4 irrevocable trusts to beat estate tax uncertainty

For clients waiting to see if Congress will extend or cut the lifetime gift and estate tax exclusion next year, setting up an irrevocable trust now can be a base-covering estate planning option. 

The lifetime gift and estate tax exclusion amount is scheduled to drop from $13.99 million per person in 2025 to about $7 million at the start of 2026. While Congress can preserve the larger exclusion amount by extending the Tax Cuts and Jobs Act of 2017, the budget reconciliation process — the likely avenue for passing any extension — requires that tax cuts cannot be extended beyond a "budget window," usually 10 years, unless they are offset by other sources of revenue or spending cuts. 

Extending all the provisions in the TCJA for 10 years would add an estimated $4.6 trillion to the federal budget deficit. 

Alternatively, legislation has recently been introduced to repeal the estate tax entirely. Were it repealed, and noncitizen nonresident investors were no longer subject to U.S. estate tax on their U.S. assets over $60,000, this could make the U.S. a more attractive destination for foreign capital. However, this legislation's passage is uncertain at best.

READ MORE: 4 estate planning tax tips for rich clients before the 2026 sunset

Given these uncertainties, clients with federally taxable estates who have not used up all of their lifetime exemption amounts should consider making gifts that use the larger exclusion amount before it has a chance to decrease from about $14 million to about $7 million. Clients could transfer as much as an extra $7 million free of the 40% estate and gift tax.

But clients may be uncomfortable making large gifts, either because they anticipate needing the assets during their lifetime or simply wish to maintain control of their funds. 

In such cases, setting up an irrevocable trust now and waiting to fund it until Congress's willingness to extend the larger exemption amount or to repeal the estate tax becomes more apparent is a viable option. If and when the exclusion amount is reduced, clients can then fund the trust.

READ MORE: ​​Tax-favored gifts exemptions that give back — in any administration

Irrevocable trusts can maximize a client's remaining lifetime gift tax exemption while preserving assets for descendants, and in some cases, spouses. If the generation-skipping transfer tax exemption is also allocated to an irrevocable trust, the trust can continue for multiple generations, with no estate or GST taxes due at the deaths of the beneficiaries. The amount of the gifted assets, plus any future appreciation, will be removed from the client's estate. 

Financial advisors and CPAs urging their clients to put trust structures in place should recommend that clients act early, as estate planning attorneys may be overburdened by the second half of 2025.

It's also important to consider which assets clients should give. Any assets given to an irrevocable trust would no longer be owned by the donor at death, so the trust would not be entitled to a step-up in basis at the donor's death. Advisors should help clients consider this loss of basis step-up before making large gifts of highly appreciated assets. 

Alternatively, clients could make a loan of up to $14 million to family members, or to a grantor trust of which the client's descendants are beneficiaries, and later forgive some or all of that loan, meaning the loan would be treated as a gift at the time of forgiveness.

READ MORE: Trusts are useful but complicated. Here are some basics

Here are four irrevocable trust structures to consider depending on the client's circumstances:

Standard irrevocable trust

A client's lifetime gifts to the trust would use some or all of their gift tax exemptions. The assets contributed to the trust would be removed from the client's estate, and any future appreciation on those assets would pass to descendants free of estate tax.  

Spousal lifetime access trust

If a married client is worried about making substantial gifts because they might need the gifted assets for living expenses later in life, one spouse could give assets to a spousal lifetime access trust — or SLAT — for the benefit of the other spouse, and their descendants, which preserves the option for the other spouse to benefit from those assets. (There are drawbacks of this type of trust to consider as well.)

Irrevocable life insurance trust

An irrevocable life insurance trust, or  ILIT, would own a life insurance policy and any death benefit would be excluded from the client's estate. Gifts to the trust would qualify for the annual exclusion. Life insurance trusts can also be used to provide liquidity to a client's estate in order to pay estate taxes.

Grantor trusts

A grantor trust treats the donor, or grantor, as the owner of the trust for income tax purposes, but not for gift or estate tax purposes. The grantor pays the federal income taxes attributable to the trust income, thus allowing the trust assets to grow much faster. The grantor's payment of the trust's income taxes is not treated as an additional gift to the trust.