The OBBBA temporarily increases the state and local tax (SALT) deduction cap to $40,000 for non-grantor trusts beginning with tax year 2025, which offers a significant planning opportunity. Trustees should consider accelerating the payment of state income taxes and real estate taxes before year-end to fully utilize this expanded deduction. This is particularly beneficial for trusts located in high-tax jurisdictions or those with substantial real estate holdings. Since the increased cap is scheduled to sunset after 2029, taking advantage of it now can yield meaningful tax savings while the provision is in effect.

Trusts and estates can also benefit from accelerating other deductible expenses into the current tax year to reduce taxable income. Common deductible expenses include trustee fees, legal expenses and accounting costs. Timing these payments before December 31 ensures they are captured in the current year’s tax return.

Capital loss harvesting is a valuable year-end strategy for trusts and estates. By realizing losses on underperforming investments, trustees can offset capital gains realized during the year and reduce net taxable income. If capital losses exceed gains, up to $3,000 of the excess losses can be used to offset ordinary income in the current year and the remainder will be carried forward to future years. Trustees should carefully review investment portfolios before year-end to identify loss positions but be mindful of the IRS wash-sale rules, which disallow losses if the same or substantially identical security is repurchased within 30 days before or after the sale.

One of the most effective strategies for minimizing trust-level income tax is to distribute income to beneficiaries who are in lower tax brackets. In 2025, trusts reach the highest federal income tax rate of 37% at just $15,650 of taxable income. By contrast, individual beneficiaries may have significantly more room in lower brackets. Trustees can use discretionary distributions to shift taxable income from the trust to beneficiaries and reduce the overall tax burden borne across the trust and beneficiaries. This approach not only preserves more wealth within the family but also aligns with fiduciary duties when done in accordance with the trust’s terms and the beneficiaries’ needs.

The Internal Revenue Code allows trustees to make a “65-day election,” which permits distributions made within the first 65 days of the following tax year to be treated as if they were made in the prior year. This election, available under section 663(b), provides valuable flexibility for trustees who may not have finalized distribution decisions by year-end. Distributions made by March 5, 2026, can be applied to the 2025 tax year, which allows trustees to retroactively reduce the trust’s taxable income and shift it to beneficiaries. This strategy is especially useful when year-end income and expense figures are not yet finalized and offers a second chance to optimize tax outcomes.

It’s important to recognize that the distribution strategies discussed above primarily apply to trusts taxed as complex trusts and not all irrevocable trusts fall into this category. Many estate plans utilize grantor trusts, which are structured so that the grantor is treated as the owner of the trust’s assets for income tax purposes, but not for estate tax purposes. In these cases, distributions to beneficiaries do not carry out taxable income because the income is reported on the grantor’s personal return. Given this distinction, trustees and advisors may wish to evaluate whether a trust currently taxed as a grantor trust could or should be converted to a complex trust in future years to take advantage of income-shifting opportunities. This decision should be carefully balanced against the estate planning benefits of the grantor paying the trust’s income taxes – namely, reducing the grantor’s taxable estate while allowing trust assets to grow income tax-free for beneficiaries.

The passage of the OBBBA in July 2025 permanently reshaped the federal estate, gift and generation-skipping transfer (GST) tax landscape. Effective January 1, 2026, the lifetime exemption increases to $15 million per individual ($30 million for married couples). These amounts are indexed for inflation and do not sunset, unlike the temporary increases under the Tax Cuts and Jobs Act (TCJA).

The urgency for many to use lifetime exemptions before the end of 2025 has eased with the passage of the OBBBA. However, those with significant wealth who are interested in making gifts and have sufficient assets to do so should still consider gifting in 2025. Even though the exemption is increasing, using the current $13.99 million ($27.98 million for married couples) exemption now can help shift more assets out of your estate sooner. Transferring appreciating assets locks in lower valuations and removes future growth from your taxable estate.

We recommend reviewing your existing trusts and estate plans to ensure alignment with the new exemption levels and strategic goals.

The 2025 gift tax annual exclusion is $19,000 per donor per donee. This is the amount that can be gifted to an individual from your estate without triggering gift tax or using any portion of your lifetime exemption. Married couples can effectively double this exclusion to $38,000 per recipient by electing to split gifts on their gift tax returns or by making gifts from community property assets.

Annual exclusion gifting strategies to consider are:

Certain transfers do not count against your lifetime exemption and are not subject to gift tax. These include:

For individuals concerned about relinquishing too much control or access when making large gifts, SLATs offer a flexible and strategic solution. A SLAT allows one spouse (the donor-spouse) to transfer assets to an irrevocable trust for the benefit of the other spouse (the beneficiary-spouse), effectively removing those assets from the donor’s taxable estate. Importantly, this structure provides indirect access to the gifted assets through the beneficiary-spouse, offering a measure of financial security while still achieving estate tax efficiency.

Grantor trusts remain a cornerstone of advanced estate and income tax planning. These structures allow the grantor to retain certain powers – such as the ability to substitute assets or borrow without adequate security– that cause the trust’s income to be taxed to them personally. This arrangement enables the trust to grow without the drag of income taxes, effectively creating a tax-free transfer of wealth to future generations. Importantly, the grantor’s payment of the trust’s income taxes is not considered an additional gift, preserving the grantor’s lifetime gift and estate tax exemption.

