Estate Tax Exemption Sunset 2026: Portability and IDGT Explained
Summary
TLDRThe video script discusses the impending expiration of Trump-era tax cuts, particularly the halving of the gift and estate tax exemption from $13.61 million to an estimated $7 million after January 1, 2026. It emphasizes the importance of estate planning, with a focus on strategies like portability, community property laws, and the use of trusts to mitigate death taxes. The speaker, a legal expert, also touches on generation-skipping transfer tax and the benefits of an 'A team' approach involving a CPA, financial advisor, and attorney for effective wealth management.
Takeaways
- 📅 On January 1, 2026, the Trump-era tax cuts will expire, significantly impacting estate tax exemptions and rates.
- 💰 Currently, in 2024, the gift and estate tax exemption is $13.61 million, which is expected to be halved to around $7 million in 2026, adjusted for inflation.
- 🔝 The federal estate tax rate is set to increase from 40% to 45% after the expiration of the Trump-era tax cuts.
- ⏰ There is a sense of urgency as the expanded exemption amount is only available until December 31, 2025, prompting estate planning considerations.
- 👨💼 The speaker, a partner at Cunningham Legal with 30 years of experience, emphasizes the importance of a multidisciplinary team approach involving CPAs, financial advisors, and attorneys for effective estate planning.
- 💡 Basic estate hygiene, akin to washing hands before eating, is crucial for avoiding death taxes and involves strategies that take time to implement.
- 🔄 The concept of 'cake and frosting' is used to illustrate how gift taxes work with the current exemption levels, with the 'Obama cake' and 'Trump frosting' being distinct layers of exemption that will be affected differently post-2026.
- 🔄 Portability is a key strategy that allows a surviving spouse to inherit the unused estate and gift tax exemption of the deceased spouse, which can save millions in federal estate taxes.
- 🏡 Community property laws in states like California provide significant tax benefits, such as step-up in basis, which can be crucial for estate and tax planning.
- 🔗 The use of trusts, such as Community Property Trusts and Intentionally Defective Grantor Trusts, can be instrumental in managing tax liabilities and creating multigenerational wealth.
Q & A
What is the significance of January 1, 2026, in relation to the tax exemption amount?
-January 1, 2026, is significant because it is when the Trump-era tax cuts expire, which means the current gift tax exemption amount of $13.61 million will be reduced, likely to around $7 million after adjustment for inflation.
How does the federal estate tax rate change after January 21, 2026?
-After January 21, 2026, the federal estate tax rate, also known as the death tax rate, is expected to increase from 40% to 45%.
What is the role of a certified specialist in state planning trust and probate law?
-A certified specialist in state planning trust and probate law, like the speaker, is an expert who advises on legal matters related to estate planning, trusts, and probate, helping clients navigate complex tax and legal issues.
What is the importance of 'basic estate hygiene' in the context of the script?
-In the context of the script, 'basic estate hygiene' refers to fundamental estate planning practices that help avoid unnecessary tax burdens and legal complications, similar to the importance of washing hands before eating or delivering a baby.
What is meant by the 'A team' in estate planning?
-The 'A team' in estate planning refers to a group of professionals including a CPA, financial adviser, and attorney who collaborate to develop and execute comprehensive estate planning strategies.
Why is it crucial to file for portability in estate planning?
-Filing for portability allows a surviving spouse to inherit the unused portion of a deceased spouse's estate and gift tax exemption, which can significantly reduce the estate tax liability.
How does community property status affect estate and gift tax planning?
-In community property states, assets included in a spouse's gross estate receive an adjusted cost basis upon the spouse's death, which can help avoid capital gains tax and foster the creation of intergenerational wealth.
What is the purpose of a Community Property Trust in non-community property states?
-A Community Property Trust in non-community property states allows couples to utilize a trust structure that provides a full adjusted cost basis upon the death of one spouse, similar to community property rules, to potentially reduce capital gains tax.
How does an 'Intentionally Defective Irrevocable Grantor Trust' (IDGIT) help in estate planning?
