Estate Planning When Estate Tax Isn’t a Concern

Key Takeaways:  

• Recent estate tax law changes have raised exemption amounts, eliminating estate taxes for most taxpayers. 
• Trusts provide flexible asset protection and tax benefits; non-grantor trusts can maximize deductions and exclusions. 
• Basis step-up and ongoing review of beneficiary designations are crucial for minimizing future taxes and maintaining asset protection. Estate planning should remain adaptable to tax law changes and evolving personal circumstances. 

The Tax Cuts and Jobs Act (TCJA) doubled the federal gift and estate tax exemption from $5 million to $10 million, adjusted for inflation, for transfers made after December 31, 2017, and before January 1, 2026. Because of this sunset date, practitioners advised their clients to take full advantage of this “use it or lose it” bonus exemption. Taxpayers who utilized their full exemption amount before January 1, 2026, could remove significant wealth from their estate without the risk of a “claw back” of gift and estate tax when the exemption reverted to pre-TCJA levels in 2026.  

However, the One Big Beautiful Bill Act (OBBBA) increased the gift and estate tax exemption to $15 million ($30 million for married couples) in 2026, with annual inflation adjustments beginning in 2027. Under current law, only a small fraction of U.S. taxpayers will ever face the estate tax. So, the question now becomes: Does estate planning still matter when estate taxes aren’t an issue? 

Income Tax Planning Opportunities 

Taxpayers who would have been subject to gift and estate tax if the exemption had reverted to pre-TCJA levels may have made lifetime gifts to fully utilize their increased exemption. By doing so, they removed those assets from their taxable estate, allowing those assets to appreciate outside of their estate. This may have involved creating trusts for the benefit of a spouse and/or descendants. A common type of trust used in estate planning is the intentionally defective grantor trust (IDGT). This type of trust can incorporate most of the frequently used trust structures, including spousal lifetime access trusts (SLATs), irrevocable life insurance trusts (ILITs), and dynasty trusts.  

In this regard, “defective” refers to the disconnect between the estate tax and income tax treatment of the trust. The assets owned by the trust are excluded from the grantor’s estate, while the income is included on the grantor’s personal income tax return. A reasonable person may question the benefit of gifting assets only to continue to pay tax on the income earned by those assets. By having the grantor pay the income tax instead of the trust, the assets inside the trust continue to grow, while the grantor reduces the size of their taxable estate by the amount of tax paid. The grantor is essentially making tax-free gifts to the beneficiaries of the trust without using any of his or her exemption.  

Grantor vs. Non‑Grantor Trust Planning 

An opportunity may exist for taxpayers who won’t be subject to the estate tax under current law by toggling off grantor trust status of their IDGTs. There are several provisions which may cause a trust to be treated as a grantor trust. If a grantor chooses to relinquish these powers, the trust will be treated as a non-grantor trust. Non-grantor trusts pay tax on income earned, though they are subject to the highest federal income tax bracket of 37% at only $16,000 of taxable income. However, distributions made from a non-grantor trust pass on taxable income to the beneficiaries. If the beneficiaries of the trust are subject to a lower income tax rate (and not subject to the kiddie tax on investment income), a tax savings can be created in aggregate between the trust and its beneficiaries. 

Leveraging SALT Deduction Caps Through Trust Planning 

The OBBBA also increased the state and local tax (SALT) deduction limitation from $10,000 to $40,000 beginning in 2025, with 1% annual increases through 2029, at which point it will revert to $10,000. Non-grantor trusts can benefit from this increased cap as well. With a grantor trust, any state or local taxes are passed on to the grantor, where they are subject to the grantor’s SALT limit. A non-grantor trust is eligible for its own $40,000 cap separate from the grantor. Additional non-grantor trusts may be used to take advantage of the cap on a per-trust basis, provided the primary beneficiary of each trust is different. 

Qualified Small Business Stock Opportunities in Trusts 

Similarly, multiple non-grantor trusts may be used to take advantage of the gain exclusion available on qualified small business stock. Each trust for the benefit of a separate primary beneficiary is eligible for a gain exclusion of up to the greater of 10 times basis or $15 million. 

Basis Planning: Preserving the Step-Up 

The basis of an asset included in the estate of a decedent is adjusted to the value of that asset at the time of the decedent’s death. This is often referred to as the “step-up in basis” (although the basis adjustment may instead result in a step-down if the value has declined to below the basis).  

Assets outside of a decedent’s estate are not eligible for this basis adjustment. With the federal estate tax rate of 40% vs. a maximum federal capital gains tax rate of 23.8% (including the net investment income tax), the trade-off of losing the basis step-up can be significantly outweighed by the estate tax savings.  

If estate tax isn’t a concern, it may be more beneficial to leave assets in the estate until death (assuming no other reasons to keep assets out of the estate, such as Medicaid planning). Even if an estate tax return isn’t required, basis is still adjusted to the date of death value, eliminating all appreciation that would be subject to capital gains taxes upon sale by the beneficiaries of the estate. 

If the trustee has the discretion to distribute principal to a beneficiary for any purpose, it may be beneficial to distribute appreciated assets to that beneficiary with the intent to hold those assets in their name until death. Assuming the assets in the trust are outside of the beneficiary’s estate, no basis adjustment is available if those assets remain in trust at the time of the beneficiary’s death. 

Upstream Planning as a Basis Strategy 

“Upstream planning” is a lesser used but still powerful basis planning tool available if family members of the generation older than an individual won’t be subject to the estate tax. For example, taxpayers may gift property to their parent who holds the assets until their death. The original owner will inherit those same assets upon the parent’s death. If the parent owned those assets for more than one year, the basis is adjusted to the date of death value, eliminating the capital gains tax that would be owed by the original owner upon sale. 

Additional Estate Planning Considerations 

As referenced earlier, married couples have twice the estate exemption vs. that of single taxpayers. Any exemption unused by the first spouse to die (the deceased spousal unused exclusion, or DSUE) can be added to the exemption available to the surviving spouse. This isn’t automatic, however. For the spouse to add the DSUE to their own exemption amount, a portability election must be made on the federal estate tax return of the first spouse to die. It is often advisable to file an estate tax return even if estate tax isn’t owed to claim the DSUE, as future laws may be passed that reduce the estate exemption. Alternatively, the surviving spouse may come into an unexpected windfall or inheritance, increasing the size of their estate beyond the exemption. 

Asset protection will always remain an important consideration in estate planning. Even if estate tax isn’t a concern, estate planning can provide significant value by properly sheltering assets from creditors or lawsuits. 

Beneficiary designations should be reviewed periodically, and as part of any estate planning update or conversation. Retirement accounts, life insurance policies, etc., should be reviewed to check that the person named as the beneficiary of those assets is still the same person the owner wishes to inherit those assets. 

“Permanent” May Not be Permanent 

Although the gift and estate tax exemption has been increased to $15 million, it remains subject to potential reduction by a future Congress. The planning opportunities created by the increased exemption should be carefully evaluated in conjunction with the risk of a law change. While these opportunities may be a homerun for an individual in poor health or later in life, younger individuals in good health may be setting themselves up for unintended consequences and additional estate tax.  

As always, incorporating flexibility into the estate plan is key. We can help.