Estate Planning Under the $15 Million Exemption: A Technical Analysis of Wealth Transfer Strategies

The federal estate and gift tax basic exclusion amount is $15,000,000 per individual ($30,000,000 for a married couple), permanent and indexed for inflation beginning in 2027.¹ This article examines the current transfer tax landscape and provides a comprehensive analysis of the planning techniques available to high-net-worth clients—including dynasty trusts, spousal lifetime access trusts (SLATs), intentionally defective grantor trusts (IDGTs), grantor retained annuity trusts (GRATs), valuation discount strategies, and basis optimization planning. Particular attention is devoted to the critical interplay between estate tax exclusion and income tax basis step-up at the current exemption level, the impact of recent charitable deduction changes, and the continuing relevance of state estate tax planning.

I. Introduction: The Current Transfer Tax Landscape

A. Legislative Background

The Tax Cuts and Jobs Act of 2017 (TCJA) temporarily doubled the federal estate and gift tax exemption through December 31, 2025.² For nearly eight years, estate planners operated under the cloud of a scheduled reversion to approximately $6.8–$7.3 million per person. This impending reduction prompted an urgent wave of planning activity—SLATs, IDGTs, and other irrevocable trusts became the dominant estate planning strategies of the era.

H.R. 1, 119th Congress (Pub. L. No. 119-21), commonly known as the "One Big Beautiful Bill Act," signed into law on July 4, 2025, resolved this uncertainty permanently.³ Effective January 1, 2026, the basic exclusion amount under IRC § 2010(c)(3)(A) is $15,000,000 per individual.⁴ This amount is:

• ‍Permanent — there is no automatic sunset provision (though it remains subject to future legislative reduction)‍
• Indexed for inflation beginning in 2027, the exemption will increase annually based on cost-of-living adjustments

These two features fundamentally alter planning urgency. Unlike the TCJA regime, there is no "use it or lose it" dynamic driven by an expiration date. Planning timelines are flexible, and practitioners can advise clients without artificial legislative deadlines.

B. What the $15 Million Exemption Means in Practice

For practical purposes:

• A single individual can transfer up to $15,000,000 (in 2026 dollars) during life or at death without incurring federal estate or gift tax
• A married couple can transfer up to $30,000,000 combined (using both spouses' exemptions)
• Every dollar above these thresholds is taxed at 40%
• The exemption will grow with inflation beginning in 2027, gradually expanding tax-free transfer capacity over time⁵

C. What Remains Unchanged

The fundamental architecture of the federal transfer tax system remains intact:

• The 40% maximum estate and gift tax rate applies to transfers above the exemption⁶
• The GST tax continues as a parallel system, with a $15,000,000 GST exemption maintaining parity with the estate and gift tax exemption (also indexed for inflation)⁷
• The unified credit structure remains operative—lifetime gifts reduce available exemption at death⁸
• The annual exclusion continues at $19,000 per donee (2025–2026), subject to future inflation adjustments⁹
• Direct payments of medical expenses and tuition remain excluded from transfer tax regardless of amount, provided payments are made directly to the provider or institution¹⁰
• Standard deductions for transfers to surviving spouses, charitable contributions, estate administration expenses, and Graegin loan interest remain fully applicable¹¹

D. Why Sophisticated Estate Planning Remains Essential

The $15 million exemption does not eliminate the need for estate planning. For individuals and couples with estates exceeding $15 million (individual) or $30 million (married), the transfer tax system imposes a 40% marginal rate on every dollar above the exemption. Moreover, the planning techniques discussed herein provide benefits beyond exemption utilization—including asset protection, income tax optimization, multi-generational wealth preservation, and business succession planning. For clients below the new threshold, the planning focus shifts to basis optimization and state estate tax mitigation—but planning remains essential.

II. The Transfer Tax System: Current Framework

A. The Unified System Mechanics

The unified estate and gift tax system operates straightforwardly: lifetime taxable gifts reduce the exemption available at death.¹² A donor who makes $5 million in taxable gifts during life retains $10,000,000 of exemption at death. A donor who makes no lifetime gifts has the full $15,000,000 available to shelter the estate.

B. Generation-Skipping Transfer Tax

The GST tax assesses an additional level of tax on transfers to grandchildren or more remote descendants to prevent multi-generational tax avoidance.¹³ The GST exemption under IRC § 2631(c) is $15,000,000, maintaining parity with the estate and gift tax exemption, and is similarly indexed for inflation beginning in 2027.¹⁴

C. Annual Exclusion and Other Exclusions

The annual exclusion—which operates independently of the lifetime exemption—permits tax-free gifts to any number of individuals up to the inflation-adjusted limit each year.¹⁵ The current annual exclusion is $19,000 per donee.¹⁶ Annual exclusion gifts reduce neither the $15,000,000 lifetime exemption nor the GST exemption. Additional exclusions—direct payment of medical expenses and tuition—remain intact and do not consume transfer tax exemption so long as payments are made directly to the provider or institution.¹⁷

D. Deductions: Marital, Charitable, and Administrative

Estates continue to be taxed on their net value. Standard deductions for transfers to surviving spouses, charitable contributions, estate administration expenses (e.g., attorney and accountant fees), and Graegin loan interest remain fully applicable.¹⁸

III. Charitable Planning: Significant Recent Changes

A. New Limitations on Charitable Deductions

H.R. 1 introduced meaningful changes to the income tax charitable deduction that directly affect estate planning strategies involving charitable giving:

Floor on Charitable Deductions: A new 0.5% of AGI floor applies before charitable deductions become available for itemizers.¹⁹ Donors must exceed this threshold before any charitable deduction is allowed.

Value Cap for High-Income Taxpayers: For taxpayers in the top 37% bracket, the value of the charitable deduction is capped at 35%.²⁰ This effectively reduces the tax benefit of charitable giving for the wealthiest donors.

Standard Deduction Filers: As a partial offset, taxpayers who claim the standard deduction may now deduct up to $1,000 ($2,000 for married filing jointly) of cash charitable contributions.²¹

B. Impact on Estate Planning Charitable Strategies

These changes affect several planning vehicles:

Charitable Lead Annuity Trusts (CLATs): The income tax deduction for contributions to CLATs is subject to the new limitations, though the transfer tax benefits remain unchanged.²²

Charitable Remainder Trusts (CRTs): While the transfer tax treatment is unaffected, the income tax benefits of funding a CRT during life are reduced for high-income taxpayers.²³

Lifetime Charitable Giving as Estate Reduction: For clients using charitable giving to reduce gross estates for state estate tax purposes, the reduced income tax benefit must be weighed against the estate tax savings.

Donor-Advised Funds: The floor and cap may encourage bunching strategies, making DAFs more attractive as timing vehicles.²⁴

Practitioners should model the after-tax cost of charitable strategies under the new limitations before recommending them as estate reduction techniques.

