The 2025 changes to federal tax law have resulted in favorable developments for estate planning and estate taxation. This latest update from Much’s Estate Planning & Wealth Transfer group provides an overview of current transfer tax laws and planning opportunities to consider going into the new year.
Current Transfer Tax Laws
The federal gift/estate and generation-skipping transfer (GST) tax exemptions will increase to $15 million per person as of January 1, 2026, with adjustments for inflation in future years. These exemptions are now “permanent,” meaning that existing law does not reduce this amount unless additional legislation is passed. The Illinois estate tax exemption remains at $4 million per person and does not receive an annual inflationary increase.
The federal transfer tax exemptions can be used during lifetime and/or at death. Using these exemption amounts during lifetime is generally more efficient for transfer tax purposes because any income and appreciation on the gifted assets escape estate taxation.
Estate taxes are imposed at a 40% federal rate on a decedent’s “taxable estate,” which does not qualify for a marital or charitable deduction, notwithstanding potential estate taxes imposed on a state level. In Illinois, the effective marginal estate tax rate ranges from 8% to 16%. As with income taxes, state estate taxes are deductible for federal estate tax purposes. This results in a cumulative federal and Illinois estate tax rate of approximately 48% for estates above both exemptions.
The trade-off is the loss of the basis change at death, which can result in an income tax cost on any “built-in” gains aggregating 28.75%. This includes a federal 20% capital gains tax, the 3.8% federal net investment income tax, and state capital gains taxes (Illinois at 4.95%).
Portability and Spousal Planning Considerations
Married couples should be aware of the “portability” election, which allows a surviving spouse to use any unused estate tax exemption of their deceased spouse. To preserve this benefit, an estate tax return (Form 706) must be filed within nine months of death (with extensions available) of the first to die, even if no estate tax is owed. This election provides significant flexibility for couples who did not engage in lifetime planning or who have unequal estates.
Couples should review their existing estate plans to ensure they remain appropriate given current exemption levels. Traditional “credit shelter trust” structures may no longer be optimal for all families, particularly when considering basis adjustment opportunities and state estate tax thresholds.
Lifetime Transfer Strategies
Federal tax laws allow for an “annual exclusion amount,” which can be gifted from any one person to any other person in any given year without using any estate/gift tax exemption. This amount will remain at $19,000 per donee in 2026.
To take advantage of the historically high exemption amounts, taxpayers should strongly consider lifetime gifting strategies in 2026 in addition to making annual exclusion gifts. This is especially important for younger individuals and for transfers of assets with high potential for appreciation. For taxpayers who live in states with a state estate tax but no state gift tax, such as Illinois, lifetime gifting will also reduce state estate tax liability.
Charitable Giving
Year-end presents an excellent opportunity to implement or review charitable giving strategies. For individuals aged 70.5 or older, qualified charitable distributions (QCDs) from individual retirement accounts (IRAs) allow for direct transfers of up to $108,000 (in 2026) to qualified charities, which can satisfy required minimum distributions without generating taxable income.
Donor-advised funds provide flexibility for those who wish to take an immediate charitable deduction while retaining the ability to recommend grants to charities over time. For appreciated securities held for more than one year, donating the assets directly to charities avoids capital gains taxes while providing a fair market-value deduction.
Charitable remainder trusts and charitable lead trusts can serve dual purposes by providing income or estate tax benefits while supporting philanthropic goals. These vehicles are particularly effective for highly appreciated assets or for individuals seeking to diversify concentrated positions.
Planning for Basis Change
Good estate planning incorporates income tax considerations rather than focusing solely on estate, gift, and GST taxes. Upon an individual’s death, the cost basis of any assets included in his or her gross estate for estate tax purposes receives an adjustment to fair market value at the date of death. For appreciated assets, this can result in substantial income tax savings when the assets are sold. However, assets that are not included in the gross estate do not receive a basis adjustment. This creates a trade-off between making lifetime gifts (to reduce estate taxes but with the donee receiving the donor’s “carry-over” basis) and keeping assets in the gross estate (to obtain the basis adjustment and reduce income taxes).
Fortunately, several techniques can help individuals plan for possible basis changes while still retaining estate tax benefits. Irrevocable trusts that receive lifetime gifts can be structured to allow for a possible basis change.
Other Considerations
- Retirement accounts require additional attention following the SECURE Act and the SECURE 2.0 Act changes. Designated beneficiaries should be reviewed regularly to ensure they align with current wishes and family circumstances. Consider whether making Roth IRA conversions or naming a charitable beneficiary may be appropriate.
- Ensure fiduciaries have appropriate authority to access digital assets, including cryptocurrency, online accounts, social media profiles, and digital files.
- Business owners should review succession plans to ensure smooth transitions and minimize tax consequences.
- Estate planning is an ongoing process that should adapt to changes in tax law, family circumstances, and personal goals.
Please reach out to a member of Much’s Estate Planning & Wealth Transfer group to evaluate your circumstances and determine appropriate strategies that fulfill your estate planning objectives. We recommend scheduling a review before year-end to take advantage of 2026 planning opportunities. We look forward to working with you in the new year.