Taxation & Wealth Planning

An estate planning attorney provides vital guidance to help clients understand and navigate the
complex federal, state, and sometimes even local tax implications associated with estate and
gift planning.

1. Estate Taxes

   Estate taxes, often referred to as “death taxes,” are levied on the transfer of an individual’s
   estate after death. In the United States, there is a federal estate tax with a high exemption
   threshold, which is adjusted annually for inflation. In 2025, the federal estate tax exemption is
   set to be $13.99 million per individual, meaning that estates valued below this amount are not
   subject to federal estate taxes. However, estates above this threshold face a top federal tax rate
   of 40%. Estate planning attorneys help clients calculate the value of their estate to determine
   whether they may be subject to estate tax and explore strategies for reducing that taxable
   amount.

2. Gift Taxes

   The gift tax is a federal tax applied to an individual who transfers assets to another person
   without receiving something of equal or greater value in return. The federal government
   provides an annual gift tax exclusion, which will be set at $19,000 in 2025, allowing individuals
   to gift up to this amount to as many people as they wish each year without incurring gift tax.
   Additionally, there is a lifetime gift tax exemption that is unified with the estate tax exemption,
   meaning that any portion of the exemption used for lifetime gifts reduces the amount available
   to shield the estate from taxes at death.

   An estate planning attorney may recommend strategies like gifting interests in a family business
   or transferring appreciating assets early to minimize future tax burdens.

3. Generation-Skipping Transfer (GST) Taxes

   The generation-skipping transfer (GST) tax is imposed on transfers to individuals who are two or
   more generations younger than the donor, such as grandchildren, to prevent wealthy families
   from avoiding estate tax across multiple generations. The GST tax exemption is the same as
   the federal estate tax exemption, allowing up to $13.99 million per person in 2025 to pass to
   “skip” generations without incurring GST tax. An estate planning attorney may help clients set
   up generation-skipping trusts, which are designed to maximize the GST exemption and allow
   wealth to pass to grandchildren or beyond while avoiding additional tax liability at each
   generational level.

4. Trusts as Tax Planning Tools

   Trusts are commonly used in estate planning to manage and reduce tax liabilities, as well as to
   ensure that assets are distributed according to a client’s wishes. Certain types of trusts can

   shield assets from estate and gift taxes and are particularly valuable in cases where clients wish
   to transfer large amounts of wealth. Common trusts include:

   • Revocable Living Trusts: While revocable trusts do not provide direct tax benefits, assets in
     these trusts are still part of the taxable estate. These trusts can have provisions to create credit
     shelter trusts and QTIP trusts to help limit estate tax exposure upon the death of spouses.
   • Irrevocable Life Insurance Trusts (ILITs): By placing life insurance proceeds in an ILIT, an
     individual can ensure that the payout will not be included in the taxable estate, potentially saving
     heirs a significant amount in estate taxes.
   • Grantor Retained Annuity Trusts (GRATs): GRATs allow clients to transfer appreciating
     assets with minimal gift tax. The grantor receives annuity payments for a fixed term, and if the
     trust’s assets grow at a rate exceeding the IRS-set rate, the excess value can pass to
     beneficiaries tax-free.
   • Charitable Trusts: Charitable remainder trusts and charitable lead trusts offer a means of
     passing assets to heirs while also making charitable donations. These trusts can provide tax
     deductions and reduce the taxable estate.

5. Tax Implications of Asset Basis and Capital Gains

   When an individual inherits property, they receive a “step-up” in basis, meaning the property’s
   basis is adjusted to its fair market value at the time of the decedent’s death. This step-up in
   basis is advantageous for beneficiaries, as it can significantly reduce capital gains tax if the
   property is later sold.

   On the other hand, gifting assets during one’s lifetime does not trigger a step-up in basis.
   Instead, the recipient takes on the donor’s original basis, potentially leading to higher capital
   gains if the property has appreciated significantly.

6. Income Taxes on Estates and Trusts

   Estates and trusts are generally subject to income tax on any earnings generated by assets
   held within them. Unlike individual tax brackets, which rise progressively with income, trusts are
   taxed at the highest rate after only $15,650 of income (in 2025). To mitigate this burden, an
   estate planning attorney might advise the distribution of income to beneficiaries, who are likely
   taxed at lower individual rates. Additionally, tax planning for estates often involves evaluating
   the timing of income recognition and strategically allocating income between the estate or trust
   and its beneficiaries.

7. Retirement Accounts and Tax-Deferred Assets

   Retirement accounts, such as IRAs and 401(k)s, come with special tax considerations when
   they are part of an estate. These accounts are subject to income tax when distributions are

   made to beneficiaries, and estate taxes may also apply if the overall estate exceeds exemption
   thresholds. Changes from the SECURE Act, such as the 10-year distribution rule for most non-
   spouse beneficiaries, have made it essential for estate planning attorneys to develop strategies
   to minimize tax impacts on inherited retirement accounts.

Conclusion

Through a combination of tax-efficient gifting, the establishment of trusts, and strategic planning
around asset basis and retirement accounts, estate planning attorneys can minimize tax
liabilities and maximize the value that clients can pass on to their heirs. By understanding the
specifics of estate, gift, GST, and income tax laws, as well as the interplay of state and federal
regulations, estate planning attorneys empower clients to make informed decisions that
preserve their financial legacy. Contact us for a consultation!