CPA for Estate Taxes: Planning to Protect and Transfer Your Wealth
Last Updated: 2025
Estate taxes have the potential to take 40% of your accumulated wealth above the exemption threshold — wealth you've already paid income taxes on, spent decades building, and intended to pass to your children, grandchildren, or other beneficiaries.
The federal estate tax applies to estates above the current exemption ($13.61 million per individual / $27.22 million per couple in 2024). But this exemption is scheduled to sunset significantly at the end of 2025, potentially dropping to approximately $7 million per individual without Congressional action. This pending change has created urgency for high-net-worth families to implement estate planning strategies before the window closes.
A CPA specializing in estate taxes works alongside estate attorneys to design, implement, and administer tax-efficient wealth transfer strategies — helping families pass maximum wealth to the next generation while minimizing what goes to the federal (and state) government.
Table of Contents
- The Federal Estate Tax: How It Works
- The 2025 Exemption Sunset
- Gift Tax: The Estate Tax's Partner
- Generation-Skipping Transfer Tax (GSTT)
- Annual Gift Exclusion Strategies
- Irrevocable Life Insurance Trusts (ILITs)
- Grantor Retained Annuity Trusts (GRATs)
- Spousal Lifetime Access Trusts (SLATs)
- Charitable Estate Planning Tools
- Family Limited Partnerships and Valuation Discounts
- The CPA's Role in Estate Settlement
- Frequently Asked Questions
- Conclusion
The Federal Estate Tax: How It Works
The federal estate tax is a tax on the transfer of a decedent's taxable estate to heirs. Here's how it's calculated:
The Taxable Estate:
The taxable estate is the fair market value of everything you own at death:
- Real estate (at fair market value)
- Investment accounts and retirement accounts
- Business interests
- Life insurance death benefits (if you own the policy)
- Personal property (vehicles, jewelry, art, collectibles)
- Bank accounts
Less allowable deductions:
- Debts and liabilities
- Funeral expenses
- Estate administration expenses
- Marital deduction (transfers to surviving spouse are fully deductible — no estate tax on transfers between spouses)
- Charitable deduction (transfers to qualifying charities reduce the taxable estate)
The Tax Rate:
The federal estate tax rate is a flat 40% on the taxable estate above the applicable exclusion amount. The graduated rates at the lower levels are effectively irrelevant because the lifetime exemption absorbs the lower brackets.
The Applicable Exclusion Amount:
The unified credit against estate and gift taxes covers transfers up to the applicable exclusion amount — $13.61 million per individual in 2024. This means an individual can transfer up to $13.61 million at death (or through lifetime gifts, or a combination) before owing estate tax.
Portability:
A surviving spouse can "port" the deceased spouse's unused exclusion amount to their own estate. If a spouse dies leaving a taxable estate of $5 million, the remaining $8.61 million exclusion can be transferred to the surviving spouse — potentially giving the survivor a combined exclusion of $13.61 million + $8.61 million = $22.22 million. Portability must be elected on a timely filed estate tax return (Form 706), even if no tax is owed.
The 2025 Exemption Sunset
This is the most urgent estate planning issue for high-net-worth families right now.
The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the estate and gift tax exemption from approximately $5.49 million (2017) to $11.18 million per individual. With inflation adjustments, this grew to $13.61 million in 2024.
The Sunset:
The TCJA's provisions sunset on December 31, 2025 — meaning that without Congressional action, the exemption returns to its pre-TCJA level, adjusted for inflation. Estimates suggest the post-sunset exemption will be approximately $6.8-$7.5 million per individual in 2026.
For a married couple:
- Current (2024): $27.22 million combined exemption
- Post-sunset (est. 2026): $13.6-$15 million combined exemption
Families with estates between $15 million and $27 million that are currently below the estate tax threshold could suddenly find themselves with significant estate tax exposure.
The Anti-Clawback Regulation:
The IRS has issued regulations confirming that gifts made using the increased exemption before the sunset will NOT be "clawed back" into the estate for estate tax purposes when the donor dies after 2025. This makes the window between now and the sunset an extraordinary opportunity to make large gifts using the increased exemption before it disappears.
A CPA working on estate planning urgently advises clients whose estates are in the $7-27 million range to implement gifting strategies before December 31, 2025.
Gift Tax: The Estate Tax's Partner
The federal gift tax and estate tax are unified — meaning the same lifetime exemption ($13.61 million in 2024) applies to both taxable lifetime gifts and transfers at death. They are two sides of the same coin.
