

Financing life insurance policy premiums is a very effective method of paying for a large up-front premium or a series of premium payments for five to 10 years. A loan from a bank or premium financing company allows the policy owner to borrow the cash necessary to pay the insurance premium. By borrowing, the grantor doesn’t have to liquidate assets, which means they can avoid an unfavorable taxable capital gains event. It also leaves appreciating assets in the portfolio available for other higher yielding investments. The loan is repaid either before the grantor’s death out of the cash values of the life insurance or out of the life insurance proceeds when the grantor dies, leaving the interest paid on the debt as the only cost of setting up the ILIT.

Family Limited Partnerships (FLPs)
By transferring ownership interests in closely held family businesses or investments to family limited partnerships, individuals can leverage minority ownership and non-voting valuation discounts as high as 35%, effectively reducing the taxable value of their estates even further. FLPs are used to facilitate family business succession planning and asset protection, allowing for wealth transfer among families.

Proactive Planning In Times Of Uncertainty
Beyond the higher estate and gift-tax exemptions, many other favorable tax changes are also set to expire under the Tax Cuts and Jobs Act at the end of 2025. Also sunsetting will be the lowered marginal tax rates, expanded tax brackets, and the 20% qualified business income deduction for pass-through entities.

While the future of the act’s provisions remains uncertain, proactive and strategic estate planning can help. An advisor’s planning strategies may include the optimized timing of income and deductions; retirement contributions; Roth conversions; loss harvesting; charitable giving; and perhaps a re-examination of a client’s business structures, recognizing that the 21% C corporation tax rate was made permanent by the legislation. Additionally, integrating lifetime gifting, trusts and family limited partnerships into your estate plan can offer robust protection against shifting tax policies and help curb the impact of expiring tax provisions and potentially higher tax rates after 2025.

Of course, it’s imperative for CPAs, financial advisors, tax professionals and estate attorneys to ensure these strategies align with their clients’ broader financial goals, so they can maximize the benefit to their heirs, minimize tax liabilities, and secure and preserve a legacy for generations to come.

Daniel F. Rahill, CPA/PFS, JD, LL.M., CGMA, is a wealth strategist at Wintrust Wealth Management. He’s also a former chair of the Illinois CPA Society Board of Directors and is a current officer and board member of the American Academy of Attorney-CPAs.