In 2010, legislators passed the 2010 Tax Act, which included new gift, estate, and generation-skipping transfer (GST) tax provisions. Increasing to $5 million in 2011 (indexed annually for inflation) and in 2018, the Tax Cuts and Jobs Act doubled the basic exclusion amount to $11.18 million (indexed annually for inflation).
Now, in 2023, the exclusion is $12.92 million. If this trend appears to be encouraging and for those of you who had their plans done in the last 5 years, you may have gotten accustomed to the ceiling being raised to accommodate wealth accumulation and transfer. However, in 2025, this trend is not only being halted, but reverted to a level prior to 2018; nearly a 50% decrease!
Do you understand these new rules? How do they impact your current estate plan?
Let’s explore some of the key areas that you’ll want to have information about before proceeding with your strategy.
Exclusion portability
Under prior law, the gift and estate tax exclusion was effectively "use it or lose it." In order to fully utilize their respective exclusions, married couples often implemented a bypass plan: they divided assets between a marital trust and a credit shelter, or bypass, trust (this is often referred to as an A-B trust plan). Under the recent Tax Acts, the estate of a deceased spouse can transfer to the surviving spouse any portion of the basic exclusion amount it does not use. The surviving spouse's applicable exclusion amount, then, is increased and the surviving spouse can use for lifetime gifts or transfers at death.
That means the basic exclusion amount of $12.92 million per taxpayer allows a married couple to pass on up to $25.84 million gift and estate tax free in 2023.
Does this make the A-B trust obsolete? Not exactly! A few reasons to consider A-B trusts
- The assets of the surviving spouse, including those inherited from the deceased spouse, may appreciate in value at a rate greater than the rate at which the basic exclusion amount increases. This may cause assets in the surviving spouse's estate to exceed that spouse's available applicable exclusion amount. On the other hand, appreciation of assets placed in a credit shelter trust will avoid estate tax at the death of the surviving spouse.
- The distribution of assets placed in the credit shelter trust can be controlled. Since the trust is irrevocable, your plan of distribution to particular beneficiaries cannot be altered by your surviving spouse. Leaving your entire estate directly to your surviving spouse would leave the ultimate distribution of those assets to his or her discretion.
- A credit shelter trust may also protect trust assets from the claims of any creditors of your surviving spouse and the trust beneficiaries. You can also include a spendthrift provision to limit your surviving spouse's access to trust assets, thus preserving their value for the trust beneficiaries.
But what about A-B Trusts with formula clause?
If you currently have an A-B trust plan, it may no longer carry out your intended wishes because of the increased exclusion amount. Many of these plans use a formula clause that transfers to the credit shelter trust an amount equal to the most that can pass free from estate tax, with the remainder passing to the marital trust for the benefit of the spouse. For example, say a spouse died in 2003 with an estate worth $12.92 million and an estate tax exclusion of $1 million. The full exclusion amount, or $1 million, would have been transferred to the credit shelter trust and $11.92 million would have passed to the marital trust. Under the same facts in 2023, since the exclusion has increased, the entire $12.92 million estate will transfer to the credit shelter trust, to which the surviving spouse may have little or no access.
Wealth transfer strategies through gifting
Because of the larger exclusion and lower tax rates, this is a unique time of unprecedented opportunities for gifting.
By making gifts up to the exclusion amount, you can significantly reduce the value of your estate without incurring gift tax. In addition, any future appreciation on the gifted assets will escape taxation. Assets with the most potential to increase in value, such as real estate (e.g., a vacation home), expensive art, furniture, jewelry, and closely held business interests, offer the best tax-savings opportunity.
Gifting may be done in several different forms. These include direct gifts to individuals, gifts made in trust (e.g., grantor retained annuity trusts and qualified personal residence trusts), and intra-family loans. Currently, you can also employ techniques that leverage the high exclusion to potentially provide an even greater tax benefit. For example, creating a family limited partnership may also provide valuation discounts for tax purposes.
For high-net-worth married couples, gifting to an irrevocable life insurance trust (ILIT) designed as a dynasty trust can reduce estate size while providing a substantial gift for multiple generations (depending on how long a trust can last under the laws of your state).
Before implementing a gifting plan, consider a few issues:
- Do you anticipate that your estate will be subject to estate taxes at your death?
- Is reducing estate taxes more important to you than retaining control over the asset?
- Does the transfer tax savings outweigh the potential capital gains tax the recipient may incur if the asset is later sold? (The recipient of the gift gets a carryover basis (i.e., your tax basis) for income tax purposes. On the other hand, property left to an individual as a result of death will generally receive a step-up in cost basis to fair market value at date of death, resulting in potentially less income tax to pay when such an asset is ultimately sold.
- In addition to this opportunity to transfer a significant amount of wealth tax-free, it's important to remember that you can still take advantage of the $17,000 in 2023 per person, per year annual gift tax exclusion. Also, gifts of tuition payments and payment of medical expenses (if paid directly to the institutions) are still tax-free and can be made at any time.
Looking Forward
Review your plan, adjust and consider the 2025 reduction a significant catalyst to rethink your strategy.