-An IDGIT allows a person to transfer assets to a trust, avoiding capital gains tax, and pay the income tax liability during their lifetime, which can reduce the taxable estate's value and potentially create multigenerational wealth.
What is the impact of remarriage on portability in estate planning?
-Remarriage by a surviving spouse can result in the loss of portability, as the unused estate and gift tax exemption of the deceased spouse may not be inherited by the new spouse.
Outlines
📉 Tax Exemptions and Estate Planning
The speaker discusses the impending expiration of Trump-era tax cuts, specifically the significant reduction in the gift tax exemption from $13.61 million to an estimated $7 million after January 2026. This change, along with the increase in the federal estate tax rate from 40% to 45%, underscores the urgency for estate planning. The speaker, a partner at Cunningham Legal with 30 years of experience, emphasizes the importance of 'basic estate hygiene' and the role of a coordinated team including a CPA, financial advisor, and attorney. The video also mentions the firm's YouTube channel, which offers over 200 videos on various legal topics in plain English.
💼 Estate Tax Strategies and Portability
This section delves into strategies to avoid death taxes, with a focus on the concept of 'portability.' Portability allows a surviving spouse to inherit the unused estate and gift tax exemption of the deceased spouse, which can be crucial in saving significant amounts in federal estate taxes. The speaker provides examples to illustrate how portability can be used effectively, especially when the exemption is expected to decrease. The discussion also touches on the importance of filing a timely Form 706 to elect portability and the impact of remarriage on portability. The speaker advises that, regardless of the future of estate tax exemptions, electing portability is a prudent strategy to mitigate potential tax liabilities.
🏡 Community Property and Estate Tax Benefits
The speaker explores the benefits of community property laws, particularly in California, which can be a powerful tool in estate planning. Upon the death of a spouse, community property receives an adjusted cost basis, potentially eliminating capital gains tax when the asset is sold. The speaker provides practical advice on notifying relevant parties, such as tax preparers and financial advisors, to ensure proper documentation of the changed basis. Additionally, the discussion extends to non-community property states, where strategies like the Community Property Trust can provide similar benefits. The speaker also introduces the concept of an 'intentionally defective irrevocable grantor trust,' which can be a powerful tool for wealth preservation across generations.
💼 Advanced Estate Planning with Grantor Trusts
In this part, the speaker discusses the use of 'intentionally defective irrevocable grantor trusts' (IDITs) for advanced estate planning. IDITs allow assets to be transferred out of an individual's estate for tax purposes while still being controlled by the grantor. The speaker explains the concept of 'tax burn,' where the grantor pays income tax on the trust's earnings, effectively reducing the estate's taxable value. The potential for asset swapping close to death to obtain an adjusted cost basis is also highlighted. The speaker emphasizes the importance of ongoing care and coordination among the advisory team when using IDITs. The video concludes with a call to action for viewers to subscribe to the firm's YouTube channel for more informative content.
Mindmap
Keywords
💡Estate Tax
💡Gift Tax
💡Generation-Skipping Transfer Tax
💡Portability
💡Community Property
💡Intentionally Defective Irrevocable Grantor Trust (IDGIT)
💡Adjusted Cost Basis
💡Tax Burn
💡Inheritance Tax
💡Trust
Highlights
On January 1, 2026, the Trump-era tax cuts will expire, significantly impacting estate tax exemptions.
Currently, the gift tax exemption is at $13.61 million, a substantial increase from the $600,000 in the 90s.
Post-2026, the exemption is expected to be halved to around $7 million, adjusted for inflation.
The federal estate tax rate is also set to rise from 40% to 45%, adding urgency to estate planning.
Cunningham Legal, with 30 years of experience, offers expertise in estate planning, trust, and probate law.
Their YouTube channel provides over 200 videos explaining complex legal topics in plain English.
Estate planning is compared to 'basic estate hygiene', emphasizing the importance of proactive measures.
A team approach involving a CPA, financial advisor, and attorney is recommended for effective estate planning.
The concept of 'cake and frosting' is used to explain how gift taxes work with different tax exemptions.
Portability allows a surviving spouse to inherit the unused estate and gift tax exemption of the deceased.
