Paul O. Dillon, Attorney at Law

What the Loss of Step-Up in Basis could Mean for Estate Plans

Adding to the uncertainty around estate planning for 2025 are discussions about eliminating the step-up in basis, which would present a significant challenge for families seeking to grow wealth over generations. A recent article from Forbes, “Estate Planning: What The Potential Elimination Of Step-Up In Basis Means For Families,” explains how this tool has protected homeowners and family business owners from overly burdensome taxes.

Step-up in basis is a tax provision that adjusts the value of an inherited asset to its fair market value as of the date of the original owner’s death. If a person purchased a home for $100,000 several decades ago, now valued at $1 million, heirs would inherit the home at the stepped-up value of $1 million. If they decided to sell the property immediately, they would owe little or no capital gains taxes.

If there were no step-up in basis, the impact would be felt by middle-class families who inherit property, stock investments, or small businesses. This would have a significant impact on opportunities for building generational wealth.

Heirs who hope to keep a home in the family or continue to own rental property may find themselves needing to sell the assets to cover the tax bills. Small business owners who rely on this step-up in basis would also face a liquidity crisis, unless there were ample funds for heirs to keep running the business. The alternative is to close the business.

The solution, if this change does occur, can be found in a few different estate planning strategies. They include:

• Using trusts, such as a revocable living trust, may help manage capital gains. However, they must be created correctly by an experienced estate planning attorney. Irrevocable trusts should be examined as a possible alternative.
• Gifting strategically, even while living, may be another option. This could help by locking in current tax rules and taking advantage of the currently high federal exemptions.
• Tax planning should always be included in estate planning, especially if the step-up in basis is eliminated. Roth IRAs, 529 plans, or life insurance-based strategies may help shield assets passed on to the next generation.
• Donations to charities and the use of donor-advised funds are a means of eliminating or minimizing capital gains taxes, while supporting causes that hold meaning for the family.

However, things change, the need for proactive estate planning by a skilled estate planning attorney remains a constant. With effective estate planning, homeowners and small business owners can safeguard their wealth, ensuring it can be passed on to future generations.

Reference: Forbes (March 21, 2025) “Estate Planning: What The Potential Elimination Of Step-Up In Basis Means For Families”

Optimize Estate Planning and Update Financial Baseline to Secure Your Future

Revisiting estate planning and financial strategies in the first quarter of the year can yield long-lasting benefits, according to a recent article from Kiplinger, “10 Ways to Refine Your Financial Plan for a More Secure Future.” No matter how busy you are, these ten steps are a good use of your time.

Conduct an annual financial review. Gain a clear view of your financial situation to make informed decisions. Is your net worth the same as it was last year? How have your assets and liabilities changed? Has recent market volatility or a large purchase impacted your overall financial situation? An objective look from a bird’s-eye view shows whether you’re still on track to reach your goals or if you’re retired, ensuring that you’re still on the right path.

Review your philanthropic plans. Whether you’re donating a wing to a local hospital or making monthly donations to local charities, review your giving over the last twelve months. Are you taking advantage of tax benefits through strategies like Donor-Advised Funds (DAFs), or should you consider using Charitable Trusts instead? Consult with your estate planning attorney to ensure that your generosity also benefits you and your family if that is an objective.

Review budgets and spending habits. Having discretionary income doesn’t necessitate a free-for-all. Understanding income and spending is fundamental to financial health at any level. Examine last year’s expenses and separate out one-time costs, such as installing a new roof or incurring large medical bills. Once you’ve identified spending habits, map out a plan for the rest of the year. Treating money with intention is more rewarding.

What’s your illiquid compensation? If you establish a 10b5-1 plan, you can execute stock transactions during open trading windows, mitigating legal risk and balancing your corporate responsibility with personal priorities. This type of plan allows you to schedule trades in advance and align transactions with both near-term and long-term goals. Know the value of any non-cash compensation and how much of your net worth it represents.

Is it time to rebalance your portfolio? If you haven’t rebalanced your portfolio in the last year, now is the time to do so. Be sure your asset mix is still what you wanted. The nature of markets and fund managers makes it impossible to avoid shifts entirely.

Maximize tax-advantaged accounts. Don’t leave money on the table. Accounts like 401(k)s, IRAs, HSAs and 529 plans all work to maximize tax advantages. However, it is only if you’re making contributions strategically. If your income is too high for direct contributions, or if you have a lower income, consider Roth conversions for IRAs and 401(k) plans.

Check your risk management. Insurance isn’t as sexy as investment portfolios. However, the protection is worth the investment. Make sure your wealth is protected with the correct insurance and a good estate plan.