For individuals seeking to remove life insurance proceeds from their taxable estate while providing liquidity for heirs, ILITs are a time-tested and effective planning tool. An ILIT is a trust specifically designed to own and manage life insurance policies outside of the insured’s estate. By purchasing a policy through the trust, the death benefit is excluded from the insured’s gross estate, potentially saving millions in estate taxes. ILITs are often funded using annual exclusion gifts which are used to pay premiums. When structured properly, these gifts avoid gift tax and preserve the grantor’s lifetime exemption.

For individuals looking to transfer a personal residence to heirs at a reduced gift tax cost while continuing to live in the home, QPRTs offer a strategic solution. A QPRT allows the owner to transfer a primary residence or vacation home into an irrevocable trust while retaining the right to live in the property for a specified number of years. Because the transfer is structured as a future interest gift, the value of the taxable gift is discounted, often significantly, based on the retained interest. If the grantor survives the trust term, the residence passes to the beneficiaries outside of the taxable estate, potentially saving substantial estate taxes.

QPRTs are especially effective in high-interest-rate environments, where the IRS valuation assumptions further reduce the taxable value of the gift. However, if the grantor does not outlive the trust term, the full value of the residence is included in the estate, so careful planning is essential.

CRTs establish an income stream for the beneficiary over a defined period – either for life or a set number of years after which the remaining assets pass to a qualified charity. The donor receives a charitable income tax deduction equal to the present value of the remainder interest that will eventually go to charity. High-interest-rate environments result in a larger deduction – a favorable outcome for income tax planning.

CRTs are particularly effective when funded with low-basis, highly appreciated assets. By contributing these assets to the trust, the donor avoids immediate capital gains tax, yet the full fair market value is used to calculate both the income interest and the charitable deduction.

To preserve family wealth, CRTs are often paired with wealth replacement strategies, such as ILITs. This ensures that heirs receive assets equivalent in value to those ultimately donated to charity.

Intra-family loans are a tax-efficient way to transfer wealth by lending money to family members at low, IRS-approved interest rates known as Applicable Federal Rates (AFR). As long as the loan is properly documented and interest is charged at or above the AFR, it is not considered a gift and does not use any of the lender’s lifetime exemption. These loans can help fund home purchases, business ventures or investments, and if the borrower earns a return greater than the interest rate, the excess growth stays outside the lender’s estate, making it a simple but powerful estate planning tool.

GRATs are used to transfer the future appreciation of assets to beneficiaries with little or no gift tax. They are especially useful for individuals who have already used their lifetime exemption and want to shift additional wealth out of their estate. The grantor contributes assets to a trust while retaining an annuity interest for a set term. If the assets grow faster than the IRS’s section 7520 hurdle rate during that period, the excess appreciation passes to beneficiaries’ gift tax-free. A common strategy involves using short-term, rolling GRATs to reduce mortality risk and smooth out fluctuations in asset performance.

For individuals who have already used most or all of their lifetime exemption, a sale to an Intentionally Defective Grantor Trust (IDGT) offers a powerful way to transfer appreciating assets out of the estate with minimal gift tax exposure. This strategy involves selling assets at fair market value to an irrevocable trust in exchange for a promissory note. Because the trust is a grantor trust, the transaction is disregarded for income tax purposes. Typically, the trust is seeded with a gift of at least 10% of the sale value to support the transaction and ensure it is respected for tax purposes.

Recent changes to the rules governing retirement accounts, particularly under the SECURE Act and SECURE 2.0 Act, make it more important than ever to review your estate plan and ensure that beneficiary designations align with your tax and legacy goals. This is especially critical when naming a trust as the beneficiary, as the income tax treatment of inherited retirement accounts can vary significantly depending on the type of account and the classification of the beneficiary.

As of 2025, most non-spouse beneficiaries must fully deplete inherited retirement accounts within 10 years of the original owner’s death. If the account owner had already reached their Required Beginning Date (RBD), the beneficiary must also take annual Required Minimum Distributions (RMDs) during that 10-year period. These rules apply to both individuals and trusts, and failure to comply can result in penalties.

Naming a Charitable Remainder Trust (CRT) as the beneficiary of a retirement account allows the account to provide income to heirs over time with the remainder going to charity. This structure defers income tax, supports philanthropic goals and can be paired with life insurance in an ILIT to replace the value for heirs. Charitably inclined individuals may also consider leaving retirement accounts to a charity directly; this strategy can reduce both estate and income tax exposure for heirs.

Additionally, Roth conversions remain a popular planning tool. By converting traditional IRAs to Roth IRAs during life, individuals can prepay income tax at today’s rates, reduce the size of their taxable estate and allow heirs to inherit tax-free Roth assets. This is particularly appealing under the 10-year rule, as Roth IRAs are not subject to RMDs during the owner’s lifetime and offer tax-free growth and distributions to beneficiaries.

Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.