1. Use It or Lose It
For 2025, the estate and gift tax exclusion amount is $13.99 million. Unless Congress enacts legislation to extend the current law, the exclusion amount will be approximately 50% of that amount (indexed for inflation) on January 1, 2026. Estimates suggest that the 2026 exclusion amount will be approximately $7 million. In 2012, the last time the exclusion amount was set to decrease, attorneys found it difficult to accommodate all requests for new plan documents. Therefore, if you intend to take advantage of the increased exclusion amount, consider avoiding the year-end 2025 rush. Take steps now that will allow you to use the increased exclusion amount. Prepare documents today to receive gifts in the future, then monitor Congress’ actions. If it looks like the exclusion amount will decrease, you will be prepared to make the necessary transfers without having to compete for your attorney’s attention in 2025.
2. Annual Giving
For 2025, the gift tax annual exclusion is $19,000. You can give this amount to any number of people and the gift will be entirely excluded from the gift tax. Together, you and your spouse can give $38,000 to each person in 2025. Both spouse’s can apply their annual exclusion amounts, even if only one spouse makes the gift, but to do that the spouses must file gift tax returns electing to do so. Annual exclusion gifts entirely remove the assets (not just the appreciation thereon) from your gross estate (and the federal estate tax). Make these gifts early in the year because (to state the obvious) you can’t make them after you die. Remember, to qualify 2 for the annual exclusion, the gift must be immediately available to the recipient. When making gifts in trust, be sure the beneficiary can immediately access the gift (for example, by using a Crummey demand power). In addition to annual exclusion gifts, also consider paying tuition for your children and grandchildren directly to educational institutions, as well as paying their medical expenses directly to health care providers. There is no limit on the amount of those payments, they are not counted against your annual exclusion amount and they are also excluded from the gift tax and your gross estate.
3. Life Insurance Policy Review
Like any financial asset, you should review your life insurance policies regularly to see if they are performing as expected. This is particularly true of policies that invest their internal value in mutual fund type investments or index fund type investments. Review traditional whole life policies, too, as there may be significant cash build up in the policy that is not being used efficiently. For underperforming policies or whole life policies with excess cash build up, consider exchanging the policy for a new policy using a tax-free exchange. Also, review term life policies so that you know when the term ends, and when conversion rights (if any) will expire. A PNC Private Bank® Insurance Strategist can help you review your policies.
4. Planning with Interest Rates
Certain planning techniques work better in a high interest rate environment, while others work better in a low interest rate environment. When preparing an estate plan, consider that charitable remainder trusts and qualified personal residence trusts perform better while interest rates are high, while grantor retained annuity trusts (GRATs), charitable lead trusts and sales to defective trusts perform better when interest rates are low.
5. Basis Planning
Generally, subject to exceptions, the basis of an asset owned by a decedent or included in the value of a decedent’s gross estate for federal estate tax purposes (and subject to the federal estate tax) receives a new basis equal to the fair market value of the asset on the decedent’s date of death or the alternate valuation date. (Income in respect of a decedent, such as individual retirement accounts and qualified plans do not receive a new basis.) Assets owned by an irrevocable trust, the value of which is not included in a decedent’s gross estate, would (generally) not receive a new basis. Assets that have been held in trust for some time may have very low bases compared to their market values, resulting in large unrealized capital gains. If a trust beneficiary has unused estate tax exclusion, consider modifying the trust so that its value up to the beneficiary’s unused exclusion amount is included in that beneficiary’s gross estate when the beneficiary dies (also, select the lowest basis assets for this inclusion).
A similar principle can apply to grantor trusts. The grantor of an intentionally defective grantor trust pays federal (and possibly state) income tax on the trust’s income, but the value of the trust is excluded from the grantor’s gross estate (and is not subject to estate tax). Often, to create a grantor trust, the person who created and funded the trust retains the power to exchange assets in the trust for other assets of equivalent value. If a grantor trust has appreciated assets, before the grantor dies, consider exchanging the trust’s appreciated assets for the grantor’s cash or other high basis assets. When the grantor dies, because the grantor now owns the low-basis assets, the unrealized capital gains in the assets will be eliminated as the assets receive a new basis equal to their market value. If the grantor lacks sufficient cash to swap assets, consider borrowing to fund the exchange.