Filing for portability is crucial to maximize tax savings and requires a timely filed form 706.
Community property laws in states like California provide significant benefits for married couples.
Non-community property states can utilize Community Property Trusts to achieve similar benefits.
Intentionally Defective Grantor Trusts are highlighted as a powerful tool for wealth transfer and tax planning.
The importance of communication among the A Team (attorney, financial advisor, CPA) for effective strategy implementation is emphasized.
Cunningham Legal's approach to explaining complex legal topics in layman's terms is praised for its clarity.
Transcripts
in January 1 2026 the uh Trump era tax
cuts expire so what that means
translated is uh right now in 2024
there's a gift in aate tax exemption
amount of $13.61 million which was is
way more than the $600,000 when I
started practicing in the 90s and on
January 21 2026 that number is basically
going to get cut in half and I'll
explain how that works and adjusted for
inflation uh we're kind of thinking that
the exemption will land somewhere around
7 thou or $7 million in
2026 also the death tax rate is going up
the Federal rate's going up to 45% from
40 so the clock is ticking and um
something to think about so I'm a
partner at Cunningham legal I've got 30
years experience we have offices
throughout uh California I'm certified
specialist in state planning trust and
probate law a real estate broker
Securities and insurance licensed and a
pilot we also have a YouTube channel so
you can check that out it's Cunningham
legal you just type in YouTube
Cunningham legal we have over 200 videos
and we cover a lot of these topics and
you know whether you're an attorney or
not an attorney maybe a professional
fiduciary we cover these topics in plain
English so it's a really good way to
understand them and also to um you know
just a different way to talk to your
clients about them
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so death taxes really uh fundamentally
they're they're optional right you can
or your clients can avoid death taxes
but it takes time it takes what What I
Call basic estate hygiene that's kind of
you know washing your hands before you
eat uh or you know deliver a baby that's
the old example from uh you know the
people who would go from working on
kabers to delivering babies when they
wash their hands they went wow infant
mortality went down 80% but this is good
habits this what we're talking about and
we're talking about an A team we're not
talking about the 80s a team we're
talking about the CPA financial adviser
and um and attorney so typically that's
going to be an experienced trust in a
state attorney one or more trust in
state attorneys as you'll see sometimes
it requires more than one attorney but
it really is a group effort this is not
done in isolation there are way too many
moving Parts when we get into these
complex strategies so what I'm going to
do is we're going to talk about income a
little bit of everything here income tax
capital gains tax death tax we're going
to talk about the federal estate tax I'm
when to use the term death tax I'm not
using it in a political sense it's
because some states have a death tax now
you you know if you're in California and
that's California here State death tax
not in California and State inheritance
tax none in California many states do
have uh estate taxes which is on the
estate level so is the decedent a
resident of a particular State there's
an extra tax did the decedent own
property located in a state that has an
estate tax and that may be subject to
tax also the person inheriting are there
inheritance taxes in Maryland and
Pennsylvania leap to my mind those are
states that have inheritance taxes so
it's something to be mindful of when
you're counseling a client um is there
an inheritance tax in the state in which
that child uh typically the child is
residing we're going to cover gift tax
generation skipping transfer tax we're
really not going to cover property tax
too much if you're in California very
important even if you're an attorney or
a fiduciary outside of California and
you're working on a on a on a matter
that has real property in California
best practice is check in with a lawyer
who is knowledgeable about California
property taxation because it is a
Minefield and it's a you know for the
uny and there A lot's been written on
California propert tax and um it's a
very Arcane cryptic uh system and you
just don't want to step in it so
December 31 2025 is the big date right
that is the the the last date that we
have this expanded exemption amount and
I like to think of the exemption amount
as a two-tiered cake so I am mentioning
presidents not because I am talking
about one party or another I'm just
giving you um a reference point other
than a date on what these things are so
in 2011 we got a $5 million
death tax exemption right state federal
estate tax exemption and that's a cake
that's the obam cake in 2017 we got
another layer of of benefit which is the
frosting so you've got the cake which is