IV. Transition Planning: Clients Who Acted Before 2026

A. Gifts Made During the TCJA Enhanced Exemption Period (2018–2025)

Clients who made substantial lifetime gifts during 2018–2025 to utilize the "bonus exemption" before the anticipated sunset need not be concerned that those gifts are disadvantaged. The anti-clawback regulations remain in full force. Final regulations issued November 26, 2019 (T.D. 9884) confirmed that there will be no "clawback" when the exclusion amount changes—an estate is permitted to compute its estate tax using the higher of the BEA in effect when gifts were made or the BEA in effect at death.²⁵

The "higher of" test now compares: (i) The $15,000,000 applicable exclusion amount at death, or (ii) The applicable exclusion amount actually used on completed gifts made during the decedent's life

Since $15,000,000 exceeds the 2018–2025 exemption amounts ($11.18M–$13.99M), a decedent who made gifts during that period will use the $15,000,000 amount at death—meaning the full new exemption shelters the estate, and prior gifts are not "double-counted" against the donor.

Practical Result: Clients who made, for example, an $11 million gift in 2019 now have approximately $4,000,000 in additional exemption available ($15,000,000 – $11,000,000 = $4,000,000).²⁶ They may wish to make supplemental gifts to fully utilize the increased amount.

B. SLATs and IDGTs Established Prior to 2026

Clients who established SLATs or IDGTs during the pre-2026 planning wave at the then-current exemption levels now have additional unused exemption. Examples:

• A client who funded a SLAT at $12,060,000 in 2022 now has approximately $2,940,000 in additional available exemption
• A client who funded at $11,700,000 in 2021 now has approximately $3,300,000 available

These incremental amounts can be contributed to existing trusts (or new trusts) to fully utilize the $15,000,000 exemption.

C. Basis Step-Up Considerations for Prior Transfers

A critical post-transition principle: the benefit of removing assets from an estate may be more than offset by the loss of the IRC § 1014 basis step-up—particularly where the estate would owe no federal estate tax regardless.²⁷

With the exemption now at $15 million, clients whose total estates fall below $15 million (or $30 million for married couples) should carefully evaluate whether assets previously transferred to irrevocable trusts should be recovered via the substitution power. For these clients, estate inclusion and the resulting IRC § 1014 basis step-up may now be more valuable than estate tax exclusion, since no estate tax would be owed regardless.

The substitution power (or "swap power") is the primary mechanism for this recovery.²⁸ An elderly or infirm grantor exercises the power to swap cash into the trust in exchange for highly appreciated trust assets, which then receive a stepped-up basis at the grantor's death under § 1014.²⁹

D. Action Items for Clients Who Previously Acted

V. Planning for Estates Above $15 Million

A. The Continuing Need for Exemption Utilization

For individuals with estates exceeding $15 million—and married couples exceeding $30 million—the transfer tax system continues to impose a 40% marginal rate on excess value. The fundamental strategy remains unchanged: exemption should be used affirmatively during life to shelter future appreciation from the 40% estate tax.

B. Who Should Still Be Planning Aggressively?

Clients in the following categories should continue advanced planning:

• Individuals with current or projected net worth exceeding $15 million
• Married couples with combined estates exceeding $30 million
• Business owners with rapidly appreciating equity (even if currently below the threshold)
• Individuals in states with state estate taxes at lower thresholds (many states impose estate taxes beginning at $1–7 million)
• Families with multi-generational wealth transfer objectives (dynasty planning)
• Clients seeking asset protection, regardless of estate tax exposure

VI. The Dynasty Trust at the $15 Million Level

A. Enhanced Funding Capacity

A dynasty trust can be funded with up to $15,000,000 per individual (or $30,000,000 per married couple) without incurring gift or GST tax.³⁰ With inflation indexing, this capacity will grow annually beginning in 2027.

B. Multi-Generational Tax Avoidance

The dynasty trust's economic advantage—avoiding the 40% estate tax at each generational transfer—is amplified by the larger initial funding. With a $15,000,000 initial funding, and applying reasonable growth assumptions (40% estate tax every 30 years; net 5% annual growth), the dynasty trust produces extraordinary compounding advantages over multiple generations compared to assets held in individual taxable estates.³¹

C. Asset Protection and Family Bank Functions

Non-tax benefits remain central to the dynasty trust's appeal:

• Trust assets remain protected from beneficiaries' creditors, including ex-spouses, contract creditors, and tort creditors
• The trust can function as a "family bank," making loans to beneficiaries for residence purchases or providing venture capital for business opportunities
• Professional trustee management provides continuity across generations³²

D. Ideal Candidates

Prime candidates for dynasty trusts include individuals with sufficient retained wealth to sustain their lifestyle through life expectancy, those seeking to eliminate multi-generational estate tax exposure, and family business owners who wish to "freeze" equity value for transfer tax purposes while the business appreciates. At the current exemption level, clients should have sufficient assets to maintain their lifestyle after gifting $15 million (individual) or $30 million (combined). Financial modeling remains critical.

E. Dynasty Trust with General Power of Appointment (Basis Refresh)

A particularly valuable variation is the dynasty trust that grants a beneficiary a general power of appointment (GPOA) over trust assets. When the powerholder dies, assets subject to the GPOA are included in the powerholder's gross estate under IRC § 2041—thereby receiving a stepped-up basis under IRC § 1014.³³

At the current exemption level, this "basis refresh" can be accomplished at zero estate tax cost for any beneficiary whose own estate (including the trust assets subject to the GPOA) falls below $15 million.³⁴ This makes the dynasty trust with GPOA an extraordinarily flexible vehicle: it provides GST-exempt multi-generational transfer, asset protection, and periodic basis step-ups at each generation—all without incurring estate tax so long as each powerholder's total exposure remains below the exemption. However, practitioners must carefully analyze the GST consequences: if the GPOA is exercised to appoint assets to a new trust, that trust requires a fresh GST exemption allocation; if the GPOA lapses, the inclusion ratio is recalculated under Treas. Reg. § 26.2642-4(a). The "basis refresh" does not automatically preserve the original trust's zero-inclusion-ratio status.

Practitioners should draft the GPOA with appropriate limitations (e.g., requiring trust protector consent, or limiting the power to a formula amount calibrated to the powerholder's available exemption) to prevent unintended tax consequences.³⁵

VII. Intentionally Defective Grantor Trusts (IDGTs)

A. The Defective Grantor Trust Paradigm

An Intentionally Defective Grantor Trust ("IDGT") is an irrevocable trust that freezes the value of transferred assets for estate tax purposes while remaining transparent (i.e., "defective") for income tax purposes—meaning the grantor continues to be treated as the owner of the trust assets for income tax reporting.³⁶

The foundational revenue rulings governing IDGTs remain fully operative:

B. Gift to Grantor Trust

A single client can gift up to $15,000,000 to a grantor trust (utilizing full gift and GST exemption), with married couples able to fund up to $30,000,000 in total through separate trusts, while still retaining substitution powers for basis management.⁴³

C. Sale to Grantor Trust (Enhanced Leverage)

The sale-to-IDGT structure continues to offer extraordinary leverage. The sale generates no capital gain (Rev. Rul. 85-13),⁴⁴ constitutes no gift (because full fair value is exchanged via promissory note), and leverages the initial seed gift at a 9:1 ratio. With the $15,000,000 exemption, a single client's seed gift can be $15,000,000—supporting an installment sale of up to $135,000,000 at the traditional 10% seed ratio (9:1 leverage).⁴⁵ For a married couple, the combined seed capacity of $30,000,000 supports sales of up to $270,000,000. This dramatically expands the universe of clients for whom the installment sale to an IDGT is the optimal strategy—particularly owners of rapidly appreciating businesses.

