Inheritance & Tax Planning: The Changing Landscape of Trusts & Estates
Strategies for Estate Taxes, Trusts, and Legacy Planning
Adapting to a New Era in Estate Planning
Estate and inheritance planning continues to be an area of high complexity. Recent shifts in federal tax thresholds, evolving IRS interpretations, and refined reporting requirements have altered how wealth can be transferred, sheltered, and stewarded across generations. While the estate tax applies to relatively few U.S. households, the complex nature of planning coupled with constantly evolving tax policy may result in a static estate plan exposing families to unnecessary taxes or limited flexibility in the future.
Modern estate planning must therefore move beyond the static document approach toward a dynamic, adaptive framework—one that integrates tax efficiency with flexibility, foresight, and family governance. The most effective plans address not only how wealth is preserved, but also how it is controlled, communicated, and continued across generations.
The New Tax Terrain
The current tax landscape has ushered in both opportunities and new complexities for affluent families. Adjustments to estate and gift exemptions, revisions to basis treatment, and expanded reporting obligations have changed the way trusts and inheritances function within a broader financial plan.
Permanently Elevated Exemptions & Indexing
The unified federal estate and gift tax exemptions have been permanently set at higher levels, with ongoing inflation indexing beginning in 2026. The exemption is scheduled to rise to approximately $15 million per individual ($30 million per married couple), with the generation-skipping transfer (GST) tax exemption aligned accordingly. This permanence eliminates the prior sunset risk that had created urgency for high-net-worth families to “use or lose” the temporarily higher exemptions in place since 2018.
While this provides relief for many, large estates remain subject to estate tax—and proactive planning remains essential. Families who delayed action based on uncertainty should still review their plans to ensure gifting strategies, trust structures, and liquidity solutions remain aligned with their goals.
Step-Up in Basis for Irrevocable Trusts
Recent IRS guidance has clarified how assets in irrevocable trusts are treated at death. Under guidance issued in 2023, assets held in such trusts will not automatically receive a step-up in basis unless they are included in the grantor’s taxable estate. This means heirs inherit assets at the trust’s original cost basis, potentially creating substantial capital gains exposure upon their eventual sale. The clarification aligns with the treatment of other completed gifts made during the decedent’s lifetime but may be different that existing estate plans anticipated.
Families who transferred assets to irrevocable trusts purely for estate tax reduction may now need to reconsider whether certain holdings should remain excluded from the estate at death. Adjusting trust provisions, swapping assets, or creating inclusion mechanisms may help preserve the step-up benefit without undermining overall estate tax objectives.
Trust Income and Reporting Requirements
Trust income remains subject to highly compressed tax brackets, meaning trusts can quickly reach the highest marginal rates. In addition, enhanced transparency and reporting rules have increased the administrative complexity of trust management. Accurate accounting, valuation, and trustee documentation have become critical not only for compliance, but also for protecting the integrity of long-term family governance structures.
Trust Structures: Building for Flexibility and Control
Trusts have long served as the backbone of estate planning, but their purposes and mechanics are evolving. The most effective structures today are layered, flexible, and capable of adapting to future tax and legal developments.
Layered Trust Planning
Instead of relying on a single, comprehensive trust, many families are now implementing multiple trusts, each designed with a distinct role. A revocable trust may manage liquidity and probate avoidance, while irrevocable structures handle long-term transfers, charitable objectives, and spousal support.
- A basis-protected trust may hold assets that should remain includible for step-up purposes.
- A growth-trapping trust can isolate appreciating assets to minimize transfer taxes.
- Charitable remainder or lead trusts help align philanthropic and tax objectives.
- Spousal lifetime access trusts (SLATs) maintain flexibility for the family while shifting ownership out of the estate.
This layered approach hedges against changes in law while maintaining family control and distribution flexibility.