five million and the frosting on top
which is another 5 million now adjusted
for inflation this is how we get to the
6 U 805 million and or the 13.1 million
when you add these two together now the
reason I talk about a cake and frosting
is when you make a gift you don't take
like a slice of the cake out and it's a
little bit of Obama and a little bit of
um uh Trump frosting the the gifts start
from the oldest exemption first meaning
if a client makes a gift of a million
dollars they are making it out of that
Obama cake now in 2025 or 2026 that
Trump frosting is going to get wiped off
the cake we're left with the Obama cake
so if you make a gift of a million
you're not gifting your Trump exemption
okay you're gifting your Obama exemption
so this is really important people say
oh I want you know use a couple million
of this Trump exemption you would have
to make a gift of 6.85 million and then
you're tapping into the Trump uh era tax
cut so this can be challenging for sort
of the middle Estates you know couples
with a $20 million estate that's
probably the most the hardest planning
in in many respects to uh to to do so
they expire and we think that the
exemption just based on this adjustment
for inflation so the Obama era 2011 a $5
million exemption will likely be 7even
and that's kind of what we're modeling
out for clients when we look at this and
again the death tax rate or the estate
federal estate tax rate is going from 40
to 45% and you can put State inheritance
taxes or state death taxes on top of
that so look let's look at some
strategies to avoid death taxes so what
are they well number one is file for
portability now if you're a lawyer you
probably know what this is uh and if
you're a fiduciary handling a deance
estate it's very important to pay
attention to this a portability allows a
surviving spouse to inherit the unused
portion of a deceased spouse's estate
and gift tax exemption and that's
13.61% surviving spouse could under
those circumstances uh inherit the
deceased spouse's unused exemption
amount because it's unused right so that
would be the full
13.61% representative who in this case
is able surviving spouse timely files
for portability and inherits Baker's
$13.61 million exemption so when Abel
dies in 2026 remember 2026 is when the
exemption drops to 7 million there's no
estate tax and this saves $ 5.85 million
in federal estate tax one reason that
number is so high is it's a 45% tax on
top on amounts over 7 million based on
our estimate so example two Abel and
Baker are married and have again have an
estate but in this instance uh Baker's
representative who's able files for
portability picks up the $13.61 million
exemption and therefore there is no tax
when able dies so this is very important
so if you have this case come into your
office and maybe these clients have a a
trust that leaves everything to the
surviving spouse or maybe it's a
disclaimer trust and and that's
something that we cover on our our
videos on our YouTube page if that is
alien to you it's very important to
think about portability and certainly if
you're in a position to advise these
clients I I will say as a default in our
firm we're recommending that surviving
spouses do file for portability and pick
up the unused exemption amount because
really if you don't we don't know what
this estate exemption is going to be it
could go back to 600,000 highly unlikely
it could go to a million it could go to
three million we don't know we don't
know what assets your client or they
could buy the next Nvidia and have their
assets go away up you just don't know
what's going to happen in in a client's
estate so I would say to to mitigate the
liability of the the practitioner uh
portability is a great uh a great way to
help avoid death taxes so how do you
elect portability it must be a timely
filed form 706 and you have um we cover
the the the time limits but you you have
to uh file this portability election and
then you have to itemize generally the
assets assets and as you will see should
be valued when somebody passes away
things that are included in the gross
estate of a decedent meaning the taxable
Federal taxable state of a cedant should
be valued and um even if the estate is
small really think about advising the
client to elect portability and file
that 706 and the deceased spouse's uh
representative has five years to pick up
the deceased spouse to unuse exemption
and if portability is elected this is
very important for the planning that
we'll be discussing so in this case if
Abel inherits Bakers the deceased
spouse's uh portability
exemption AEL does not inherit Baker's
generation skip transfer tax exemption
amount and that's a mouthful and we'll
get into that in a few slides but that
is loss so in order to preserve that you
would have to use typically a trust
mechanism of of one form or another
remember remarriage forfeits portability
so if you have a client who says yeah
you know Abel says Ah Baker passed away
and uh I'm I'm gonna remarry
Charlie if Abel marries Charlie you're
going to lose that portability so it's
very important that the client