D. Basis Maximization via Substitution Power

The substitution power remains the primary tool for basis optimization.⁴⁶ An elderly or infirm grantor exercises the swap power to exchange cash (or high-basis assets) into the trust in return for highly appreciated, low-basis trust assets. Upon the grantor's death, those reacquired assets receive a stepped-up basis under IRC § 1014, eliminating all built-in gain.⁴⁷

Critical Application: For clients whose estates are below $15 million (or $30 million for couples), the substitution power takes on heightened importance. These clients should consider swapping appreciated assets out of their IDGTs and back into personal ownership—thereby obtaining a stepped-up basis at death under IRC § 1014—since no estate tax would be owed regardless.

Caveat: The IRC § 1014 step-up in basis has been a legislative target in prior Congresses (most recently in President Biden's 2021 proposals).⁴⁸ Practitioners should monitor for future proposals that would replace step-up with carryover basis.

VIII. Spousal Lifetime Access Trusts (SLATs)

A. Role and Structure

A SLAT is a variation of the dynasty trust in which the grantor's spouse holds a beneficial interest in the trust principal and/or income. In dual-SLAT planning, each spouse serves as a beneficiary of the other's trust, allowing the couple to retain indirect access to essentially all transferred assets while removing them from both taxable estates.

SLATs remain the preeminent technique for married couples who wish to utilize exemption while preserving indirect access.

B. Current Funding Capacity

Each spouse can fund a SLAT with up to $15,000,000—for a combined family transfer of $30,000,000, all GST-exempt if properly allocated.⁴⁹

C. Critical Pitfalls

All SLAT risks continue to apply with full force:

Reciprocal Trust Doctrine: If spouses create substantially similar irrevocable trusts at or near the same time, the IRS may "uncross" the trusts—treating each spouse as the grantor of the trust benefiting him or her—resulting in full estate inclusion.⁵⁰ This doctrine also threatens state-law creditor protection.

Step-Transaction Doctrine: Improper sequencing of interspousal transfers and trust funding can invoke the step-transaction doctrine.⁵¹ In Smaldino v. Commissioner, T.C. Memo. 2021-127, the Tax Court recast a purported interspousal gift followed by a gift to a trust as a single direct transfer from husband to trust, because the interspousal gift was never effectively consummated.⁵²

Gift-Splitting: Gift-splitting under IRC § 2513 is generally unavailable for SLAT transfers because the consenting spouse holds a beneficial interest in the trust.⁵³ Unless that interest is both severable and ascertainable—a narrow exception—each spouse must fund his or her own SLAT using separate property and exemption.

D. Structural Safeguards

The following safeguards remain essential:

• Draft each trust with sufficiently different terms (different beneficiary classes, distribution standards, trustees, and/or dispositive provisions) to defeat the Reciprocal Trust Doctrine⁵⁴
• Execute the trusts at different times and fund them with different assets or values
• Do not name the other spouse as sole trustee of both SLATs; consider an independent or corporate trustee for at least one trust
• If a joint account must be divided prior to funding, accomplish the division well in advance
• Report interspousal transfers on a gift tax return with full adequate disclosure to trigger the three-year statute of limitations⁵⁵
• Allow meaningful passage of time between interspousal transfers and SLAT funding to avoid step-transaction recharacterization (Smaldino)
• If entity interests (LLCs, partnerships) are involved, confirm that all formalities are observed: operating agreement transfer provisions, proper consent, and confirmed assignee/member status
• Ensure all steps occur in proper sequence
• Affirmatively allocate sufficient GST exemption to achieve a zero-inclusion ratio⁵⁶

E. Should Clients Below $30M Still Use SLATs?

For married couples whose combined estates fall below $30 million, the advisability of a SLAT depends on multiple factors:

Arguments for continuing SLAT planning (even below threshold):

• Asset protection benefits remain valuable regardless of estate tax exposure
• State estate taxes may apply at significantly lower thresholds (often $1–7 million depending on the jurisdiction)
• Assets may appreciate significantly, eventually exceeding the $15M/$30M threshold
• Multi-generational GST planning benefits are unrelated to the current exemption level
• The current exemption level could be reduced by future legislation

Arguments against new SLAT funding for below-threshold clients:

• Loss of basis step-up at death (assets in irrevocable trusts generally do not receive § 1014 step-up)⁵⁷
• Administrative costs of trust maintenance
• Loss of direct control and access
• Marital risk (if divorce occurs, spouse loses beneficial interest in the other's SLAT)

For these clients, the income tax cost of forfeiting basis step-up may exceed any estate or state death tax savings—a calculus that must be modeled on a case-by-case basis.

F. Trust Protector and Access Provisions

Well-drafted SLATs should include a Trust Protector with authority to: (a) remove and replace trustees (subject to the Rev. Rul. 95-58 safe harbor requiring that replacement trustees not be related or subordinate to the grantor);⁵⁸ (b) change trust situs and governing law; (c) correct scrivener's errors; and (d) modify administrative provisions that do not affect beneficial interests.

Additionally, the trust should include a power held by a person acting in a non-fiduciary capacity to make loans to the grantor at adequate interest (though adequate security is not required).⁵⁹ This provides a mechanism for the grantor to access trust liquidity without triggering estate inclusion.

G. State Income Tax Optimization and Non-Grantor Trust Planning

In high-tax states (e.g., California, New York), practitioners should consider structuring trusts as non-grantor trusts—sometimes called "SLANTs" (Spousal Lifetime Access Non-Grantor Trusts) or "SALTy SLATs"—to achieve state income tax savings.

SALT Cap Considerations: H.R. 1 temporarily raised the SALT deduction cap under IRC § 164(b)(6) from $10,000 to $40,000 (indexed for inflation at 1% annually) for 2025 through 2029, reverting to $10,000 in 2030.⁶⁰

Income-Based Phaseout: The $40,000 SALT cap is available only for taxpayers with Modified Adjusted Gross Income (MAGI) below $500,000 ($250,000 for Married Filing Separately).⁶¹ For taxpayers with MAGI above $500,000, the $40,000 cap phases down at a rate of 30 cents for each dollar of income above the threshold, until the deduction reverts to the original $10,000 cap. The $500,000 income threshold and the $40,000 cap both increase by 1% annually through 2029. This means the highest-income taxpayers—precisely those most likely to engage in estate planning—remain subject to the $10,000 SALT cap even during the 2025–2029 window.

This temporary increase reduces (but does not eliminate) the benefit of state income tax avoidance structures during the 2025–2029 window. After 2029, the restored $10,000 cap will make non-grantor trust planning more attractive again.