Review estate planning and make annual exclusion gifts. Your estate planning attorney can explain how using your annual exclusion can help reduce estate tax exposure and benefit your loved ones. You can give $19,000 to as many people as you want annually without triggering any gift taxes or reducing your lifetime estate tax exemption. Making these gifts earlier in the year allows for more growth over time, making it a smart move for generational wealth transfers.

Tax planning season. If your finances are complex and your assets extensive, tax-saving strategies need to be revisited annually, and the first quarter is the most likely time. Let’s say you expect to have significant capital gains; charitable giving or tax-loss harvesting earlier in the year can help offset those tax liabilities.

Talk with your family about money. If your goal is to leave a legacy, you’ll want to discuss your values, philanthropy and creating a legacy with your family regularly, as well as stewarding wealth across generations. A habit of regular check-ins about finances will help establish a shared vision for both short-term and long-term goals.

Reference: Kiplinger (March 6, 2025) “10 Ways to Refine Your Financial Plan for a More Secure Future”

Is Charitable Giving Part of Your Estate Plan?

Legacy gifts and complex assets can be used in charitable giving to create a lasting impact for donors, heirs and the nonprofits they benefit, according to a recent article from Wealth Management, “Unlocking the Power of Complex Assets and Legacy Gifts in Philanthropy.”

Legacy donations, sometimes referred to as planned giving, involve gifting assets to a charity through trusts, wills, or beneficiary designations. These donations can be made during the donor’s lifetime, upon the donor’s passing, gifted all at once, or in a steady stream. Several trusts specifically allow for making donations, with Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) among the most widely used.

An estate plan incorporating charitable giving should include educating family members about their own role in philanthropy. Creating a tradition of giving and service teaches the importance of compassion and social responsibility as part of the family’s legacy.

Legacy donations are often made through Donor-Advised Funds (DAFs). The estate planning attorney should discuss how donations are made to ensure that they align with the estate plan. Donations can be made annually, based on a percentage of the fund’s year-end balance, or structured according to the donor’s wishes.

Donating illiquid assets may yield greater benefits for a nonprofit than cash gifts. Nevertheless, some charities are reluctant to accept non-cash assets, since they may need to manage the assets and/or liquidate them. The DAF may provide a means of converting assets into cash for charitable giving.

A common gift to nonprofits is real estate property. The nonprofit may not have the money to maintain the property until it is sold, then sell the property. Instead of selling it and paying capital gains taxes (which will reduce the amount of money the charity receives), the donor can gift it to a DAF. The DAF facilitates the transfer, alleviating the nonprofit from the transactional work involved in real estate transactions.

Tax policy has recognized the social benefit of charitable giving for many years, acknowledging that donated assets aren’t income and shouldn’t be taxed. Legacy and complex asset gifts are not taxed as long as they are donated to charities recognized as 501(c)(3) organizations.

There have been some recent attempts to change the tax treatment of gifts, so an estate planning attorney should be consulted to ensure that all charitable giving falls within the current regulations and yields benefits for both donors and charity.

Reference: Wealth Management (Nov. 6, 2024) “Unlocking the Power of Complex Assets and Legacy Gifts in Philanthropy”

What Is Legacy and Estate Planning?

Creating a last will and testament is part of planning for the future. Leaving a legacy is another. Both are part of an estate plan, which addresses planning for incapacity during your lifetime and the disposition of your property after you’ve passed. A comprehensive estate plan is a worthy endeavor, says a recent article from North Shore News, “How to secure your legacy with estate planning.”

The core components of an estate plan include a last will, power of attorney and advance directives for health care decisions, sometimes called health care power of attorney or health care proxy. Your family will face additional stress and expenses if you don’t have a last will. Your wishes for the disposition of property won’t be honored, unless you proactively have an estate plan created.

Will charitable giving be part of your legacy? This also requires advance planning. When you make donations to individual charities or use Donor Advised Funds, you create a legacy of giving and may also create tax benefits. An experienced estate planning attorney will help create a plan to maximize the tax advantages of charitable gifting.

Estate planning is especially important for women, who statistically live longer than men and tend to have lower earning power. Women need to consider who will be their caregivers if their partners predecease them or if they are solo agers.

Discussing family dynamics with an estate planning attorney can help ensure that the estate plan is created to address individual needs. Estate planning is never a one-size-fits-all plan.

Estate planning also requires regular reviews. One estate planning attorney advises her clients to revisit their estate plans every time there’s a presidential election. It’s an easy way to remember the passing of four years, which is a good time to review an estate plan.

