R&D Healthcare Credits
Nicholas Misenti, JD, CPA

Many people are unaware of the federal estate tax or think it doesn’t apply to them. The typical estate plan that results is no plan at all or Wills that leave everything to the surviving spouse and then from the to the surviving spouse to the children. That can be a costly mistake.

The Federal Estate Tax Exemption

The current federal estate tax exemption is a very generous $12 million per person, or $24 million for a married couple, that was created by the Tax Cuts & Jobs Act of 2016 (TCJA or Trump Tax Cuts), plus an unlimited exemption for transfers to a spouse during life or at death. This is where the belief arises that the federal estate tax is no longer a consideration except for a select few.   However, that belief overlooks some important things:

The Tax Cuts & Jobs Act of 2016 (TCJA) Sunset Provisions

The current estate tax exemption sunsets and will be automatically cut in half, beginning in 2026. $6 million per person ($12 million per married couple) is still significant, but at a level where many more people will be subject to the tax.  But there are other problems as well.

The Estate Tax Exemption is a Function of Who Controls the Presidency and Congress

The estate tax exemption is fluid and depends on which party controls the federal government.  The TCJA was passed without any democratic support and was possible only because republicans controlled the presidency and both chambers of congress by significant margins.  President Biden and democrats have proposed lowering the exemption to $3.5 million per person. 

The Estate Tax Rate is Very High

When the estate tax does apply, the amount of the tax can be staggering.  Most net worth above the exemption is taxed at a 40% rate! That means 40% of your net worth above the exemption goes to the federal government, instead of your family. Further, the Biden administration has proposed not only reducing the exemption, but also raising the tax rate to 45%. 

The Benefits of Estate Tax Planning Go Beyond Estate Tax Savings

Estate tax planning can eliminate all estate taxes in many cases, and yield a significant savings for very large estates, thereby saving a family millions of dollars in taxes.  See the example below.  This planning would start with Wills transferring property to Bypass and Marital Deduction Trusts to benefit the surviving spouse upon the death of the first spouse, instead of direct transfers to the spouse.  Assets in the Bypass Trust are not considered owned by the surviving spouse and thus are not included in the surviving spouse’s estate.  Thus, these assets bypass the surviving spouse’s taxable estate. Special language can be used so that the surviving spouse can be the trustee of his or her trusts, without triggering ownership of the Bypass Trust. Assets with large unrealized capital gains can be allocated to the Marital Deduction Trust, thereby achieving a stepped-up basis on these assets and avoiding any income tax on these unrealized capital gains.  However, there are other advantages, including:

  • Property in the trusts is controlled after death to ensure that the assets ultimately go to the children, instead of, for example, a new spouse.

  • The trusts can be structured to distribute assets to the children upon the death of the surviving spouse or hold the assets in trusts for a definite period or for the children’s and even grandchildren’s lives, creating a dynasty trust.

  • While assets are held in the trusts, there is the added benefit of asset protection.  Assets cannot be reached by the spouse’s, children’s, or grandchildren’s creditors, except in the very limited instances of child support or tax obligations in some states.

  • These trusts can be combined with other estate tax planning strategies, including Irrevocable Life Insurance Trusts, which remove all life insurance from a taxable estate, the discounting of gifts of minority interests to children in a Family LLC to maximize the $16,000 annual gift tax exclusion and preserve the estate tax exemption, and charitable deduction trusts.

Estate Tax Planning Example

Here’s an example that illustrates the impact of the estate tax on a typical estate plan and how estate tax planning can eliminate estate taxes, assuming the tax year is 2026 or after:

Example A) $15 million estate with the typical estate planWills with a distribution of all the property of the first to die to the surviving spouse and then from the surviving spouse to the children.

No Estate Taxes (due to Spouse Exemption)

40% Tax on $3 Million Taxable Estate*= $1.2 Million in Estate Tax

*$15 million estate less (election to use $6 million exemption from first spouse + surviving spouse’s $6 million exemption)

= $3 million taxable estate


Example B) $15 million estate with Wills that fund Martial Deduction and Bypass Trusts

No Estate Taxes:  $6 million estate tax exemption + $1.5 spouse exemption

$6 million Bypass Trust not part of surviving spouse’s estate

$1.5 million Marital Deduction Trust under $6 million exemption

No Estate Taxes.  Tax savings = $1.2 million

If you’re interested in learning more about the estate tax and estate tax planning, please contact Attorney Misenti at nicholas@taxrxgroup.com or nicholas.misenti@aegislion.com.



Comments are closed