understand that and again gifts are made
uh first H gifts are made remember we
talked about the Obama and Trump cake
but if Abel inherits Baker's dece spous
Dan's exemption when Abel makes a gift
Abel makes the gift out of the deceased
spouse's unused exemption first right
then the Obama exemption then the Trump
exemption so very important if you've
got a client whose one spouse is near
death it's these are very important
considerations generation skipping
transfer tax concerns so again
portability can be very valuable
community property my understanding is
there are a lot of people from
California on here and um so you're
probably if you're an attorney I hope
you're familiar with this community
property very powerful tool there are
nine community property states in the
United States each with their own
separate Laws Texas has different
community property rules in California
uh which is was a shocker to me when I
attended a continuing education course I
kind of thought everyone did it the
California way but uh we've got nine
states that are community property
States and that leaves 41 that are not
plus the District of columia so as you
know if you're a California attorney all
property that is included in a spouse's
gross estate uh all community property
that's included in a spouse's gross
estate receives an adjusted cost basis
meaning that's a step up or a step down
if you paid a million bucks for stock
and it's down to 100,000 that basis gets
stepped down if you bought stock for
100,000 it's worth a million it gets
stepped up and uh it is best to document
the change of basis with valuation so
here's a little bit of a practice tip
it's really important for the client and
typically it's going to be the lawyer
nudging the client or the lawyer
reaching out to the client's team in
this case The A Team uh it's really
important to notify the tax preparer the
financial advisor and managers of
partnership interest that a um a
community spouse has passed away and the
reason is on a partnership return the
manager when they file the return can
make what is called a 754 election and
in order to get an adjusted cost basis
on a for a surviving spouse on a
partnership interest that election has
to be made on the partnership 1065
return so it's very important to
communicate with these people that
somebody's passed away uh and the tax
preparer obviously if you got rental
property and you get an adjusted cost
basis you're going to start red
depreciating the property and then the
financial adviser these are kind of
common mistakes we see the tax preparer
doesn't put in the new basis information
the uh manage the manager of the
partnership doesn't make your 754
election and then certainly the
financial adviser isn't putting in the
apprpriate basis information when that
those stocks get a new cost basis when a
spouse passes away so that's a really
good way of avoiding capital gains tax
um which technically isn't a death tax
but it's something important to pay
attention to because it it tends to to
Foster the creation of of
intergenerational wealth so example one
Abel and Baker are married Baker Buys in
baker's name alone $100,000 of Nvidia
stock I think we all wish we would have
bought $100,000 of Nvidia stock a while
ago with earnings from employment so uh
community property rule in California is
even though Baker's even though that
stock account is in baker's name it is
still community property because it is
uh because the source of funds was was
community and then Baker dies when the
Nvidia stock is worth a million bucks
Abel sells the Nvidia stock and pay zero
in capital gains tax Abel and Baker are
married example two and they buy a
million-dollar apartment building in
Santa Barbara at Baker's death it's
worth 10 million Abel keeps the
apartment building and resets the
depreciation clock
right at the $10 million value which and
this is a huge income tax benefit for a
surviving spouse so the surviving spouse
ultimately will be a single filer taxes
typically go up but what we find with
many of our clients who own real estate
they get that adjusted cost basis and
their income tax bill oftentimes drops
so question um question was does the
amount of portability remain what was
claimed on the 706 after the January 1st
2026 date
yes that's that's the that's the power
of that of the portability yes it
remains so what about non-c commmunity
property States what if you uh are in
one of those states that doesn't have
community property are you totally out
of luck well the answer is no because
there is this uh a pretty recent um
structure called the Community Property
Trust so some states allow residents of
states that are not community property
states there 41 states in the District
of Columbia to utilize a trust structure
so that when one spouse passes away the
assets of that particular trust get a
full adjusted cost basis now these
states are Alaska Florida Kentucky South
Dakota and Tennessee they offer their
own version of a community property
trust if you talk to a lawyer from
Florida they'll say Florida is the best
talk to a lawyer from Alaska they say