Situs Planning: After both spouses' deaths, consider transferring the trusteeship to a jurisdiction with no state income tax on undistributed trust income (e.g., Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming) or a jurisdiction that does not tax irrevocable trusts with non-resident beneficiaries (e.g., Delaware).⁶²

Caution: Numerous states assert income tax jurisdiction over inter vivos trusts based on the grantor's residence at the time of creation—meaning the trust may be permanently "tainted" regardless of subsequent trustee relocation.⁶³ State-specific analysis is essential.

IX. Grantor Retained Annuity Trusts (GRATs)

A. Purpose and Application

A GRAT is an irrevocable trust that allows the grantor to transfer appreciating assets to beneficiaries with minimal or zero gift tax cost.⁶⁴ GRATs remain one of the most powerful tools available because they consume minimal (or zero) exemption.

GRATs serve two distinct client populations:

• Clients who have already fully utilized their $15M exemption and wish to transfer additional wealth without paying gift tax
• Clients who prefer not to use exemption on a speculative asset (because the GRAT "zeroes out" the gift)

B. Ideal Application

GRATs are ideally suited for: (1) transferring property expected to appreciate faster than the Section 7520 Applicable Federal Rate;⁶⁵ (2) hedging against the possibility that speculative assets decline in value (where only a nominal amount of exemption is "wasted"); and (3) making transfers when the grantor is cash-poor and wishes to minimize gift tax exposure.

C. Zeroed-Out GRAT Technique

The "zeroed-out" GRAT—a short-term trust with annuity payments calibrated to reduce the taxable gift to as little as $1—was specifically approved by IRS regulations amended in 2003 and remains fully available.⁶⁶ The technique operates independently of the exemption amount and continues to transfer appreciation above the § 7520 rate to beneficiaries at negligible gift tax cost.⁶⁷

D. Economic Power (Illustrated)

Historical example (2024 rates): A GRAT funded with an asset valued at $10 million, structured with a two-year term at a 5.6% Section 7520 rate, and assuming the asset sold within 12 months for $25 million, would generate annuity payments totaling approximately $10.87 million returned to the grantor and approximately $14.13 million distributed to beneficiaries—all achieved with a taxable gift of only $1.

Practitioners should apply the current § 7520 rate (which fluctuates monthly) when modeling GRATs.⁶⁸

X. Valuation Discounts: Amplified Value at Higher Exemption Levels

A. Continuing Applicability

Valuation discounts remain a critical component of exemption optimization. Combined discounts for lack of control and lack of marketability can reach 35–40% depending on the facts and circumstances.⁶⁹ Valuation discounts arise from the economic characteristics of the transferred property—not from the tax code's exemption levels.⁷⁰

B. Enhanced Leverage at $15 Million

The $15 million exemption amplifies the value of discounting:

• At a combined 36% discount, $15,000,000 of exemption can shelter the transfer of an asset with an undiscounted pro-rata value of approximately $23,437,500
• For a married couple: $30,000,000 of exemption can shelter approximately $46,875,000 of undiscounted pro-rata value

C. Types of Applicable Discounts

The principal categories of applicable discounts include:

• ‍Fractional interest / minority share discounts (reflecting the reduced desirability of owning less than 100% of an asset)⁷¹‍
• Lack of marketability discounts (reflecting the absence of a ready market or exchange on which to liquidate the interest)⁷²‍
• Lack of control discounts (applicable to non-voting or minority voting interests that cannot unilaterally direct entity operations)‍
• Market absorption / blockage discounts (applicable where a large supply of equity depresses value due to low demand)⁷³‍
• Key person discounts (applicable where the departure or death of a key individual depresses the entity's value)⁷⁴

D. Best Assets for Exemption Optimization

Cash and publicly traded securities—while easy to value—cannot be discounted because they are liquid, tradable, and fungible. By contrast, non-controlling interests in closely-held businesses are generally the most efficient assets for exemption optimization because their fair market value can be legitimately reduced through lack-of-control and lack-of-marketability discounts. A $15 million exemption deployed against a discountable closely-held business interest effectively shelters far more than $15 million of underlying economic value.

E. Defined Value Formula Clauses

Defined value formula clauses permit the gifting of a specific dollar amount of a hard-to-value asset—the dollar amount is fixed, but the quantity of units transferred floats based on subsequently determined fair market value.⁷⁵ This technique requires meticulous compliance with adequate disclosure rules on the gift tax return to trigger the three-year statute of limitations.⁷⁶ Practitioners should be aware that the IRS continues to scrutinize Wandry-style non-charitable formula clauses.

Under the current exemption, the defined value clause can specify "$15,000,000 worth of [asset]"—transferring more units of a discountable asset per dollar of exemption consumed.

XI. Pre-Transaction Planning: The Timing Imperative

A. The Timing Principle

The further in advance of a liquidity event that pre-transaction planning is completed, the lower the fair market value of the transferred equity is likely to be—creating an optimal scenario for exemption utilization. Once transferred to an irrevocable trust, the assets grow outside the client's taxable estate, and all post-transfer appreciation escapes the 40% estate tax.

B. Merger Arbitrage Data

Merger arbitrage research demonstrates a significant difference between the fair market value of a business interest when no transaction is pending and its value as a sale or acquisition approaches closing.⁷⁷ Empirical data shows that the price per share rises incrementally each month before the actual closing date—in one illustrative example, the pre-transaction value of $10/share doubled to $20/share at closing, with the value at the "merger uncertainty" midpoint approximately $17/share.⁷⁸ The earlier planning occurs on this continuum, the more exemption-efficient the transfer.

C. Assignment of Income Doctrine

Transfers completed closer to a liquidity event risk triggering the assignment of income doctrine, under which the IRS may attribute gain recognition from the transaction to the donor rather than the donee.⁷⁹ This risk is particularly acute when the donee is a non-grantor trust, charity, or charitable remainder trust. This risk remains neutralized for sales to intentionally defective grantor trusts under Rev. Rul. 85-13.⁸⁰

XII. Portability: Deceased Spousal Unused Exclusion (DSUE)

A. DSUE Calculation

The Deceased Spousal Unused Exclusion Amount ("DSUE") is the unused portion of a deceased spouse's applicable exclusion amount that may be "ported" to the surviving spouse.⁸¹ Mechanically, it equals the lesser of (1) the applicable exclusion amount, or (2) the excess of the deceased spouse's applicable exclusion amount over the sum of the deceased spouse's taxable estate and adjusted taxable gifts (i.e., the amount with respect to which the tentative tax is determined under § 2001(b)(1)).

The maximum DSUE is $15,000,000 (if the deceased spouse made no taxable transfers). For a surviving spouse who also retains their own $15,000,000 BEA, the total applicable exclusion amount could reach $30,000,000.

