iAny estate planning attorney will tell you that certain years stick out in their professional lives more than others. Here are some recent examples:
- 2010: The year that estates of billionaires—including, most famously, New York Yankees owner George Steinbrenner—were administered without paying a penny of federal estate tax.
- 2012: The year the affluent made gifts to capture gift tax exemptions—then, at $5.12 million—before a scheduled reduction to $1 million.
- 2020: An election year where wealthy individuals feared record-high exemptions scheduled to remain in effect for five more years might abruptly be slashed with little notice.
In the final months of these years, scores of individuals emerged hoping to take advantage of tax benefits before it became too late. To accommodate, members of the trusts and estate community worked around the clock to finalize trust agreements, engage valuation companies, and draft documents transferring stock in closely held companies to irrevocable trusts. But many clients were frustrated when they learned that optimizing these tax benefits usually requires more than writing a check and signing a trust agreement, and can take well more than a month to craft and effectuate.
We expect 2025 to be another year for the estate planning record books. Absent legislative action, the federal estate, gift, and generation-skipping transfer (“GST”) tax exemptions—currently at $13,610,000 per individual—will be reduced by approximately one-half. Undoubtedly, scores of individuals sitting on the sidelines waiting to see if the tax laws will actually change this time, will emerge in the waning months of 2025 asking trusts and estates practitioners to help them capture these tax benefits.
And, although we will of course make every effort to comply, this article explains why you should not be one of the latecomers to this gift-giving party. Plan to capture your exemption now, when there is sufficient time to implement a gifting plan that uses exemptions in the most tax-efficient manner.
Gifting Is Usually More than Writing a Check
Ideal gifting is rarely as simple as writing a check. Consider Samantha and Steve, a hypothetical wealthy couple in their 60s with $60 million of assets, which consist of a closely held business ($25 million), real estate ($25 million), securities ($8 million), and cash ($2 million).
We can of course help this family capture their exemption (a combined $27+ million for a married couple), but it won’t be as simple as writing a check. Sure, on the last day of 2025, Samantha could write a check to her son, Adam, for $2 million, and Steve could retitle his brokerage account in the name of his daughter, Annie, but that wouldn’t even capture half of their exemption and it would leave this couple without any liquid assets or cash to spend.
The better plan would be for Samantha and Steve to make gifts of all or a portion of the closely held company or real estate. With proper planning—and time—these gifts could be structured to minimize the impact on this couple’s liquidity or their ability to reside in their homes for years to come.
You Can’t Leverage without Time to Plan
Wealthy individuals benefit from leveraging their exemptions. This means using your exemption to gift more than $13.6 million in assets. How do we help clients achieve this result? By sticking to the central principle of the gift tax law that treats the value of a gift based on the amount a “willing buyer and seller” would pay—and not the actual value of the asset the individual transfers.
For example, suppose you want to purchase a house with a fair-market value of $20 million but it comes with a catch: the owner will only sell it if you permit him to continue residing there for ten more years. Any reasonable buyer would only purchase that house at a steep discount from its $20 million actual value.
How does this apply to estate planning? Bill (another hypothetical client) creates a special type of irrevocable trust, known as a qualified personal residence trust, which provides Bill with the exclusive right to use his $20 million home for seven years before the home becomes the property of his nephew, Neal. Using the “willing buyer and seller” analysis (and certain tax-based calculations), Neal would only pay a fraction of the fair-market value for a house he can’t occupy for seven years, and so Bill’s gift to Neal is heavily discounted from its actual $20 million value.
Similar leveraging is common with closely held businesses by transferring a minority interest—a non-controlling interest would also be discounted by a willing buyer—or adding restrictions to an operating agreement, which may not be meaningful to the family member receiving the gift, but which would reduce the amount an unrelated buyer would pay for a share of that company.
Don’t Ignore Cost Basis
When individuals hastily give assets away, they ignore a significant benefit (often referred to as a “step-up in costs basis”) applied to assets retained until death: the wiping away of all unrealized capital gain. However, this benefit does not apply to assets gifted during life.
For example, imagine an individual is deciding between gifting a brokerage account or a painting, each with a fair-market value of $10 million, but the painting has a basis of $1 million and the brokerage account has a basis of $9 million. The brokerage account would make the better choice for a gift because the painting has a larger amount of unrealized gain that death would wipe away.
The conundrum here, however, is that this individual lives off the income from the brokerage account and could not continue to do so after gifting it to a trust. Is there any way to gift the painting and still wipe away the capital gain on this asset at death?
With proper planning, this would be possible. The individual can gift the art to a trust, which provides that individual with a power to reacquire trust assets by substituting assets of equivalent value. When the timing is right, the individual can reacquire the art with its low basis and transfer to the trust the brokerage account. To achieve the tax benefit, the individual must exercise the power to reacquire prior to death. Otherwise, the art would remain in the trust and would not receive the step-up in cost basis as a result of the individual’s death.
Conclusion
Hopefully, this article has convinced you to get off the sidelines and get into the gifting game now. If you are fortunate enough to be able to consider taking advantage of the current tax laws, waiting to see what happens may limit your ability to do so. With your gifting complete, you may happily ring in 2026 without concern for the reduction of the estate tax benefits it brings with it.
