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DEAR TRUST OFFICER:
I understand that the $13.99 million exemption from the federal estate and gift tax gets cut in half at the end of this year. Will this really happen? Should I be doing something about my estate plan?—WATCHING CONGRESS
DEAR WATCHING:
Your understanding is correct. Congress has scheduled reductions in the estate tax exemption before, and every time the action has been reversed before it was implemented. This time could be different.
However, with the Republicans holding both the House and Senate, and given that the Senate Majority Leader, John Thune, has in the past advocated the total repeal of the federal estate tax, there is a good chance that the current exemption amount will be renewed, according to many tax observers.
You will get an early clue to the outcome of the tax debate in the coming fight over how the federal budget is to be scored this year. Should the baseline be scored under current policy, or under current law? The difference is that under current law a portion the 2017 tax reform expires, which constitutes a future tax increase worth an estimated $4.6 trillion. Under a current policy analysis, cancelling a future tax increase has no effect on budgets, we just keep doing what we are doing.
If the latter view prevails, it is likely that the larger estate tax exemption will be saved. But either way, you should review your estate plans this year if they are several years old. There are many factors other than taxes that may call for estate plan amendment.
As a wise man once said, predictions are hard, especially about the future.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
In 2017 the standard deduction for married couples filing jointly was $12,700, and was used by 68% of taxpayers. It was set to grow to $13,000 in 2018. Instead, under the Tax Cuts and Jobs Act of 2017, the standard deduction for couples was lifted to $24,000. This was not as significant a tax break as it first appears, because the personal exemption, worth $4,050 per dependent, was eliminated at the same time. Nevertheless, the change was simplifying for many taxpayers, because by 2023 91% of taxpayers took the standard deduction instead of itemizing.
Due to inflation, the standard deduction for couples has grown to $30,000 this year. However, that change is scheduled to expire at the end of the year.
Writing for the American Association of Individual Investors, Charles Rotblut observes that the old standard deduction would have been adjusted for inflation just as the current one has been. According to his calculations, the smaller standard deduction would have grown to $16,200 by this year. If Congress does not act, next year’s standard deduction will be something in that neighborhood.
If you have the feeling that the inflation adjustments to the standard deduction seem low, you are not wrong. The 2017 tax reform adopted the chained consumer price index instead of the traditional CPI for determining the inflation adjustments to the tax code. This change does not expire at the end of the year. The chained CPI accounts for the way consumer behavior is altered as prices change, with the result that inflation adjustments are lower.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
Parents who are building a college fund for their child or children have two tax-advantaged alternatives, the 529 plan and the Coverdell Education Savings Account (CESA). Contributions to 529 plans and CESAs are not tax deductible, but there is no tax as the income builds up in the account. Distributions from the plans are tax free if they are used for qualified education expenses. The definition of what qualifies is not the same for the two approaches.
CESAs have one advantage over 529 plans. Where 529 plans are typically limited to just a few investment choices, with the money managed by the plan sponsor, there are no similar limitations for CESAs.
However, there are CESA disadvantages to consider also, where the 529 plan is superior. Most importantly, no more than $2,000 per year per student may be contributed to an ESA. Second, contributions must end when the beneficiary reaches age 18. Therefore, no more than $36,000 total may be set aside for one student, which almost certainly will fall far short of the financial need. Still, having a dedicated capital source that is growing tax free as one begins higher education is nothing to sneeze at.
A third problem is that contributions to CESAs are not permitted for those whose income is too high—modified adjusted gross income of $110,000 for singles, $220,000 for a married couple. No similar limitation applies to the 529 plan.
Successor beneficiaries
What if the beneficiary decides against college? The CESA accumulation may be rolled into another CESA for a family member of a beneficiary, or a new beneficiary may be designated for the 529 plan. The new beneficiary must be of the same or higher generation as the original beneficiary. Alternatively, subject to a variety of rules, unused 529 plan money may be rolled into a Roth IRA for the beneficiary.
The CESA must be distributed by the time the beneficiary reaches age 30, or within 30 days after that date. The distribution may be in the form of a rollover to another family member. Amounts not rolled over and not used for qualified expenses are included in taxable income, and a 10% tax penalty applies. No such age limits apply to the 529 plan.
Start early
As valuable as the tax advantages of CESAs and 529 plans may be, the biggest advantage is starting early. The sooner one begins setting aside funds for a college education, the more time that capital has to grow into something significant.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
Sometimes a sound estate plan may need to be modified after it is put into effect. One such situation was recently outline in Private Letter Ruling 202504006 from the IRS.
Decedent’s estate plan called for the creation of two trusts, a Marital Trust for the surviving spouse and a Decedent’s Trust. Although the Ruling doesn’t mention it, the Decedent’s Trust was likely funded so as to fully consume the Decedent’s federal estate tax exemption while avoiding being included in the taxable estate of the surviving spouse. With the unlimited marital deduction, there was probably no federal estate tax due at Decedent’s death.
The Marital Trust was a Qualified Terminable Interest Property (QTIP) trust, which meant that the surviving spouse could not change the final disposition of the trust assets. The trust beneficiaries arranged under state law to divide the QTIP trust into two nearly identical trusts, leaving all income and remainder interests intact. The difference was that Trust 1 would be funded to take full advantage of the surviving spouse’s federal estate tax exemption, and Trust 2 would hold the balance of the assets.
The next step was for the surviving spouse to disclaim her entire interest in the newly created Trust 1. This was a transfer subject to the federal gift tax. By doing so, the surviving spouse consumed her entire federal estate and gift tax exemption—she “locked in” the exemption, and will not lose should Congress decide to lower the exempt amount in the future.
The questions presented to the IRS were whether these actions required the recognition of gain or loss for income taxes, whether Trust 2 continued as a valid QTIP trust, whether the spouse would be treated as having made a transfer to Trust 2, and what the tax effects will be when the spouse dies. Happily, for this estate, there were no adverse tax determinations.
No numbers were presented in the Ruling, but it seems likely that this estate saved millions of dollars in estate tax obligations with this modification.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
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