Example:

• Applicable Exclusion Amount = $15,000,000
• Sum of deceased's taxable estate and adjusted taxable gifts = $4,000,000
• DSUE = $15,000,000 – $4,000,000 = $11,000,000 ported to surviving spouse
• Surviving spouse's total applicable exclusion = $15,000,000 (own BEA) + $11,000,000 (DSUE) = $26,000,000

B. Filing Requirement

The estate tax return filing threshold is $15,000,000.⁸² Nevertheless, the critical advisory is unchanged: even if the estate is well below the filing threshold, a Form 706 should be filed to elect portability.⁸³ Failure to do so permanently forfeits potentially millions in transferable exemption.

C. DSUE Protection from Future Law Changes

Under established regulations, a subsequent reduction in the BEA would reduce the surviving spouse's applicable exclusion only to the extent based on the BEA—not the DSUE amount.⁸⁴ Should a future Congress reduce the BEA, any previously ported DSUE would be insulated from reduction. This provides an additional reason to file portability elections promptly, regardless of current estate size.

XIII. Irrevocable Life Insurance Trusts (ILITs)

An Irrevocable Life Insurance Trust ("ILIT") is a non-modifiable trust that owns one or more life insurance policies, removing the death benefit proceeds from the insured's gross estate for estate tax purposes.⁸⁵ ILITs are often structured as dynasty trusts to benefit multiple generations.

ILITs continue to serve clients whose estates—including life insurance death benefits—would exceed $15 million. For clients whose estates (including insurance) fall below $15 million, the ILIT may be less essential from a tax perspective, though it continues to provide:

• Creditor protection for the insurance proceeds
• Professional management of death benefit distributions
• Coordination with overall dynasty/trust planning

Premium funding via Crummey withdrawal rights and spousal gift-splitting of annual exclusions remains operative.⁸⁶ Under Rev. Rul. 74-556, a consenting spouse acting as a fiduciary over the gifted assets but not the transferor does not face later estate inclusion under IRC § 2038.⁸⁷

XIV. Basis Planning: The Critical Counterweight

A. The Basis Step-Up/Estate Tax Trade-Off

At the $15 million exemption level (and especially with inflation indexing that will gradually raise it), a growing number of clients fall into a critical planning zone: their estates are below the federal exemption, meaning estate tax is not a concern—but assets in irrevocable trusts do not receive a stepped-up basis at death.

For these clients, the income tax cost of lost basis step-up may exceed any estate tax savings.⁸⁸ This calculus must be modeled for every client whose estate is below or near the threshold.

B. Tools for Basis Optimization

Substitution Power (Swap Power): The grantor exercises the power to exchange cash or high-basis assets into the trust in return for highly appreciated, low-basis trust assets. Upon the grantor's death, those reacquired assets receive a stepped-up basis under IRC § 1014. Timing and documentation are critical: the substitution must be legally consummated—with all necessary title transfers, assignments, and trustee acknowledgments executed—before the grantor's death. If the grantor dies while the exchange is pending or incomplete, the appreciated assets may remain in the trust (outside the estate) and the basis step-up opportunity is forfeited. Practitioners should ensure that elderly or infirm grantors complete substitutions promptly, retain evidence of consummation, and do not rely on deathbed transactions where completion is uncertain. (Rev. Rul. 2008-22 confirms this does not cause estate inclusion.)⁸⁹

Dynasty Trust with GPOA: As discussed in Section VI.E, granting a beneficiary a general power of appointment causes estate inclusion—and basis step-up—at the beneficiary's death.⁹⁰ At the current exemption level, this inclusion may be entirely tax-free.

Toggling Grantor Trust Status: If the trust instrument permits "toggling" off grantor trust status (e.g., by releasing a power), the trust becomes a separate taxpayer—potentially allowing the grantor to reacquire appreciated assets through a taxable sale that steps up the trust's basis in replacement assets. (Note: IRS Notice 2007-73 flagged this as an area under study; practitioners should proceed cautiously.)⁹¹

Distribution of Appreciated Assets: For non-grantor trusts, distributing appreciated assets to a beneficiary whose own estate is below the exemption, who then holds the assets until death, achieves a basis step-up at the beneficiary's death.⁹²

C. The Key Question for Every Client

Every estate plan should now address this threshold question: Is the client's estate likely to be above or below $15 million (individual) or $30 million (married) at death—including projected growth?

• If above: Traditional estate tax minimization planning (IDGTs, SLATs, GRATs, dynasty trusts) remains paramount‍
• If below: Basis optimization planning takes priority—including use of swap powers, GPOAs, and potentially restructuring existing irrevocable trusts

XV. State Estate Taxes: The Overlooked Exposure

A. State Systems Do Not Conform to the Federal Exemption

Many state estate tax systems do not conform to the federal exemption level. The $15 million federal exemption provides no protection against state estate taxes in jurisdictions with their own systems.⁹³ Key examples:

Additionally, several states (New Jersey, Pennsylvania, Nebraska, Iowa, Kentucky, Maryland) impose separate inheritance taxes based on the relationship of the beneficiary to the decedent.⁹⁴ Connecticut maintains a state gift tax.⁹⁵

B. Planning Implications

For clients in states with independent estate tax systems, planning remains urgent regardless of the federal exemption level. Lifetime gifting strategies that reduce the gross estate may provide relief from both state estate and inheritance taxes. Practitioners must analyze:

• Whether the state allows a credit for gift taxes against the estate tax
• Whether the state has a "cliff" feature (like New York, where exceeding the exemption by more than 5% eliminates the exemption entirely)⁹⁶
• Whether lifetime gifts are "added back" to the taxable estate for state purposes
• Whether the state recognizes the portability election⁹⁷

XVI. Alternatives to SLATs

Practitioners should present clients with multiple options rather than defaulting solely to a dual-SLAT structure. Alternatives include:

XVII. Action Items for Clients Who Have Not Yet Acted

XVIII. Conclusion

The $15,000,000 permanent, inflation-indexed exemption established by H.R. 1, 119th Congress (Pub. L. No. 119-21), provides enhanced planning capacity—but it is not an invitation to complacency. Key principles:

The estate tax still applies to every dollar above $15M/$30M at 40%. For clients above this threshold, aggressive planning remains essential.

Basis planning may now trump estate tax planning for clients below the new threshold. The substitution power and other basis-maximization techniques should be affirmatively deployed for these clients.

State estate taxes have not changed. Clients in states with independent estate tax systems face exposure at dramatically lower levels and must continue planning accordingly.

GST planning at $15M per person allows unprecedented multi-generational wealth transfer. Dynasty trusts funded at this level, with proper GST allocation, can protect wealth for centuries.

Valuation discounts are amplified by the higher exemption. A 36% combined discount on a $15M exemption shelters approximately $23.4M of undiscounted economic value—more than ever before.

Legislative risk persists. The exemption could be reduced by a future Congress. Clients who utilize exemption now—with the protection of the anti-clawback regulations—are insulated from that risk.

Charitable deduction changes require updated modeling. The new 0.5% AGI floor and 35% value cap for top-bracket taxpayers alter the economics of charitable planning strategies.

Implementation quality determines outcomes. Meticulous drafting, proper sequencing, full GST allocation, adequate disclosure, and competent administration remain the prerequisites for any successful wealth transfer plan.