A carefully crafted and regularly updated estate plan addresses changes to your life and the laws governing wills, trusts and retirement accounts. The SECURE Act made major changes to how assets in retirement accounts are distributed to heirs, for instance. The addition of Roth IRA and SEP accounts created huge changes in the passing of assets to the next generation.

Your estate planning attorney will give you and your family the peace of mind of knowing you’re prepared for the future, including the unexpected events, happy and sad, that life brings.

Reference: North Shore News (October, 2024) “How to secure your legacy with estate planning”

Charitable Giving Trusts Protect Assets and Create a Legacy of Giving

James Gandolfini was beloved for his role as Tony Soprano in the HBO show The Sopranos. His early death revealed a lack of estate planning and some painful lessons for his real-life family. Gandolfini left a $70 million estate and about 80% of it was not protected from estate taxes. A recent article from Investing Daily, “How to Avoid The Estate Planning Mistakes of James Gandolfini (aka Tony Soprano),” explains two of the many options Gandolfini didn’t take advantage of.

A Charitable Lead Trust, or CLT, serves several purposes. It provides a stream of income for a certain amount of time to a charitable organization. At the end of the period, the property in the trust goes to the donor or the beneficiary. When the gift is made under a CLT, the grantor immediately gets a federal income tax deduction equal to the present value of the future income stream. It should be noted that taxes do have to be paid every year by the donor on the value of the income interest paid to the charity.

You can create a CLT during your lifetime or establish it upon your death by stipulating it in your will. By establishing the CLT at death, an estate tax deduction is created. The CLT serves to reduce estate taxes and supports a charity you care about.

A similar trust is known as a Charitable Remainder Trust or CRUT. This type of trust increases the income stream while lowering taxes. With a CRUT, you are donating to charity.  However, you earn income from the donated assets during your lifetime. The objective is to sell a major appreciated asset without paying capital gains taxes on the profits. The donor funds the CRUT, and the charity receiving the asset is the charitable beneficiary. The charity must be an IRS-approved charity to gain these benefits.

The CRUT’s trustee can be the donor, the charity, an independent trust manager, or any person designed by the donor. Anyone receiving income from the asset under the terms of the CRUIT is known as an income beneficiary.

The trust document must name the trustee, the charitable beneficiary, the percentage to be paid to income beneficiaries and all the terms of the trust. The trust document also must specify the annual percentage paid by the donor, an amount between 5% and 50%. The annual percentage is required to give at least 10% of the amount transferred to the CRUT.

The trust can be funded with any kind of asset. The trustee then sells the assets, reinvesting the proceeds into a financial instrument owned by the trust. The term can be for the life of the donor or the life of a donor plus someone else. The CRUT can also be set by years, up to 20 years.

CRUTs and CLTs require the knowledge of an experienced estate planning attorney to be sure that they meet all the necessary guidelines to achieve their goals. For many people, these are excellent tools to create a family legacy of giving, while enjoying tax benefits and growing assets.

Reference: Investing Daily (Sep. 11, 2024) “How to Avoid The Estate Planning Mistakes of James Gandolfini (aka Tony Soprano)”

Estate Planning Lessons From Warren Buffett

As one of the creators of The Giving Pledge, encouraging wealthy people to give away most of their wealth to charitable causes, Warren Buffett’s estate plan isn’t like other billionaires’ estate plans. There are many takeaways for people of all different wealth levels, according to a recent article, “What Clients Can Learn from Warren Buffett’s Estate Plan” from Wealth Management.

Buffett says he’s changed his will several times after seeing how his children matured over the years. Building flexibility into an estate plan is important. It’s hard to tell which child will end up with a better financial situation, or which is more financially responsible. In addition, any time there is a significant life event, like divorce, moving to a new state, a new child in the family or marriage, estate planning documents should be reviewed, especially state-specific ones.

Buffett is celebrated for leading a relatively ordinary lifestyle, living in the same house, and driving the same car for many years. In a newsletter, he declared to Berkshire Hathaway shareholders his estate would be an open book, a simple last will and testament to be filed at the Douglas County Courthouse. The courthouse will no doubt be flooded by requests for the document, as it will become part of the public record once it’s filed.

Many families choose to use trusts to keep their bequests private, lighten their tax burden and facilitate wealth distribution.

A change to his estate plan will end his donations to the Bill & Melinda Gates Foundation. Buffett has given more than $40 billion to the foundation in the last fifteen years. His donations will cease when he dies. Buffet has put his three children in charge of a charitable trust. They will decide what causes to fund and how much to allocate.