Grantor Trusts with Inclusion Features
Because of recent IRS rulings, more estate plans now include grantor trusts with built-in “toggle” mechanisms that allow assets to be included or excluded from the taxable estate depending on future law. These structures combine estate tax efficiency with flexibility to preserve basis advantages when beneficial.
GRATs, IDGTs, and Dynasty Trusts
Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs) remain powerful for transferring appreciating assets. Properly structured, they allow for the tax-efficient transfer of future appreciation while minimizing current gift taxes. Dynasty and perpetual trusts—often used to sustain wealth for multiple generations—are increasingly drafted with decanting provisions, powers of appointment, and trustee flexibility, ensuring adaptability across decades of legislative change.
Non-Grantor Trusts and SALT Deduction Opportunities
For residents with high taxable income, non-grantor trusts have regained prominence due to expanded state and local tax (SALT) deduction limits. The allowable deduction has been raised in many cases to $40,000, enabling the strategic use of multiple trusts to optimize state tax efficiency. Since a non-grantor trust is a standalone entity, each trust may avail itself of a deduction for state taxes up to $40,000. Note that this higher SALT deduction is currently enacted as a temporary measure and is set to sunset after 2029. Proper structuring is essential to avoid exceeding AGI thresholds or triggering anti-abuse provisions.
Advanced Strategies for the Modern Estate
Families are employing increasingly sophisticated methods to balance estate tax mitigation, capital gains management, and philanthropic intent in light of shifting laws.
Partial Inclusion Trust Design
Trusts can now be structured to include only certain assets in the taxable estate—typically those that have appreciated significantly and would benefit from a step-up in basis—while excluding others for protection or control purposes. This hybrid approach helps optimize both estate and income tax outcomes.
Family Limited Partnerships and Discounting Techniques
LLCs and Family Limited Partnerships (FLPs) continue to serve as vehicles for control and valuation efficiency. By transferring fractional interests, families may apply discounts for lack of marketability or control, reducing taxable values. With greater IRS scrutiny on these techniques, documentation and purpose must be clear and defensible.
Charitable Integration
Charitable Remainder Trusts (CRTs), Charitable Lead Trusts (CLTs), and Donor-Advised Funds (DAFs) can complement an estate plan by balancing income needs, philanthropic goals, and tax efficiency. The permanent increase in exemptions makes charitable planning less about necessity and more about intent—how a family wishes to express values and extend influence through giving.
Life Insurance as a Liquidity Strategy
Life insurance continues to play an essential role in estate liquidity, particularly through Irrevocable Life Insurance Trusts (ILITs). Proceeds can be used to offset estate taxes or equalize inheritances without disrupting long-term investments or forcing asset sales.
Annual Gifting and Timing
Annual exclusion gifting remains one of the simplest and most reliable tools for wealth transfer. Even with higher exemptions, consistent gifting over time can help reduce the taxable estate while maintaining control through trusts or structured vehicles.
Governance, Oversight, and Continuity
Effective estate planning is not only technical—it’s human. The ability of future generations to sustain and manage wealth depends on structure, communication, and shared purpose.
Families are increasingly formalizing governance systems that include:
- Regular reviews of trust terms and estate structures every few years or upon major life or legislative changes.
- Built-in flexibility, such as powers of appointment, decanting provisions, and trustee discretion, to allow for adjustments over time.
- Education for heirs, helping younger generations understand investment principles, family mission statements, and philanthropic priorities.
- Transparent documentation, ensuring all trust decisions, valuations, and distributions are supported by appropriate records to withstand audit scrutiny.
This proactive approach reinforces family unity, reduces the risk of conflict, and helps preserve intent across generations.
Sample Case Studies
Case Study 1: The Business Owner and the Family Legacy
Scenario:
A 62-year-old business owner plans to sell her privately held manufacturing company valued at $40 million. She has two adult children—one active in the business and one not. Her goals are to minimize taxes on the sale, equalize inheritances, and preserve control of the family foundation that supports local education programs.
