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DEAR TRUST OFFICER:
How might my estate plan be affected by the recent tax law changes?—AFFLUENT, NOT RICH
DEAR AFFLUENT:
The amount exempt from federal estate tax for deaths occurring this year is $13.99 million per person. Next year that goes to $15 million. More importantly, unlike past increases in the exemption amount, this time it’s permanent, there is no expiration date. There will be inflation adjustments, so future inflationary increases in family wealth won’t boost an estate into the taxable arena.
Since 2017, when the exempt amount was temporarily doubled, there has been considerable discussion about the advisability of “locking in” the higher exemption while it lasted. What’s more, the IRS issued regulations covering the tax effects of such lock-in strategies. These are all mooted now.
Of course, a future Congress could decide to reduce the exemption amount, but that seems unlikely. The amount exempt from federal estate tax has never been reduced. In fact, there is some bipartisan support for eliminating federal estate taxes entirely, though that also seems unlikely at this moment.
For billionaires, this change in the federal estate tax rules means very little. For the vast majority of American families, including those who are affluent but not rich, it means that in planning for wealth management the focus may shift away from death taxes to income taxes. The full basis step-up for assets owned at death is still in the tax code. For those whose estates are unlikely to reach the taxable threshold, strategies for minimizing taxes on capital gains and shifting income streams to family members in lower tax brackets may take center stage.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
On February 25, 2013, Barbara lent $2.3 million to her son, Stephen. The loan was secured by a note that required payment of interest only for nine years, and repayment in full at the end of the term. The interest rate was set at 1.01%, which may seem like a bargain, but that was the applicable federal rate at that time. Barbara was 79 years old when the loan was made. Because the transfer was a loan, not a gift, no gift tax return was filed for the transaction.
Barbara died in 2016. Her estate reported the note as an asset on the estate tax return. The IRS objected that when the loan was made the fair market value of the note was less than the amount lent to Stephen, and that the difference was an unreported gift to him at that time.
Before the Tax Court, Stephen provided the bank records showing the transfer to him, his annual interest payments as required by the note, and the fact that Barbara had paid income tax on the interest payments that he made to her. Under IRC §7872, because the note charged the applicable federal rate of interest, it is not a “below-market” loan. The Tax Court held that it was a valid loan, and as such, no gift tax return was required from Barbara.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
Charitable giving by Americans grew by 6.3% in 2024, to a record $592.50 billion, according to the latest report from Giving USA. Roughly two thirds of the gifts, $392.45 billion, came from individuals, who increased their giving by 8.2%.
All categories of charitable organizations enjoyed increased support, according to the report, as shown in the table below:
Increased charitable gifts, 2024
|
Organization type |
Amount received in 2024 (billions of dollars) |
Percentage increase |
|
Religion |
$146.54 |
1.9% |
|
Human Services |
$91.15 |
5.0% |
|
Education |
$88.32 |
9.9% |
|
To foundations |
$71.92 |
3.5% |
|
Public-Society benefit |
$66.84 |
16.1% |
|
Health |
$60.51 |
5.0% |
|
International affairs |
$35.54 |
17.7% |
|
Arts, culture and humanities |
$25.13 |
9.5% |
|
Environment and animals |
$21.57 |
7.7% |
Source: Givingusa.org; M.A.Co.
Future tax changes. Under the reconciliation bill signed by President Trump on July 4, beginning next year those who do not itemize their deductions will be able to take an adjustment to income for their charitable donations, up to $1,000 for singles and $2,000 for marrieds filing jointly.
However, for the itemizers the news is less good. A portion of their charitable deduction will be disallowed, equal to 0.5% of modified adjusted gross income (MAGI). So, for example, a taxpayer with MAGI of $300,000 would only get a deduction to the extent that charitable gifts exceeded $1,500. Some taxpayers may accelerate their giving into the 2025 tax year for maximum tax benefit.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
Each year the trustees of the Social Security trust funds issue a status report for them. The news this year was not great. The reserves for Old-Age and Survivors Insurance are projected to be exhausted in 2033, at which point benefits will have to be reduced to 77% of what is scheduled. The exhaustion year for OASI is unchanged from the last report, but for Hospital Insurance it comes three years earlier than the last report, also in 2033. In that year Medicare benefits will be reduced to 89% of scheduled benefits.
The major reason for the deterioration in the financial health of the trust funds, according to the report, was the repeal in January, 2025, of the Windfall Elimination and Government Pension Offset provisions of the Social Security Act. This action increased benefits for some government workers. Other factors included historically low levels of fertility and a change in the assumption of the long-term share of Gross Domestic Product that goes to labor compensation (and hence to the trust funds through taxation).
Social Security taxes and benefits were substantially overhauled back in the Reagan administration, which put Social Security tax collections into surplus for more than 25 years. The surplus funds in the trust accounts were invested in special government bonds paying a market rate of interest. In 2010 the cost of benefits began to outstrip the collection of payroll taxes, so that the interest earned on the bonds had to be tapped for benefits. By 2021 the costs exceeded payroll taxes plus the interest payments, so that the reserves had to be drawn down to meet scheduled benefits. This process will continue until 2033, when there won’t be sufficient funds to pay promised benefits.
At the end of 2024, there were 60.1 million people receiving OASI benefits at a cost of $1,327.2 billion. Payroll taxes of $1,105.6 were paid by 183.9 million workers. In addition to the tax collections, the OASI trust fund had $63.7 billion of interest income on past surpluses and $54.4 billion of taxes on OASI benefits. Reserves fell from $2,641.5 billion at the end of 2023 to $2,538.3 billion at the end of 2024, a reduction of $103.2 billion.
The report was prepared before the passage of the tax bill signed by President Trump on July 4. That legislation includes a bonus $6,000 deduction for taxpayers age 65 and older, and is in place of the President’s proposal to make Social Security benefits tax free. Income tax on benefits accounted for about 4% of OASI income in 2024, and presumably that will now be reduced.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
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