For people of more modest means, charitable giving may include Donor Advised Funds or planned giving. You can also donate time and effort to nonprofits in your community.

Buffett praises his children’s ability to make good decisions, trusting them to carry out the family’s philanthropic goals while leaving room for them to deal with future changes in the tax laws and regulations governing nonprofits. His plan for the three of them to make unanimous decisions may lead to some wrinkles in the plan. However, he believes their shared values will overcome any disagreements.

Many estate planning attorneys recommend that parents objectively examine how their children interact before making them co-executors or joint owners of property. This may work well in some families.  However, for others, it may create obstacles. In some cases, it’s useful to hold a family meeting with the estate planning attorney to identify future issues.

Reference: Wealth Management (September 4, 2024) “What Clients Can Learn from Warren Buffett’s Estate Plan”

How Does a Spousal Lifetime Access Trust Work?

Using a particular type of irrevocable trust can be especially valuable for married couples, according to a recent article from Advisor Perspectives, “Managing Wealth: Utilizing Spousal Lifetime Access Trust.”

SLATs allow one spouse to transfer assets into a trust for the other spouse's benefit. Assets may include cash, stocks, real estate property, life insurance policies, and other kinds of property. The beneficiary spouse has access to the assets while both spouses are living as well as when the grantor has passed.

Assets inherited from a deceased spouse to a surviving spouse are not subject to estate tax, but when the surviving spouse passes, there may be an estate tax due if proper planning is not done.

For example, consider a married couple with a net worth of $60 million. One spouse could transfer up to $13.61 million into a SLAT tax-free. The surviving spouse could receive distributions of the SLAT as income. When the surviving spouse passes, the remaining assets in the trust are then passed to children or whoever the named beneficiaries are, with no taxes due.

An experienced estate planning attorney must prepare SLATs to achieve their goals. They are structured as grantor trusts, meaning the spouse putting assets into the trust will need to pay the trust’s income taxes yearly. Doing so allows the assets in the trust to grow tax-free.

Another advantage of SLATs is the protection they give against claims made by creditors against the grantor and the spouse. Because the SLAT is an irrevocable trust, control has been relinquished, so creditors cannot attach them.

There are considerations before embarking on establishing a SLAT. The donor spouse must be comfortable giving up direct control and asset access. The donor spouse cannot be a trustee of the trust. And the donor spouse cannot be a beneficiary.

If the non-donor spouse predeceases the donating spouse, the donating spouse loses indirect access to the assets as the assets will pass to the beneficiaries. And if the couple divorces, the donor spouse loses access to the assets. Consider the stability of the marriage before setting up a SLAT.

Before creating a SLAT, a candid discussion with your estate planning attorney should occur. The stability of the marriage, how comfortable the donor spouse is with yielding control of assets, and the ability to pay taxes on the assets in the SLAT should all be considered.

Reference: Advisor Perspectives (July 1, 2024) “Managing Wealth: Utilizing Spousal Lifetime Access Trust”

Should You Consider Planned Giving?

Estate planning presents many opportunities for philanthropically minded people, and you don’t have to be a millionaire to be a philanthropist. One way to ensure that your assets are given to causes you care about is addressed in the article “What Is Planned Giving?” in Financial Advisor.

Planned giving means donating assets to a nonprofit in a structured way during your lifetime or as part of an estate plan. The assets can be cash, securities, real estate, life insurance proceeds, funds from retirement accounts, or assets held in trusts.

Why make a planned gift? Planned giving is a means to create a legacy, ensuring something you value continues after you are gone. This can be a large donation to fund building construction, a student scholarship, or an endowed program. It can also take the form of an annual gift to the organization.

The benefit of a planned gift is it allows you to structure assets to accomplish other things, like providing for beneficiaries. Certain charitable trusts can provide income to spouses, children, or grandchildren over decades or in a lump-sum payment.

Creating a planned giving program should align with your overall estate plan to achieve optimal results in growing wealth and minimizing tax liabilities. Doing so requires discussing your charitable intent with your estate planning attorney, determining the best way to do this and then drafting wills, trusts and any other instruments to work together.

The development office of any nonprofit organization will be familiar with planned giving and may even have someone on their team who focuses on planned gifts. They are usually happy to receive donations this way and will also know about different types of gifts and tax-efficient strategies.

Planned giving can also be used with a tax-advantaged vehicle like a donor-advised fund, which owns assets specifically for use by a charity.