Strategy Applied:
Prior to the sale, she transfers a 30% minority interest in the company into a Grantor Retained Annuity Trust (GRAT) to lock in current valuation discounts and shift future appreciation out of her estate. She will continue to receive payments from the assets during the term specified in the GRAT ensuring her ongoing financial needs are met. Simultaneously, she creates a Charitable Lead Trust (CLT) funded with post-sale proceeds to provide annual gifts to the family foundation for 20 years. By funding the CLT in the year of the business sale she can achieve a current deduction for the 20 years of contributions to offset some of the gain on the sale of the business.
She also establishes an Irrevocable Life Insurance Trust (ILIT) to provide her non-participating child with equalization proceeds at her death, preserving fairness without requiring a forced sale of assets. By layering these strategies, she reduces estate tax exposure, aligns charitable and family goals, and maintains liquidity for future flexibility.
Outcome (Illustrative):
Her lifetime gifting, trust structures, and charitable integration could reduce her taxable estate by nearly 25%, while establishing long-term funding for causes aligned with her family’s values.
Case Study 2: The Corporate Executive Nearing Retirement
Scenario:
A 58-year-old senior executive at a publicly traded company has accumulated substantial wealth through restricted stock units (RSUs), deferred compensation, and qualified plan assets. He is approaching retirement and concerned about concentrated stock exposure, future capital gains, and estate taxes for his children.
Strategy Applied:
He establishes a Spousal Lifetime Access Trust (SLAT) funded with a portion of vested RSUs and brokerage assets, allowing his spouse access to the trust assets to support the spouse during their lifetime, while removing those assets from their combined taxable estate. He also sets up a basis-protected trust designed to include selected appreciated assets at death, preserving the step-up in basis under current IRS guidance.
To diversify holdings, he contributes company stock to a Charitable Remainder Trust (CRT), receiving an income stream for life while avoiding capital gains on the sale and securing a charitable deduction.
His retirement accounts are restructured to name a see-through trust as beneficiary, ensuring controlled distributions to heirs over the 10-year post-death period allowed under current rules.
Outcome (Illustrative):
This layered strategy creates flexibility, reduces concentrated exposure, and provides a balance between current lifestyle needs, philanthropic impact, and multi-generational transfer efficiency—all while positioning his family to adapt as tax laws continue to evolve.
Conclusion: Planning for What Comes Next
The future of inheritance and estate planning will be defined by adaptability. Elevated exemptions may have eased immediate estate tax concerns, but evolving IRS interpretations and shifting policy priorities continue to introduce uncertainty. A plan designed even five years ago may no longer deliver the balance of efficiency and control families expect.
Modern planning means more than protecting wealth—it means preparing heirs, defining purpose, and embedding flexibility to respond to change. Through careful trust design, periodic review, and integration of charitable and educational objectives, families can transform estate planning from a transaction into a legacy of stewardship.
By engaging with experienced professionals who understand the evolving tax environment and the nuances of multi-generational wealth, families can remain confident that their intentions—and their impact—will endure well beyond their lifetime.
If you would like more information about the terms and strategies discussed in this guide, or if you’re ready to explore how they apply to your specific situation, contact Waverly Advisors. With experience working with individuals, families, and executives managing significant wealth, we specialize in creating tailored strategies with the goal to help you grow, protect, and transfer your assets effectively.
MEET THE AUTHOR
Becky Hoover, CFP®, CPA, CDFA®
Partner, Wealth Advisor, Director of Financial Planning
Becky joined Waverly in April of 2024 when McShane Partners was acquired by Waverly Advisors, LLC. She serves as Partner, Wealth Advisor and Director of Financial Planning. Becky was a “big four” tax consultant for over 25 years before transitioning to wealth management in 2019. She has advised individuals and businesses on complex tax and financial transactions domestically and internationally. As a wealth advisor she assists clients with financial planning, tax planning, executive compensation, and estate planning… Learn More
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