6. Income Tax Planning
Simple trusts are required to distribute their income each year and do not distribute principal. On the other hand, complex trusts may or may not distribute income and principal each year (capital gains, while taxed as income are usually allocated to trust principal). Income distributed from a trust to the extent of distributable net income (DNI) is included in the gross income of the trust’s beneficiaries who receive that income, and those beneficiaries pay the income tax on it. A trust pays income tax on the income it retains. Trusts generally reach the top marginal federal income tax rates at lower income levels than individuals. For example, in 2025, a trust will pay ordinary income tax at the top marginal rate of 37% on taxable income that exceeds $15,650. Contrast that to a married individual filing a joint income tax return who pays income tax at the top marginal rate of 37% on taxable income that exceeds $751,600. With respect to capital gains tax, trusts reach the 20% rate when taxable income exceeds $15,900, while a married individual filing a joint return reaches the 20% rate when taxable income exceeds $600,050. (Some states also impose income taxes which are not considered here.)
When considering the combined income tax burden of a trust and its beneficiaries, distributing income each year to the trust’s beneficiaries (rather than accumulating income in the trust) may produce a lower overall income tax liability. Of course, it is not always possible or advisable to distribute income to a trust’s beneficiaries. For example, a trustee (unless required to do so by the terms of the trust) would not want to distribute trust income to a beneficiary who is a minor, is suffering from addiction, or faces substantial creditors’ claims. Also, a trustee may prefer to accumulate income in a trust that is exempt from the generation-skipping transfer tax, suffering an income tax today in exchange for potential future estate tax savings.
7. Take Advantage of Powers of Appointment
Over time, family circumstances can change. People are born, others die. Children grow up, marry, have children of their own. Wealth is earned, spent, or squandered. Not only do family circumstances change, but laws can also change. Consider how tax law has changed over the years. Although in some states it has become possible to change an irrevocable trust through non-judicial settlements or decanting, including a power of appointment in the terms of a trust when it is created can allow a beneficiary (or other power holder) to alter a trust as permitted by the power. A power of appointment is a right that the creator of a trust confers upon another person (the power holder) to direct the disposition of specified property. The creator of a power of appointment sets the terms as to how the power can be exercised and the steps that the power holder must follow to exercise the power. If the power holder does not comply with the requirements of the power of appointment, its exercise could be void.
When reviewing your plans, be sure to review any trusts over which you have a power of appointment. You may wish to exercise the power to alter the trust to fit new or changed circumstances. Creating a power of appointment in a new trust, or exercising (or not exercising) a power of appointment in an existing trust can have tax consequences and impact how beneficiaries receive trust property. Be sure to consult an experienced attorney when considering creating, exercising or not exercising a power of appointment.
8. Review Your Documents
Change is the only constant in life. Accordingly, it is prudent to review your plan documents from time to time to see if circumstances have changed in a way that would impact your plan. Perhaps a family member has been born, or one has died. Perhaps a child or grandchild has developed health or other issues. Perhaps the person you asked to serve as executor or trustee has moved away or no longer has the capacity to do the job. These and other changes in circumstance too numerous to mention here should cause you to consider updating your plan documents. Even if you have created an irrevocable trust, some state laws allow them to be modified. Be sure your documents are up-to-date so that your wishes are fulfilled.
9. State Law Matters
Laws can vary greatly from state-to-state. For example, some states have high personal income tax, while some have no personal income tax. Some require trusts to have an ending date, while others allow trusts to last “forever”. When planning, consider which state’s law would help you best accomplish your goals. For example, even if you live in a state with a high tax rate, it may be possible to reduce state income tax by creating and funding trusts in a state with favorable trust laws, like Delaware. Be sure to seek legal advice in both your home state and the state where you intend to create the trust to understand how both states’ laws would apply to your specific circumstances.
10. Don't Go It Alone
Successful people have support networks, groups of professionals, friends, business associates and others with whom they can discuss ideas, plans and goals. Estate and financial planning are no different. PNC Private Bank has professionals who can work with your legal, tax and other advisors to help you achieve your personal and financial goals. To access any of PNC’s resources, contact any member of your PNC team.