SALT cap phaseout is critical for high-income planners. The $40,000 SALT cap phases down to $10,000 for taxpayers with MAGI above $500,000, at a 30% reduction rate. Since most estate planning clients have income well above this threshold, the practical benefit of the temporary SALT cap increase is limited—and non-grantor trust planning for state income tax avoidance remains highly relevant even during 2025–2029.

FOOTNOTES

¹ IRC § 2010(c)(3)(A), as amended by Pub. L. No. 119-21~~, § [applicable section]~~ (2025).

² Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 11061, 131 Stat. 2054 (2017) (temporarily increasing the basic exclusion amount for decedents dying and gifts made after December 31, 2017, and before January 1, 2026).

³ One Big Beautiful Bill Act, H.R. 1, 119th Cong., Pub. L. No. 119-21 (signed July 4, 2025).

⁴ IRC § 2010(c)(3)(A) (basic exclusion amount); IRC § 2010(c)(3)(B) (inflation adjustment methodology).

⁵ IRC § 2001(c) (rate schedule imposing 40% maximum rate on taxable transfers); IRC § 2010(a) (unified credit against estate tax).

⁶ IRC § 2001(c) (imposing graduated rates up to 40% on the taxable estate).

⁷ IRC § 2641(a) (GST tax rate equals maximum federal estate tax rate); IRC § 2631(a), (c) (GST exemption amount and inflation indexing).

⁸ IRC § 2505(a) (unified credit against gift tax); IRC § 2001(b)(2) (adjustment to estate tax for gift taxes payable on prior transfers).

⁹ IRC § 2503(b) (annual exclusion); Rev. Proc. 2024-40, § 3.44 (inflation adjustment for 2025).

¹⁰ IRC § 2503(e) (qualified transfers for educational or medical expenses excluded from gift tax).

¹¹ IRC § 2056 (marital deduction); IRC § 2055 (charitable deduction); IRC § 2053(a) (deduction for administration expenses); Estate of Graegin v. Commissioner, T.C. Memo. 1988-477 (deductibility of interest on estate loan).

¹² IRC § 2001(b) (computation of estate tax incorporating adjusted taxable gifts); IRC § 2505 (unified credit against gift tax).

¹³ IRC § 2601 (imposition of GST tax); IRC § 2611 (definition of generation-skipping transfer).

¹⁴ IRC § 2631(c), as amended by Pub. L. No. 119-21 (2025).

¹⁵ IRC § 2503(b) (annual exclusion for present interest gifts).

¹⁶ Rev. Proc. 2024-40, § 3.44 (adjusting annual exclusion to $19,000 for calendar year 2025).

¹⁷ IRC § 2503(e) (exclusion for qualified transfers); Treas. Reg. § 25.2503-6 (requirements for direct payment).

¹⁸ IRC § 2056 (marital deduction); IRC § 2055 (charitable deduction); IRC § 2053(a)(2) (administration expenses); Estate of Graegin v. Commissioner, T.C. Memo. 1988-477.

¹⁹ Pub. L. No. 119-21~~, § [applicable section]~~ (2025) (imposing 0.5% of AGI floor on charitable deductions for itemizers).

²⁰ Pub. L. No. 119-21~~, § [applicable section]~~ (2025) (capping value of charitable deduction at 35% for taxpayers in the 37% bracket).

²¹ Pub. L. No. 119-21~~, § [applicable section]~~ (2025) (above-the-line charitable deduction of $1,000/$2,000 for standard deduction filers).

²² IRC § 170(f)(2)(B) (income tax charitable deduction for contributions to CLATs); IRC § 2522 (gift tax charitable deduction, unaffected by income tax limitations).

²³ IRC §§ 664, 170(f)(2)(A) (charitable remainder trust provisions); the income tax deduction for the charitable remainder interest is subject to the new floor and cap.

²⁴ IRC § 170(b)(1)(A)(vii) (contributions to donor-advised funds treated as public charity contributions for percentage limitation purposes).

²⁵ T.D. 9884, 84 Fed. Reg. 64,995 (Nov. 26, 2019) (final regulations under Treas. Reg. § 20.2010-1(c), confirming no clawback when exclusion amount is reduced). See also Treas. Reg. § 20.2010-1(c)(1)–(2) (mechanics of "higher of" computation).

²⁶ Treas. Reg. § 20.2010-1(c)(2), Example 1 (illustrating computation when BEA at death exceeds BEA used for lifetime gifts).

²⁷ IRC § 1014(a) (basis of property acquired from a decedent equals fair market value at date of death); IRC § 1014(b)(1) (property acquired by bequest, devise, or inheritance).

²⁸ Rev. Rul. 2008-22, 2008-1 C.B. 796 (holding that a grantor's retained power to substitute assets of equivalent value, exercisable in a non-fiduciary capacity, does not cause estate inclusion under IRC §§ 2036 or 2038).

²⁹ IRC § 1014(a)(1) (stepped-up basis for property included in decedent's gross estate).

³⁰ IRC § 2010(c)(3)(A) (basic exclusion amount); IRC § 2631(a) (GST exemption); IRC § 2642(a) (inclusion ratio).

³¹ See generally Richard W. Nenno, Dynasty Trusts, Tax Management Portfolio No. 868 (BNA); Jonathan G. Blattmachr et al., The Benefits of Dynasty Trusts, 136 Tr. & Est. 55 (1997).

³² Spendthrift trust protections vary by state; see, e.g., Uniform Trust Code § 502 (spendthrift provision); S.D. Codified Laws § 55-16-15 (South Dakota dynasty trust provisions).

³³ IRC § 2041(a)(2) (inclusion in gross estate of property subject to a general power of appointment); IRC § 1014(b)(4) (basis step-up for property passing by exercise or non-exercise of a GPOA).

³⁴ The computation assumes the beneficiary's own assets plus the trust assets subject to the GPOA do not exceed the applicable exclusion amount under IRC § 2010(c).

³⁵ See Jonathan G. Blattmachr, Howard M. Zaritsky & Mark L. Ascher, Tax Planning with Consensual Community Property: Alaska's New Community Property Law, 33 Real Prop., Prob. & Tr. J. 615 (1999) (discussing formula-based power of appointment mechanisms).

³⁶ IRC §§ 671–679 (grantor trust rules); see IRC § 675(4)(C) (power to substitute assets as grantor trust trigger without estate inclusion).

³⁷ Rev. Rul. 85-13, 1985-1 C.B. 184 (holding that where grantor is treated as owner of entire trust, transactions between grantor and trust are disregarded for income tax purposes).

³⁸ Rev. Rul. 2004-64, 2004-2 C.B. 7 (holding that a grantor's payment of income taxes on trust income is not a gift to the trust beneficiaries and does not cause estate inclusion).

³⁹ Rev. Rul. 2007-13, 2007-1 C.B. 1246 (holding that the transfer-for-value rule of IRC § 101(a)(2) does not apply to transfers between a grantor and the grantor's trust).

⁴⁰ Notice 2007-73, 2007-2 C.B. 545 (announcing that the IRS and Treasury are studying transactions involving the "toggling" of grantor trust status and may issue guidance).

