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Without legislation to prevent it, the sunsetting of current estate tax laws at the end of 2025 will dramatically reduce the federal estate tax exemption from $13.61 million per person in 2024 to approximately $7 million in 2026 (this includes adjustments for inflation). This change would affect many high net-worth individuals and families, likely exposing many more estates to federal estate taxes. It is important for advisors to prepare for client discussions and start considering estate planning strategies now, especially techniques that incorporate multi-generational gifts and charitable planning.
Making larger lifetime gifts to charity and arranging for charitable bequests will help reduce the client’s taxable estate because of the charitable estate and gift tax deduction. There are many types of funds at the CFMC to meet this goal. Donor advised, field of interest, designated, unrestricted, and endowment funds at the CFMC are flexible and effective charitable vehicles for both lifetime and estate gifts.
For some clients, you may wish to begin exploring a comprehensive, multi-generational wealth transfer plan, potentially using key tax-planning vehicles:
Charitable Lead Trust
Charitable lead trusts (CLTs) may be particularly effective in the current environment. These trusts can provide income to your client’s fund at the community foundation for a set period of time, with the remaining assets passing to family members. Right now, the higher exemption allows for potentially significant initial funding of such trusts. This is because the value of the remainder interest counts toward the client’s estate and gift tax exemption.
Generation-Skipping Trust
A generation-skipping trust is an irrevocable trust that can benefit a client’s grandchildren and later generations. This trust utilizes a client’s generation-skipping transfer (GST) tax exemption (which parallels the estate and gift tax exemption). This type of trust could allow a client to take advantage of the higher exemption before it potentially decreases in 2026. It is possible under some states’ laws for these trusts to go on for many generations in a “dynasty” format, such that each generation benefits from the trust’s income (and potentially principal for health and education) without the trust’s assets being included in the beneficiaries’ estates for estate tax purposes.
Donor Advised Fund at the CFMC
Clients can also establish a donor advised fund at the CFMC that can function much like a family foundation, without the administrative burden and cost of a private foundation. Successive generations can serve as advisors and/or the donor can count on the Foundation to carry on a tradition of supporting the causes most important to the client during their lifetime.
John and Ann Mahoney (pictured above) partnered with the CFMC to create the Mahoney/Peterson Family Fund to engage the next generation in the spirit of philanthropy. "We wanted to engage our family in giving and our commitment to helping our communities. The CFMC’s guidance and support was outstanding. It is incredibly heartwarming to give together.”
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