Alaska is the best these are heavily
marketed in um in these in these
separate property jurisdictions and U so
the example here is Charlie and Delta
are residents of Colorado which is not a
community property State and the create
a joint trust naming a Tennessee trustee
and the trust these are the the the
rules that you have in these Tennessee
in a Tennessee trust provides for a 5050
division of assets at divorce you can
have an alternate provision in there uh
but just for Simplicity sake let's say
it provides for a 50-50 division of
assets half the assets are subject to
each spouse's creditors and either
Charlie or Delta can remove the assets
at any time and if so such removed
assets cease to be Community uh property
and this actually may be a good asset
protection
planning strategy for a California
resident potentially because California
residents are 100% liable for the debts
of the community so it's a way of
effectively severing the community
property just kind of an interesting
side note uh intentionally defective
irrevocable grantor trust so for those
of you whove done um public benefits
planning medical planning Medicaid
planning you might have heard of this uh
this is used in a slightly different way
uh when you're doing Advanced uh
planning for uh federal estate tax ation
so I would say this is probably one of
the single most effective tools for the
creation of multigenerational wealth
that we use and that practitioners use a
human a human with a heartbeat so a
person can create an intentionally
defective irrevocable Grant or trust
transfer assets to the trust by gift or
by sale not realizing a capital gain and
this trust this grant or trust is
ignored for income tax purposes the IRS
does not it's it's a grant our trust
totally ignored for income tax purposes
and the key here is is not ignored for
uh death tax purposes or federal estate
tax purposes so this is very very
important um the grantor pays the tax
liability during the grantor's lifetime
therefore creating an additional gift
it's called tax burn so um Robert keer
has a really good uh program on this and
he talks about this concept of tax burn
the other thing is you can swap assets
out of a grantor trust without a tax
consequence if you have a swap power in
the trust that does affect who can be
trustee and powers of trustee I'm not
getting into the Weeds on this just to
give you an idea of the power of these
grantour trust so if you've got someone
who knows they're going to die I mean we
all know we're going to die but if
they're close to death they can swap a
low basis asset out for cash right
because cash a dollar has a basis of a
dollar those low basis assets come into
the estate uh the decedent dies and then
um then you have a full adjusted cost
basis so very very um and there's some
rules connected with that but can be a
very effective strategy so uh I I ran
some numbers getting ready for this to
show you the benefit so AEL creates an
irrevocable trust for the benefit of
Charlie so this is an intentionally
defective grantor trust transfers a
million dollars to the trust and invests
in in a portfolio of Securities the
Securities returns 4% uh capital
appreciation per year 4% growth plus 3%
income and the assets are held for 20
years and then the grantor dies a
non-grantor trust lead leaves the
beneficiaries right the people who
inherit $2.7 million the grantor trust
results in $3.62 million which is almost
a million dollars different that's a lot
of money and add a zero to that it's
going to be a lot more money right it's
going to be a $10 million difference
right so what's happening as the As Time
Goes By is the grantor is paying the
income tax which means that trust that
that grantor trust is not paying tax
it's not that it's tax-free because the
grantor is paying it but the grantor has
a taxable estate right and if the grant
if the if the non-grantor trust is
paying the tax they're paying at the
higher rates but the gr Tor has high
rates anyway right so if you're going to
pay the same tax you might as well pay
it from the gr toor's estate which
further depletes the taxable value of
the estate and then if you swap the
assets Out close to death you know
there's a rule on that but if you swap
those assets out then you can also get U
an adjusted cost basis on the asset so
you swap the asset out in exchange for
cash and uh this is very important to
understand this is not a set it and
forget it strategy it requires a pretty
extensive Caren feeding and
collaboration Among The A Team so this
again the attorney financial adviser
CPA U and other professionals as well
our firm we have offices in northern and
southern California and on Zoom
everywhere and if you're watching this
on YouTube subscribe to our YouTube
channel or check it out there's a lot of
good content on there and the feedback I
get from lawyers is it's a way of
explaining things in layman's terms and
I love listening to other lawyers by the
way talk about stuff I'm like oh wow
that's a great analogy that's a great
way to explain that horrifically complex
topic
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