Helpful Tips on Trusts and Tax Planning Techniques
By Bonnie Orr, CPA, Partner, Joseph Parmegiani, JD, CPA, Partner and Bhakti Shah, JD, CPA, Partner
Key Takeaways
The One Big Beautiful Bill Act (OBBBA) permanently increases the federal estate, gift and generation-skipping transfer tax exemption (GSTT) to $15 million per individual starting in 2026, offering expanded opportunities for lifetime gifting.
Trust structures such as Intentionally Defective Grantor Trusts (IDGTs), Spousal Lifetime Access Trusts (SLATs) and Qualified Personal Residence Trusts (QPRTs) remain powerful tools for shifting wealth and managing both estate and income tax exposure.
State-level estate and inheritance taxes may differ significantly from federal rules, making it critical to coordinate planning strategies across both levels of taxation.
The sweeping One Big Beautiful Bill Act (OBBBA), signed into law on July 4, brings a pivotal update to the federal lifetime gift, estate and generation-skipping transfer tax (GSTT) exemption. Under prior law, the exemption was set to sunset on December 31 and revert to an estimated $7 million per taxpayer.
With the passage of the OBBBA, the “permanence” of the federal exemption to $15 million per taxpayer ($30 million per married couple) has been established beginning January 1, 2026, and will be indexed for inflation in future years. While this development offers a sigh of relief to taxpayers who recently updated their estate plans, it also underscores an enduring truth: in tax planning, nothing is truly permanent.
Taxpayers and families who will continue to be exposed to the estate tax should continue planning to shift wealth out of their taxable estates. Lifetime gifting remains a cornerstone of estate planning, most often into trusts that serve various estate plan goals.
Remember Portability: While portability for surviving spouses can be a great tool, surviving spouses must file estate tax returns when the first spouse dies to get this benefit. There is no portability of the GSTT exemption, therefore lifetime planning is required to use the GSTT exemption to reduce estate taxes for your next generation.
Summarized below are some tips regarding trusts commonly used for gifting, along with important information about income tax planning techniques and state inheritance taxes.
Gifting into Trusts
Trusts remain a vital tool in shifting assets out of a taxable estate while meeting a range of planning goals. Below are some of the most effective trust structures for lifetime gifting, along with other key considerations.
- Intentionally Defective Grantor Trusts (IDGTs) allow the grantor to continue to pay income taxes on the income from assets in the trust. Paying the income taxes each year is, in effect, an additional gift to the beneficiaries of the trust.
- Grantor Retained Annuity Trusts (GRATs) and Qualified Personal Residence Trusts (QPRTs) are both popular ways to get discounts on the gift amount. The Internal Revenue Service (IRS) provides clear guidance on the calculation of the gift amount, with one critical factor being current interest rates:
- Lower interest rates generally favor the outcome of gifts to GRATs.
- Higher interest rates generally result in higher discounts for gifting to a QPRT.
- If gifting a QPRT to charity, however, the charitable deduction will be greater when interest rates are down. If using these strategies, be aware of the interest rate impact.
- Lower interest rates generally favor the outcome of gifts to GRATs.
- Spousal Lifetime Asset Trust (SLATs) remain a great way to freeze the gift amount while retaining access to the income from the assets for your spouse’s lifetime. The higher “permanent” $15 million exemption leads to additional planning opportunities to shift assets out of your estate while providing flexibility and access to those assets by naming your spouse as a beneficiary.
- A SLAT can be drafted to be a non-grantor trust. A non-grantor trust is a separate entity that files its own tax returns and is responsible for its own tax liability. Depending on intended goals, this technique can not only shift the future growth of assets expected to rapidly appreciate but can also shift away the income tax burden those assets produce by making the trust a non-grantor trust. While special attention and care should be taken when drafting the trust due to its complexity, those who have used most of their exemption will find additional opportunity of approximately $1 million per spouse or $2 million per couple beginning January 1, 2026, due to the larger increase.
Income Tax Planning Techniques
For taxpayers where the estate tax may not be a pressing concern, income tax planning will take a front row seat. We continue to plan for income tax reduction strategies for families by planning to benefit from the stepped-up cost basis whenever possible. Techniques to help income tax planning with the passage of the OBBBA include utilizing non-grantor trusts.
- The OBBBA permanently increased the standard deduction, making it harder for taxpayers to itemize deductions. A popular itemized deduction is the deduction for charitable contributions. A non-grantor trust can be formed to claim the benefits of a charitable contribution to offset the trust’s income, without the taxpayer having to be concerned about meeting a hurdle to claim itemized deductions on their individual income tax return.
- A non-grantor trust is eligible to claim its own state and local tax deduction of up to $40,000, in addition to what the individual taxpayer can claim on his or her personal Form 1040.
- The OBBBA expanded the opportunity for non-grantor trusts to maximize the changes pertaining to Section 1202 qualified small business stock (QSBS). A taxpayer can exclude up to $15 million in gains from the sale of QSBS. This exclusion can be multiplied by gifting QSBS to a non-grantor trust, as a non-grantor trust is considered a separate taxpayer for federal income tax purposes and can therefore claim its own exclusion.
- Where income tax planning is at the forefront as opposed to estate tax planning, thought should be given to having gifts to non-grantor trusts drafted to be treated as incomplete gifts as opposed to completed gifts. The benefit of having the transfer to the trust be incomplete for gift tax purposes is that the trust assets would be includible in the taxpayer’s estate, allowing for the assets to receive a stepped-up cost basis upon the settlor’s demise.
- The OBBBA permanently increased the standard deduction, making it harder for taxpayers to itemize deductions. A popular itemized deduction is the deduction for charitable contributions. A non-grantor trust can be formed to claim the benefits of a charitable contribution to offset the trust’s income, without the taxpayer having to be concerned about meeting a hurdle to claim itemized deductions on their individual income tax return.
PKF O’Connor Davies Observation: Be careful where S Corporation stock is in the mix as non-grantor trusts are not eligible S Corporation shareholders unless special elections are made to qualify such trusts to hold S Corp Stock. For more on this, please see Trusts Can Be Shareholders of S Corporations … Sometimes.
While taxpayers can certainly have multiple non-grantor trusts, care should be taken to ensure that each trust is sufficiently independent and not created solely for tax benefits.
Don’t Forget State Taxes (Estate and Inheritance)
State estate and inheritance tax laws may not conform to the federal. For example, the New York State (NYS) lifetime estate exemption is $7,160,000 per taxpayer in 2025 and is scheduled to increase for inflation in 2026. NYS does not allow portability of a decedent spouse’s unused lifetime exemption and NYS treats lifetime gifts differently than federal. We can reduce NYS estate tax with certain types of trusts and lifetime gifting. Other states may be impacted by the decoupling of state from federal laws and we suggest that care is taken to fully capture all the implications to your own estate plan.
We Can Help
PKF O’Connor Davies has a dedicated team of trust, estate and gift tax advisors who specialize in this complicated area of the tax law. When seeking professional guidance, think of us for your family and succession planning needs. If you have any questions or would like to discuss further, please reach out to your client service team or:
Bonnie Orr, CPA
Partner
borr@pkfod.com
Joseph Parmegiani, JD, CPA
Partner
jparmegiani@pkfod.com
Bhakti Shah, JD, CPA
Partner
bshah@pkfod.com