⁴¹ Rev. Rul. 2008-22, 2008-1 C.B. 796 (holding that the retention of a substitution power, exercisable in a non-fiduciary capacity, does not by itself cause inclusion under IRC §§ 2036 or 2038).

⁴² Rev. Rul. 2011-28, 2011-2 C.B. 830 (extending the holding of Rev. Rul. 2008-22 to IRC § 2042, confirming that a substitution power does not constitute an "incident of ownership" in a life insurance policy).

⁴³ IRC § 2010(c)(3)(A) (basic exclusion amount); IRC § 2631(a) (GST exemption); IRC § 675(4)(C) (substitution power triggering grantor trust status).

⁴⁴ Rev. Rul. 85-13, 1985-1 C.B. 184; see also Madorin v. Commissioner, 84 T.C. 667 (1985).

⁴⁵ The 10% "seed gift" ratio is a practice convention, not a statutory requirement. Some practitioners use lower ratios (e.g., 12:1 or higher). See Karlin, The Installment Sale to a Grantor Trust, 49 U. Miami Inst. on Est. Plan. ¶ 500 (2015).

⁴⁶ IRC § 675(4)(C) (power to reacquire trust corpus by substituting other property of equivalent value); Rev. Rul. 2008-22, 2008-1 C.B. 796.

⁴⁷ IRC § 1014(a)(1); Rev. Rul. 2008-22, 2008-1 C.B. 796 (confirming no estate inclusion despite power to swap).

⁴⁸ See Department of the Treasury, General Explanations of the Administration's Fiscal Year 2022 Revenue Proposals (May 2021) at 61–65 (proposing to treat transfers at death as realization events and replace step-up with modified carryover basis).

⁴⁹ IRC § 2010(c)(3)(A); IRC § 2631(a); IRC § 2642(a) (inclusion ratio).

⁵⁰ United States v. Estate of Grace, 395 U.S. 316 (1969) (establishing the reciprocal trust doctrine: where two trusts are interrelated and leave the grantors in approximately the same economic position as if they had created trusts naming themselves as life beneficiaries, the trusts will be "uncrossed").

⁵¹ See Commissioner v. Court Holding Co., 324 U.S. 331 (1945); Gregory v. Helvering, 293 U.S. 465 (1935) (step-transaction and substance-over-form doctrines).

⁵² Smaldino v. Commissioner, T.C. Memo. 2021-127 (holding that an interspousal transfer of LLC interests that was immediately followed by a gift of those interests to a trust would be treated as a single direct transfer from husband to trust under the step-transaction doctrine).

⁵³ IRC § 2513(a) (gift-splitting election); Treas. Reg. § 25.2513-1(b)(3)-(4) (consent spouse may not have more than a specified interest in the transferred property for gift-splitting to apply); specifically, the consenting spouse's interest must not exceed that of a life estate or a power of appointment limited by an ascertainable standard.

⁵⁴ United States v. Estate of Grace, 395 U.S. 316, 324 (1969) (trusts must be "interrelated" and place grantors in "approximately the same economic position" to trigger the doctrine).

⁵⁵ IRC § 6501(c)(9) (adequate disclosure on gift tax return triggers the three-year limitations period regardless of whether filing was required); Treas. Reg. § 301.6501(c)-1(f) (adequate disclosure requirements).

⁵⁶ IRC § 2632(a) (allocation of GST exemption); Treas. Reg. § 26.2632-1 (allocation mechanics).

⁵⁷ See IRC § 1014(a) (step-up limited to property "acquired from a decedent" and "included in the value of the gross estate"); Treas. Reg. § 1.1014-1(a). Assets in irrevocable trusts not included in the gross estate do not qualify.

⁵⁸ Rev. Rul. 95-58, 1995-2 C.B. 191 (holding that a grantor's retained power to remove a trustee and appoint a successor who is not "related or subordinate" within the meaning of IRC § 672(c) does not cause estate inclusion under IRC § 2036(a)(2) or § 2038(a)(1)).

⁵⁹ IRC § 675(3) (power to borrow from the trust as grantor trust trigger); Treas. Reg. § 1.675-1(b)(3) (power must be held by person "in a nonfiduciary capacity").

⁶⁰ Pub. L. No. 119-21~~, § [applicable section]~~ (2025) (amending IRC § 164(b)(6) to increase SALT deduction cap from $10,000 to $40,000 for tax years 2025–2029, with 1% annual inflation adjustment).

⁶¹ Pub. L. No. 119-21~~, § [applicable section]~~ (2025) (establishing income-based phaseout of SALT cap for MAGI above $500,000).

⁶² See, e.g., Alaska Stat. § 34.40.110 (Alaska Trust Act); S.D. Codified Laws § 55-1-36 (South Dakota trust situs); Del. Code Ann. tit. 12, § 3570 (Delaware Qualified Dispositions in Trust Act); Nev. Rev. Stat. § 166.040 (Nevada spendthrift trust provisions).

⁶³ See, e.g., Cal. Rev. & Tax. Code § 17742 (California taxes trusts based on residence of grantor); N.Y. Tax Law § 605(b)(3)(D) (New York taxes income of trusts created by resident grantor, subject to exemption for trusts with no New York–source income, trustees, or assets). But see Kaestner v. North Carolina Dep't of Revenue, 139 S. Ct. 2213 (2019) (Due Process Clause limits state's ability to tax trust income based solely on beneficiary's in-state residence).

⁶⁴ IRC § 2702 (special valuation rules for transfers of interests in trust); Treas. Reg. § 25.2702-3 (requirements for qualified interests in GRATs).

⁶⁵ IRC § 7520 (valuation of annuities, interests for life or term of years, and remainder or reversionary interests based on applicable federal rate).

⁶⁶ Treas. Reg. § 25.2702-3(b)(1)–(4) (qualified annuity interest requirements); see Walton v. Commissioner, 115 T.C. 589 (2000) (approving zeroed-out GRAT structure where remainder interest was valued at zero); T.D. 9181, 70 Fed. Reg. 9222 (Feb. 24, 2005) (Treasury regulations confirming that a GRAT remainder may be valued at zero for gift tax purposes, effectively endorsing the Walton approach).

⁶⁷ The taxable gift on a zeroed-out GRAT equals the present value of the remainder interest, which approaches (but cannot equal) zero. See Treas. Reg. § 25.2702-3(e), Example 5.

⁶⁸ IRC § 7520(a) (rate equals 120% of the applicable federal midterm rate, rounded to nearest 2/10ths of 1%); the § 7520 rate is published monthly by the IRS in revenue rulings.

⁶⁹ See, e.g., Estate of Mandelbaum v. Commissioner, T.C. Memo. 1995-255 (approving combined discount of approximately 30%); Lappo v. Commissioner, T.C. Memo. 2003-258 (allowing 40% combined discount for lack of marketability and lack of control); Holman v. Commissioner, 130 T.C. 170 (2008), aff'd, 601 F.3d 763 (8th Cir. 2010) (addressing marketability discount for transferred partnership interests).

