Scott LaPresta, CTFA
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Key Takeaways
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Removing assets from your taxable estate may preserve more value for your beneficiaries by lowering your eventual federal estate tax liability. Generally, the more value included in your estate at death, the higher your federal estate taxes will be. For this reason, proactively shifting assets with significant growth potential out of your estate can be particularly effective, as doing so removes future asset appreciation from your taxable estate.
Since moving assets out of your taxable estate typically requires transferring ownership, consider reviewing these strategies with your private wealth management team to ensure they align with your long-term goals, such as supporting your beneficiaries, minimizing taxes, and preserving family wealth. It is also important to weigh the potential estate tax savings against the loss of a step-up in cost basis, which resets an asset’s cost basis to its fair market value at the owner’s death and can reduce capital gains taxes on a future sale.
There are a number of gifting and asset transfer strategies that can be employed to remove assets from your taxable estate while accomplishing your bigger picture wealth transfer goals, including leveraging your annual gift tax exclusion, taking full advantage of your federal lifetime gift and estate tax exemption, and using those assets to fund certain types of irrevocable trusts. With any of these strategies, understanding the complexities of the tax provisions is critical to making informed decisions that will have a lasting impact.
Using your annual gift tax exclusion
Giving assets to family or other individuals during your lifetime is a straightforward way to transfer assets out of your taxable estate while allowing the recipient to benefit from your gifts today. This could be particularly meaningful if you want to provide the recipient with supplemental income for expenses or assist with a significant contribution to help fund a big purchase for a family member.
The annual gift tax exclusion allows individuals to gift up to $19,000, or $38,000 for gifts from a married couple, to as many recipients as the donor wants in tax year 2025. Consistently using your annual gift tax exclusion each year can significantly decrease the value of your estate over time, which may lead to a lower federal estate tax liability.
Gifts made to pay for someone’s tuition or qualifying medical expenses do not count against your annual gift tax exclusion if the payments are made directly to the educational institution or medical provider. These payments are typically exempt from federal gift taxes entirely, neither reducing your lifetime exemption from federal estate and gift taxes nor triggering a taxable gift.
Any gift that exceeds the annual gift tax exclusion and is not covered by the tuition or medical payment exclusions is generally considered a taxable gift. Triggering a taxable gift requires the donor to file a Form 709 gift tax return, and the gift counts as a portion of the donor’s lifetime exemption from estate and gift taxes. Understanding how to make the most of your annual gift tax exclusion can help you transfer more wealth to the next generation tax-free while avoiding unintended tax consequences.
Efficiently leveraging your lifetime estate and gift tax exemption
With the passage of the One Big Beautiful Bill Act (OBBBA), the federal lifetime estate and gift tax exemption will increase to $15 million per individual starting in 2026, avoiding the scheduled sunset that would have significantly reduced the exemption amount from $13.99 million in 2025 to $5 million per individual in 2026, as adjusted for inflation. The exemption amount is effectively doubled for married couples and, once your exemption has been exhausted, further taxable gifts or transfers included in your estate at death are subject to a top tax rate of 40%. The changes introduced by the OBBBA are numerous, making specialized guidance essential to capitalize on potential estate and tax planning opportunities and navigate the complexities involved.
Gifting an asset with potential for appreciation early may have the added benefit of minimizing how much of your lifetime exemption is used by that gift. For example, if you and your spouse gift $1 million worth of assets to your child, your gift uses $1 million of your lifetime exemption. But if you allow the $1 million worth of assets to appreciate to $2 million before gifting it to your child, the gift will ultimately use $2 million of your lifetime exemption.
In other words, waiting to transfer appreciating assets may reduce the amount you can transfer tax-free later by using up more of your lifetime exemption. Also, gifting appreciated assets directly, rather than selling the assets and gifting cash, is generally more tax-efficient because liquidating assets before gifting them could trigger capital gains taxes for you to cover, in addition to reducing your available lifetime estate and gift tax exemption.
A comprehensive estate plan can effectively utilize your lifetime exemption so you can take advantage of the historically high exemption levels. Doing so can help shield as much wealth as possible from estate taxes, which could potentially increase the ultimate total value transferred to future generations or other beneficiaries.
Transferring assets to irrevocable trusts
Making a taxable gift to an irrevocable trust generally reduces your remaining lifetime exemption and may remove the asset and any future appreciation from your taxable estate. Irrevocable trusts can offer additional benefits, such as offering a means for structured wealth transfer and asset protection, depending on the type of trust and the provisions within the trust document. Though irrevocable trusts can be difficult to modify and generally require forfeiting ownership of the assets used to fund the trust, they can be particularly effective estate planning tools depending on your wealth transfer and tax planning goals.