How Gift Tax Works:
You can transfer up to $13.61 million during your lifetime (above and beyond annual exclusion gifts) without paying gift tax. But each taxable gift reduces the remaining exemption available for your estate. If you make $5 million in taxable lifetime gifts, your estate exemption is reduced to $8.61 million.
Annual Exclusion Gifts:
The annual exclusion ($18,000 per recipient in 2024) allows tax-free gifts to any number of individuals without touching your lifetime exemption. These are discussed in detail below.
Present Interest Requirement:
To qualify for the annual exclusion, a gift must be a "present interest" — the recipient must have the immediate right to use, possess, and enjoy the gift. Gifts to trusts generally don't qualify as present-interest gifts unless the trust includes Crummey provisions (notification of the beneficiary's right to withdraw, creating a present interest).
Direct Payments:
Two categories of payments are not considered gifts at all and don't require any exclusion:
- Direct payments to educational institutions for tuition (not room and board)
- Direct payments to medical providers for medical expenses
These can be used in addition to annual exclusion gifts, creating an additional planning opportunity for families with sufficient wealth.
Annual Gift Exclusion Strategies
The annual gift exclusion — $18,000 per recipient per year in 2024, indexed for inflation — is the simplest and most accessible estate planning tool.
Married Couple Gift-Splitting:
A married couple can combine their exclusions to give $36,000 per recipient per year. For a wealthy couple with 3 adult children, 3 children's spouses, and 6 grandchildren: that's 12 recipients × $36,000 = $432,000 annually removed from the taxable estate with zero tax consequences.
Over 10 years, this systematic gifting removes $4.32 million from the estate — saving $1.73 million in estate tax (at 40%).
Funding 529 Plans:
Annual exclusion gifts can be made to 529 education savings accounts. Additionally, a special election allows "superfunding" — contributing up to 5 years of annual exclusion gifts in one lump sum ($90,000 per recipient, or $180,000 from a couple) to a 529 account, treating it as five years of annual exclusion gifts.
Gifts to Trusts with Crummey Provisions:
Gifts to trusts (like ILITs) that include Crummey withdrawal rights qualify for the annual exclusion while still keeping assets in trust for estate planning purposes.
Irrevocable Life Insurance Trusts (ILITs)
Life insurance proceeds are included in the insured's taxable estate if the insured owned the policy at death. For high-net-worth individuals, this means a $5 million life insurance policy adds $5 million to the taxable estate — potentially adding $2 million in estate tax.
The ILIT Solution:
An Irrevocable Life Insurance Trust (ILIT) owns the life insurance policy instead of the insured. When the insured dies, the death benefit is paid to the trust — outside the taxable estate.
How the ILIT Works:
- The ILIT is created and named as owner and beneficiary of the life insurance policy.
- The insured makes annual gifts to the ILIT to fund premium payments (using the annual exclusion with Crummey provisions).
- At the insured's death, the death benefit is paid to the ILIT tax-free and outside the estate.
- The trust provides liquidity (cash) to the estate to pay estate taxes, or provides an income stream to surviving family members.
The Power of the ILIT:
The ILIT converts life insurance from an estate-taxed asset to an estate-tax-free source of liquidity. For a family that otherwise might need to sell illiquid assets (real estate, a business) to pay estate taxes, the ILIT-held insurance provides the cash needed to keep those assets intact.
Grantor Retained Annuity Trusts (GRATs)
A GRAT is an irrevocable trust to which you transfer assets while retaining an annuity payment for a fixed term. At the end of the term, the remaining trust assets pass to beneficiaries.
How GRATs Work:
You transfer $5 million in appreciating assets (growing stock, private company interests) to a GRAT. The GRAT pays you back an annuity over, say, 5 years, set at the IRS Section 7520 rate (approximately 5-5.5% in 2024) applied to the initial transfer. If the assets grow faster than the 7520 rate, the excess appreciation passes to heirs with minimal gift tax.
Zeroed-Out GRATs:
In a "zeroed-out" GRAT, the annuity payments are set so that the present value of all annuity payments equals the initial contribution — resulting in a gift of essentially $0 for gift tax purposes. Any growth above the 7520 rate passes to heirs tax-free.
