January 29, 2025

As we enter 2025, individuals and families should be aware of the latest estate and tax planning updates. The IRS has made inflationary adjustments that impact estate and gift tax exemptions, creating important opportunities for strategic financial and tax planning. Below is an overview of the key changes and planning strategies to consider.

Updated Tax Exemptions and Exclusions:

• Estate and Gift Tax Exemption: The exemption amount has increased to $13.99 million per person in 2025, up from $13.61 million in 2024. The Generation-Skipping Transfer (GST) tax exemption also matches this amount.
• Future Tax Changes: If no legislative action is taken before December 31, 2025, the exemption will revert to pre-2017 Tax Act levels of approximately $7 million per person (adjusted for inflation) on January 1, 2026.
• Annual Gift Tax Exclusion: The amount individuals can gift tax-free has increased from $18,000 in 2024 to $19,000 in 2025. Married couples can gift up to $38,000 per recipient without incurring gift tax liability or needing to file a return.

Estate Planning Strategies to Consider

1. Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust where one spouse gifts assets for the benefit of the other. This allows for asset appreciation outside of the taxable estate while ensuring financial security for the beneficiary spouse. Using the current high exemption, a donor spouse can transfer up to $13.99 million in 2025 tax-free.

2. Intentionally Defective Grantor Trust (IDGT)

An IDGT is a powerful tool for transferring wealth while minimizing estate and income tax liability. It involves:

• Making an initial seed gift to the trust.
• Selling assets to the trust in exchange for a promissory note at the IRS-set interest rate.
• Ensuring future appreciation remains outside the grantor’s estate.
• Allowing the grantor to pay income taxes on behalf of the trust, preserving wealth.

If tax exemptions decrease before 2026, outstanding promissory notes can be converted into tax-free gifts.

3. Intra-Family Loans

Families can leverage lower Applicable Federal Rates (AFRs) to structure intra-family loans or refinance existing ones. These loans offer lower interest rates than commercial lenders and can be used in conjunction with gifting strategies.

4. Charitable Remainder Trusts (CRTs)

A CRT provides income to the donor for a set period before transferring the remaining assets to charity. Benefits include:

• Generating a charitable income tax deduction.
• Deferring or avoiding capital gains tax on appreciated assets.
• Higher interest rates increasing the value passed to charity.

5. Qualified Personal Residence Trusts (QPRTs)

A QPRT allows homeowners to transfer their primary residence into a trust while retaining the right to live there for a specified period. Key advantages include:

• Reducing the taxable value of the home for estate tax purposes.
• Keeping the residence in the family while using minimal gift tax exemption.
• Maximizing benefits in a higher interest rate environment.

Conclusion

With potential tax law changes in 2026, 2025 presents a unique window to take advantage of the current high exemptions. Strategies such as SLATs, IDGTs, intra-family loans, CRTs, and QPRTs provide valuable opportunities to optimize estate and tax planning.