A spousal lifetime access trust (SLAT) provides married couples with the option to use both of their respective federal estate and gift tax exemptions for the benefit of the other, since a SLAT allows for one spouse to fund a trust that names the other spouse as a beneficiary. If drafted properly, SLATs remove assets, and any future appreciation, from the estate of the grantor (the person who creates the trust). And, if the contribution to the SLAT falls within the grantor’s available lifetime exemption, there should typically not be any gift or estate tax to pay as a result of that contribution.
A common SLAT technique involves each spouse creating a SLAT for the benefit of the other spouse. This allows the couple to remove assets from their taxable estate while the couple may benefit from the assets indirectly, such as through distributions made to one spouse that could be used jointly for household expenses.
Dynasty trusts are another type of irrevocable trust that the grantor can use to remove assets from his or her taxable estate. Assets owned by a dynasty trust are generally not included in the estates of beneficiaries. Dynasty trusts are designed to benefit several generations of the grantor’s descendants while minimizing estate taxes. Depending on the structure of the dynasty trust and any applicable state laws, a dynasty trust may also offer a degree of asset protection from the beneficiary’s creditors.
Finally, an intentionally defective grantor trust (IDGT) is designed to remove assets from the grantor’s estate while the grantor remains responsible for any income tax liability associated with the trust assets. This becomes an advantage if the grantor does not want the trust or the trust beneficiaries to be responsible for paying any resulting income tax. When the grantor pays an income tax liability, such as a capital gains tax incurred when the trust sells an investment, their taxable estate decreases, potentially reducing federal estate taxes, while preserving more of the trust’s assets for potential future growth.
Because any income generated by the assets within the IDGT is taxed at the grantor’s income tax rate rather than as trust income, where the top tax rate is reached at much lower income levels, this structure can also result in significant tax savings over time. Put simply, trusts reach the top income tax bracket much faster than individuals, so having income taxed to the grantor rather than to the trust often results in a lower overall tax liability.
A more specialized use of an IDGT involves selling assets to the trust in exchange for a promissory note. This approach offers a dual benefit, allowing the assets to potentially appreciate outside the grantors’ estate while without using any lifetime gift and estate tax exemption.
With any irrevocable trust, the trust document must be carefully drafted to ensure assets are excluded from the grantor’s estate as desired and the trust complies with any applicable laws. A coordinated effort between your estate planning attorney and your private wealth management team to execute on your direction is important so the trust is structured properly and aligned with your financial goals.
Giving to charitable organizations
Donating assets to charity can be another effective strategy for removing appreciating assets from your taxable estate, realizing potential tax benefits, and supporting philanthropic causes in a meaningful way. Charitable giving not only creates a lasting impact on the organizations you support but can also reduce the value of your taxable estate and thereby manage your federal estate tax liability.
Assuming you itemize your deductions, donations to a qualified charitable organization can provide an income tax deduction between 20% and 60% of your adjusted gross income (AGI) in the year the donation is made. The deductible amount varies depending on what type of asset was donated and to which type of organization it was given.
For example, the IRS allows a deduction of up to 30% of your AGI for donations of assets that have been held longer than one year, such as marketable securities, real estate, and collectibles. In addition, it is not typically necessary to pay capital gains taxes on these assets if they are donated directly to a qualified organization.
Upstream gifting
Upstream gifting is a term used to describe the transfer of assets out of your estate by gifting them to a parent, with the intent that those assets will later be bequeathed back to you or your child.
With upstream gifting, the assets are considered part of the parent’s taxable estate, so the cost basis of the asset will typically reset to the asset’s fair market value for capital gains tax purposes at the time of the parent’s death, which can lower capital gains taxes for you or your child if either of you eventually sells the assets.
When done effectively, upstream gifting can remove assets from your estate while preserving the step-up in cost basis for you or your children. However, this strategy should be considered holistically among family members, as the assets will then become part of your parent’s taxable estate and may use up some of your personal lifetime exemption when you gift them the assets.
Plan for the transfer of your wealth with a comprehensive approach
Considering the right methods and timing to manage your federal estate tax liability as part of a comprehensive, coordinated estate plan starts with an understanding of your long-term personal and family goals for wealth transfer.
At Commerce Trust, your private wealth management team is comprised of tax management*, estate planning, financial planning, and investment portfolio management specialists who together can assess what your potential tax liabilities may be, understand the complexities and implications of the various transfer strategies, and help implement the strategies that align with your goals and with the right timing for each strategy in mind.
Contact Commerce Trust today to learn more about our private wealth management services and how we can help you navigate tax planning to preserve your wealth for your next generation and leave the most impactful gifts for your philanthropic beneficiaries.
Comparing Wealth Transfer Strategies
*Commerce does not provide tax advice to customers unless engaged to do so.
The opinions and other information in the commentary are provided as of July 22, 2025. This summary is intended to provide general information only and may be of value to the reader and audience.
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. Commerce Trust does not provide advice related to rolling over retirement accounts.
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