What Makes GRATs Work:
GRATs are most powerful when (1) interest rates are low (making the hurdle rate that assets must exceed to benefit heirs lower), and (2) the assets transferred are expected to significantly appreciate (private company stock pre-IPO, volatile growth assets, etc.).
The Mortality Risk:
If the grantor dies during the GRAT term, the assets revert to the estate — as if the GRAT never existed. For this reason, shorter GRAT terms are preferable, and GRATs should not be used for individuals with serious health concerns.
Spousal Lifetime Access Trusts (SLATs)
A SLAT is an irrevocable trust that one spouse funds for the benefit of the other spouse and/or children. The key feature: the beneficiary spouse can access trust distributions during their lifetime, providing ongoing family benefits.
Why SLATs Are Attractive:
A SLAT allows a married couple to use their lifetime gift tax exclusion to remove assets from their taxable estate while still maintaining indirect access to those assets through the beneficiary spouse. This addresses a common objection to large gifting: "What if we need the money?"
The Reciprocal Trust Doctrine:
A critical limitation: spouses cannot create substantially similar SLATs for each other simultaneously without risking the IRS "uncrossing" the trusts under the reciprocal trust doctrine. Staggered timing, different trustees, different terms — these differences help distinguish the trusts.
The "Divorce" Problem:
Because the trust is irrevocable, if the donor spouse and beneficiary spouse divorce, the beneficiary spouse still has access to the SLAT assets — and the donor spouse does not. This is an important consideration in SLAT planning.
Frequently Asked Questions
Q: Does my state have an estate tax?
Twelve states and the District of Columbia impose their own estate tax, sometimes with lower exemption thresholds than the federal exemption. Washington state has an estate tax with an exemption of only $2.193 million (2024); Massachusetts and Oregon have $1 million exemptions. Living in a state with a separate estate tax requires state-specific planning in addition to federal planning.
Q: What is the step-up in basis and how does it affect estate planning?
Assets included in a decedent's estate receive a "stepped-up" tax basis equal to their fair market value at death — eliminating capital gains tax on lifetime appreciation. This creates a tension with lifetime gifting: assets given away during life carry the donor's original cost basis (no step-up), while assets held until death receive the step-up. Planning must balance estate tax savings from lifetime gifting against income tax savings from the step-up.
Q: When should I start estate planning?
Estate planning should begin as soon as you have significant assets, dependents, or both — and should be reviewed whenever your financial situation, family structure, or tax law changes materially. Given the pending 2025 exemption sunset, families with estates above $7 million per person should urgently review and potentially implement gifting strategies before the window closes.
Q: Do I need both a CPA and an estate attorney for estate planning?
Yes. Estate planning involves both tax strategy (CPA's domain) and legal documents (estate attorney's domain — wills, trusts, powers of attorney, beneficiary designations). A CPA identifies the optimal tax strategies and calculates their impact; the estate attorney drafts the legal instruments to implement them. The two professionals work together, and you need both.
Q: Are gifts to grandchildren subject to additional taxes?
Transfers to grandchildren or more remote descendants (or to unrelated persons more than 37.5 years younger) may be subject to the Generation-Skipping Transfer Tax (GSTT) — a separate 40% tax on top of any estate or gift tax. The GSTT has its own exemption ($13.61 million per individual in 2024, unified with the estate/gift tax exemption). Planning multi-generational wealth transfers requires managing both the estate/gift tax and the GSTT.
Q: What assets are not included in the taxable estate?
Assets held in irrevocable trusts (if properly structured), life insurance held in an ILIT, assets in charitable lead trusts that have been transferred, and assets in properly structured qualified retirement accounts (as they're subject to income tax rather than estate tax on withdrawal). Annual exclusion gifts made during lifetime also reduce the taxable estate. Working with a CPA helps identify which assets can be repositioned to reduce estate tax exposure.
Conclusion
Estate taxes are one of the few taxes that can be dramatically reduced through proactive planning — but only if that planning happens before it's too late. The 40% federal estate tax rate, combined with the potential halving of the exemption after 2025, creates urgency for high-net-worth families to implement strategies that will protect their legacy.
A CPA who specializes in estate taxes works alongside your estate attorney to model the tax impact of different strategies, identify the most effective approaches for your specific estate, and ensure that the tax dimensions of your estate plan are optimized. This coordination between legal and tax expertise is essential for comprehensive estate planning.
Our CPA firm provides estate tax planning and estate administration services. Contact us for a confidential consultation.
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