Consider why you want to make a charitable gift and what you hope to accomplish. You and your estate planning attorney can then map out a strategy to benefit you, your loved ones and the nonprofits of your choice, demonstrating your priorities and creating a legacy.

Reference: Financial Advisor (June 1, 2024) “What Is Planned Giving?”

What are the Federal and Gift Tax Exemptions for 2024?

Unless Congress acts, regulations that elevated exemptions will expire at the end of 2025, and the exemption will be cut by about half, says the article “Take Advantage Of Increased Gift And Estate Tax Exclusions in 2024” from mondaq.

Those whom the gift and estate tax may impact should speak with their estate planning attorney about using this historically high exemption. Many estate planning strategies can be used to transfer wealth and take advantage of these exemptions efficiently.

In November 2023, the IRS announced increases for gift and estate tax exemptions in 2024, including an increase in the federal gift, estate, and GST (Generation Skipping Tax) exemption and the annual exclusion from gift tax. These changes became effective on January 1, 2024.

The gift and estate tax exemption has increased to $13,610,000 per individual in 2024. Married couples can transfer up to $27,220,000 since both partners may utilize the exemption. This marks a substantial increase of $690,000 per person ($1,380,000 per married couple) from the prior year.

Generally, gift and estate taxes may be due if a person’s total wealth transfer during their lifetime and at their death exceeds the gift and estate tax exemption.

The GST tax exemption increased to $13,610,000 per person in 2024. This tax may be triggered by transfers to or in trust for family members more than one generation younger than the donor. It might also be triggered by gifts to unrelated individuals who are 37.5 years younger than the donor.

The annual gift tax exclusion increased to $18,000 per donor, per gift recipient, and $36,000 per married couple splitting gifts. The annual gift tax exclusion permits individuals to make gifts to any amount of people tax-free every year without being counted against their lifetime gift and estate tax exemption.

An experienced estate planning attorney will explain the time-sensitive opportunities presented by the increases in 2024 in conjunction with the current (yet temporary) exemptions.

Now is the time to consider funding trusts with assets expected to have high growth potential, using a portion of the gift tax exemption while removing future appreciation from the estate.

Reference: mondaq (Dec. 21, 2023) “Take Advantage Of Increased Gift And Estate Tax Exclusions in 2024”

What Happens to a Pet when Owner Dies?

Pet trusts are a legally binding arrangement in which the donor (the person creating the trust) formally outlines their wishes for how they want their pet to be cared for.

A few more people are involved in a pet trust, according to the article “’Paws-ing’ to plan: How you can ensure your pet’s future well-being with pet trust planning” from The Gilmer Mirror. A trustee oversees the way trust funds are dispensed, a caretaker, who is in charge of the pet’s care and an enforcer, who makes sure the donor’s wishes are followed. Donors may appoint a caretaker of their choice, or work with an agent to find someone suitable for their pet.

Unlike an informal promise to care for a pet made by a well-meaning friend or family member, the pet trust is legally enforceable, giving it more "teeth” than a verbal promise. There is nothing to stop the person you leave your pet with from doing whatever they wish with the pet, from leaving the pet at a shelter to selling the pet. With a trust, all parties are bound to use the money for its intended purposes and to follow pet care instructions.

What can you ask your pet’s caretaker to do? Anything you feel is necessary. It can be as basic or as detailed as you wish. The pet could be cared for as they were by you, with the same kind of food, attention and affection. They can also continue to be seen by the same veterinarian, if one is named in the trust.

Pet planning has become increasingly popular, as more people see their pets as members of the family. However, pet trusts are not just for house cats or dogs. Work animals, show animals, specially trained service and companion animals and animals used for breeding are also protected by pet trusts.

A pet trust could ensure the future of a highly trained show jumper, or to ensure a working dog ends up at a farm where she continues to herd sheep.

Pet trusts are especially important for people with service animals. A blind person who has bonded with a seeing-eye dog may only wish another blind person to inherit a seeing-eye dog. The trust could ensure that animals who have been trained to provide emotional support, or to detect health conditions like seizures, should go to individuals with these same challenges.

Individuals who live with highly trained service animals should consult an experienced estate planning attorney along with the organization that trained the animal to ensure a pet trust is created within the scope and requirements of the organization, as well as the wishes of the owner. The organization may be better able to place the animal, while adhering to the pet trust’s requirements.

A pet trust helps protect our beloved animal companions and provides peace of mind for their humans. It should be part of your overall estate plan and should be updated regularly.

Reference: The Gilmer Mirror (March 23, 2022) “’Paws-ing’ to plan: How you can ensure your pet’s future well-being with pet trust planning”