Estate Tax Planning

Jessica L. Cafferata, JD, CFP®, CDFA®, Callan Capital

Estate planning is an evolving and perpetual process although not often thought of in this manner. Chances are, when you finalized your documents, you stored them securely and may not have seen your documents since. Estate and tax laws constantly change, warranting review of your estate plan. Your wealth impacts your experiences, relationships, and community, and your values and relationships evolve and change over time. Estate planning requires upkeep, review, comprehension, and flexibility. See below for an overview of the Federal Estate Tax Exemption and three estate planning considerations.

Federal Estate Tax Exemption

Estate planning documents should be reviewed at least every five years and more frequently if you experience major life changes and as significant tax and estate laws pass. As of 2022, the federal transfer tax exemption for estate, gift and generation skipping transfer tax is $12.06MM per person ($24.12MM per married couple) with a 40% top tax rate and indexing for inflation. The tax applies to the portion of the decedent’s estate that exceeds the federal exemption level. Keep in mind that states can also have state estate tax exemptions that differ from the federal estate tax exemption value. The Tax Cuts and Jobs Act (TCJA) doubled the estate tax exemption through 2025. Many Americans are not currently subject to estate tax. However, starting in 2026, legislation mandates the exemption revert to the 2018 exemption amount of $5MM thereby extending the tax to more people. To shelter assets and appreciation from estate tax, consider a bypass trust (also known as a credit shelter trust). A bypass/credit shelter trust is an irrevocable trust that upon the death of the trust creator or settler, assets specified in the trust agreement are transferred to the trust passing free from federal or state estate tax. In addition, a bypass/credit shelter trust provides other benefits such as probate avoidance, enhanced creditor protection and ensuring that assets pass to intended beneficiaries. 

Estate Planning Considerations

Update Documents – For those with estates valued at less than the federal estate tax exemption and not subject to state estate tax, it may make sense to consider a disclaimer trust. A bypass/credit shelter trust created by disclaimer is optionable and the surviving spouse determines whether to disclaim inheriting an asset outright. If the spouse disclaims, the bypass trust funds, and the surviving spouse determines how much to fund it. Older drafted documents often have mandatory funding with a preset formula clause. 

Increase Lifetime Gifting – The IRS and Treasury clarified that the government will not “claw back” full exclusion amount gifts or partial exclusion amount gifts that are greater than the exclusion amount in effect at death. This applies for gifts given between 2018 and 2025 for someone who passes away in 2026 or beyond creating a unique opportunity for lifetime gifting before the exemption decreases. 

Portability – Unused estate tax exemption is portable between spouses if the surviving spouse timely files an estate tax return. Portability is permanent but there is a last deceased spouse rule than forfeits the exemption transferred to the surviving spouse if the new spouse predeceases. Keep in mind that most states do not allow portability of state estate tax exemptions and the generation-skipping transfer tax exemption is not portable. You can do both, applying the exclusion to the bypass/credit shelter trust and transferring “left over” exclusion via a portability election. Whether to rely on portability, fund a bypass/credit shelter trust, or do both is an important income and estate planning decision to discuss with your attorney. 

Disclaimer: Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov. 

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