Navigating Trump’s Tax Overhaul: A Guide to Strategic Estate Planning

Donald Trump’s sweeping tax-and-spending legislation has sent shockwaves through the financial planning world, especially in the realm of estate planning. Both individuals and estate planners must now pay close attention to this new landscape to achieve their tax planning objectives. Let’s dive into the details and explore how you can use these changes to your advantage.

The Power of Sophisticated Estate Planning

With the increased federal estate tax exemption, there are plenty of opportunities to plan for future generations. By leveraging charitable deduction provisions and new income tax planning opportunities, individuals can secure their family’s financial future. But remember, sophisticated planning is the name of the game here.

Understanding the Latest Tax Exemptions

The new legislation has significantly increased exemptions for estate, gift, and generation-skipping transfer taxes. Individuals should actively utilize these exemptions during their lifetime or plan for their use posthumously through a well-drafted will or revocable trust. Starting in 2026, the basic exemption will rise to $15 million per person. When combined, a married couple can effectively shield $30 million from federal estate and gift tax.

Advanced Strategies for Asset Transfer

One sophisticated strategy involves creating irrevocable trusts to strategically remove appreciated assets from an estate. This move can help transfer assets—and their future appreciation—to the next generation with minimal to no gift tax, thanks to the high exclusion amounts.

Formula Gifts: A Clever Approach

For those with hard-to-value assets, formula gifts to irrevocable trusts can dramatically impact their taxable estates. By using a formula to determine the gift’s value, rather than a fixed amount, individuals can protect themselves from IRS audits. This ensures that only the tax-exempt portion of a gift is treated as such, even if the IRS decides to reevaluate the asset’s worth.

Charitable Contributions and Estate Planning

With the new tax law, it’s a good time for families to revisit their estate plans and consider potential strategies with the increased exemption amounts. Estate planners should examine existing gifting trusts, such as spousal lifetime access trusts, to determine if more gifts can be made to utilize the increased exemption.

State-Specific Considerations

For residents of states that impose separate estate or inheritance taxes, it’s crucial to review the language in wills or revocable trusts. A credit shelter trust can help minimize estate taxes and preserve wealth, but be wary of state-specific exemption amounts, which may be lower than the federal amount.

Rethinking Charitable Giving

The tax law has also shifted the landscape for charitable deductions. High-net-worth individuals should evaluate their charitable objectives, as the deduction now caps tax savings based on an assumed 35% income tax rate rather than the actual marginal rate of 37%. Consider accelerating gifts before Dec. 31, 2025, to maximize deductions.

The Role of Non-Grantor Trusts

Irrevocable non-grantor trusts now have a permanent place in the tax planning playbook, offering state and local tax deductions and qualified business income deductions. By shifting income to these trusts, individuals can make the most of these deductions.

Maximizing Deductions with Trusts

For trusts with incomes exceeding $500,000, the SALT deduction will gradually reduce to $10,000. However, creating separate irrevocable non-grantor trusts for beneficiaries allows each trust to claim its own deductions against taxable income.

Individuals should review existing irrevocable trusts to see if modifications are possible or consider establishing new ones to utilize these deductions effectively. In some cases, converting intentionally defective grantor trusts into irrevocable non-grantor trusts may be beneficial.

Conclusion

The new federal tax law brings significant changes to estate, gift, and income tax planning. By evaluating your objectives and employing strategic planning, you can preserve more wealth than ever before. The time is now to take action and ensure your financial legacy is secure for generations to come.

This article reflects the insights and opinions of the authors, Richard J. Miller Jr. and Samantha Lauri, from Hughes Hubbard & Reed’s private client services group.

Image Credit: news.bloombergtax.com