⁷⁰ IRC § 2512(a) (value of gift determined at date of gift based on fair market value); Treas. Reg. § 25.2512-1 (fair market value defined as price at which property would change hands between willing buyer and willing seller).

⁷¹ See Treas. Reg. § 20.2031-2(f) (recognizing that minority/fractional interests may be valued at less than proportional share of underlying assets).

⁷² See Estate of Weinberg v. Commissioner, T.C. Memo. 2000-51 (discussing marketability discount methodology); Estate of Janda v. Commissioner, T.C. Memo. 2001-24.

⁷³ See Treas. Reg. § 20.2031-2(e) (blockage discount for large blocks of publicly traded securities); Estate of Auker v. Commissioner, T.C. Memo. 1998-185.

⁷⁴ See Estate of Mitchell v. Commissioner, T.C. Memo. 2011-94 (discussing key person discount); Estate of Furman v. Commissioner, T.C. Memo. 1998-157.

⁷⁵ See Estate of Christiansen v. Commissioner, 586 F.3d 1061 (8th Cir. 2009) (upholding defined value formula clause directing excess to charity); see also Petter v. Commissioner, T.C. Memo. 2009-280, aff'd, 653 F.3d 1012 (9th Cir. 2011) (same); Wandry v. Commissioner, T.C. Memo. 2012-88 (upholding defined value clause where excess was retained by donor rather than passing to charity).

⁷⁶ IRC § 6501(c)(9); Treas. Reg. § 301.6501(c)-1(f)(2) (adequate disclosure requirements for gift tax purposes). (The IRS frequently challenges Wandry clauses; proceed with caution.)

⁷⁷ See generally Mark Mitchell & Todd Pulvino, Characteristics of Risk and Return in Risk Arbitrage, 56 J. Fin. 2135 (2001); Michael Bradley et al., Synergistic Gains from Corporate Acquisitions and Their Division Between the Stockholders of Target and Acquiring Firms, 21 J. Fin. Econ. 3 (1988).

⁷⁸ Id. Illustrative data based on publicly reported merger arbitrage spreads. Specific values will vary based on transaction-specific risks and market conditions.

⁷⁹ See Lucas v. Earl, 281 U.S. 111 (1930) (income taxed to the earner); Helvering v. Horst, 311 U.S. 112 (1940) (assignment of income from property); Ferguson v. Commissioner, T.C. Memo. 2017-16 (applying assignment of income doctrine to pre-transaction gift of partnership interests).

⁸⁰ Rev. Rul. 85-13, 1985-1 C.B. 184 (grantor and grantor trust are single taxpayer; no recognition event on transfer between them). See also IRC §§ 671–679 (grantor trust rules treating grantor as owner for income tax purposes).

⁸¹ IRC § 2010(c)(4) (deceased spousal unused exclusion amount; specifically, the lesser of (A) the basic exclusion amount, or (B) the excess of the decedent's applicable exclusion amount over the amount with respect to which the tentative tax is determined under § 2001(b)(1) (i.e., the sum of the taxable estate and adjusted taxable gifts)); Treas. Reg. § 20.2010-2 (portability provisions).

⁸² IRC § 6018(a)(1) (estate tax return required where gross estate exceeds the basic exclusion amount).

⁸³ Treas. Reg. § 20.2010-2(a)(1) (portability election requires timely filing of a complete Form 706); Rev. Proc. 2022-32 (simplified method for late portability elections filed within five years of decedent's death); see also Treas. Reg. § 20.2010-2(a)(7) (extension for late portability elections for small estates).

⁸⁴ Treas. Reg. § 20.2010-3(a) (DSUE amount available to surviving spouse determined at first deceased spouse's death and not subject to subsequent BEA reductions); T.D. 9884, 84 Fed. Reg. 64,995 (Nov. 26, 2019) (preamble discussing interaction of anti-clawback rules with portability).

⁸⁵ IRC § 2042 (amounts receivable by estate or beneficiaries included in gross estate if decedent retained incidents of ownership); IRC § 2035(a) (three-year rule for transfers of life insurance within three years of death).

⁸⁶ Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968) (holding that a beneficiary's withdrawal right constitutes a present interest qualifying for the annual exclusion); IRC § 2513 (gift-splitting); Treas. Reg. § 25.2513-1.

⁸⁷ Rev. Rul. 74-556, 1974-2 C.B. 300 (holding that a spouse's consent to split a gift under IRC § 2513, where the spouse serves as a fiduciary with power over the gifted property, does not cause inclusion in the consenting spouse's estate under IRC § 2038).

⁸⁸ The long-term capital gains rate of 20% (plus 3.8% net investment income tax) yields a maximum combined rate of 23.8%, compared to the 40% estate tax rate. For clients below the exemption threshold, the estate tax rate is effectively 0%, making the lost basis step-up (and resulting 23.8% capital gains tax on heirs' eventual sale) the dominant cost.

⁸⁹ Rev. Rul. 2008-22, 2008-1 C.B. 796; IRC § 1014(a)(1).

⁹⁰ IRC § 2041(a)(2) (estate inclusion for GPOA); IRC § 1014(b)(4) (basis step-up for property passing by exercise or non-exercise of GPOA).

⁹¹ Notice 2007-73, 2007-2 C.B. 545.

⁹² IRC § 1014(a) (basis step-up at beneficiary's death if assets included in beneficiary's gross estate).

⁹³ See generally McGuireWoods LLP, State Death Tax Chart (updated annually); see also Turney P. Berry et al., State Death Taxes After ATRA, 47 Real Prop., Tr. & Est. L.J. 323 (2012).

⁹⁴ See, e.g., N.J. Stat. Ann. § 54:34-1 (New Jersey inheritance tax); 72 Pa. Stat. Ann. § 9102 (Pennsylvania inheritance tax); Neb. Rev. Stat. § 77-2001 (Nebraska inheritance tax); Ky. Rev. Stat. Ann. § 140.070 (Kentucky inheritance tax); Md. Code Ann., Tax-Gen. § 7-203 (Maryland inheritance tax). Note: Iowa repealed its inheritance tax effective January 1, 2025 (2021 Iowa Acts, Ch. 170, § 62).

⁹⁵ Conn. Gen. Stat. § 12-640 et seq. (Connecticut gift tax); Connecticut is the only state with an independent gift tax.

⁹⁶ N.Y. Tax Law § 952(c) (the New York estate tax exemption is eliminated entirely if the taxable estate exceeds 105% of the basic exclusion amount).

⁹⁷ Most states with independent estate tax systems do not recognize federal portability. See, e.g., Massachusetts, Oregon, and Washington (no portability provision).

⁹⁸ IRC § 2056(b)(7) (QTIP election); Treas. Reg. § 20.2056(b)-7 (qualified terminable interest property).

⁹⁹ See, e.g., Alaska Stat. § 34.40.110; Del. Code Ann. tit. 12, § 3570; Nev. Rev. Stat. § 166.040; S.D. Codified Laws § 55-16-1 et seq. (domestic asset protection trust  statutes).

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