2025 Year-end planning for estate and gift tax

Multiplying the QSBS exclusion

• For stock acquired after the OBBBA’s enactment, the per-issuer QSBS gain exclusion increases to $15 million, and the gross asset cap increases to $75 million for stock issued after enactment. Starting in 2027, both limits will be adjusted for inflation.
• Taxpayers may consider making a gift of QSBS to separate non-grantor trusts to multiply the available exclusion. Alternatively, taxpayers wishing to avoid a taxable gift may use an incomplete gift, non-grantor trust (ING trusts). These trusts, frequently formed in Nevada and Delaware, are commonly used for state income tax planning. Note that some states, including New York and California, have passed anti-ING legislation. In those jurisdictions, the non-grantor trusts must be completed gift trusts.

Caution: Multiple trust rule.

When establishing multiple non-grantor trusts, bear in mind the multiple trust rule of IRC section 643(f), which permits the Treasury to treat multiple trusts as a single trust if:

• The trusts have substantially the same grantor(s) and beneficiary(s), and
• The principal purpose of the trusts is tax avoidance.

Itemized deduction limitations

The OBBBA permanently repealed the former “Pease limitation” but introduced a new 2/37 limitation, which effectively limits the tax benefit of itemized deductions for high earners to 35% beginning in 2026. Notably, the new rule also repealed IRC section 68(e), which exempted estates and non-grantor trusts from itemized deductions limitations. As a result, estates and non-grantor trusts are now arguably subject to the 2/37 limitation on itemized deductions, such as the IRC section 642(c) charitable deduction and the IRC section 691(c) deduction for estate taxes paid on income in respect of a decedent (IRD).

Interpretations vary as to whether the new rule applies to estates and non-grantor trusts. To mitigate potential exposure, taxpayers may consider accelerating charitable contributions into 2025 and leaving traditional Individual Retirement Accounts (IRAs), which are generally IRD to the beneficiaries, directly to charity.

Reporting gifts and bequests from covered expatriates

On Jan. 10, 2025, the IRS issued its final covered gift and bequest regulations under IRC section 2801, which imposes a tax on U.S. citizens or residents who receive a covered gift or bequest from a covered expatriate. The tax is calculated based on the value of the gift or bequest, multiplied by the highest estate tax rate at the time of receipt. Currently, the highest estate tax rate is 40%. Similar to an inheritance tax, this tax is imposed on the US recipient of the gift or bequest.

A “covered gift” or “covered bequest” refers to property acquired, directly or indirectly, by a U.S. recipient from a covered expatriate. Generally, a “covered expatriate” is someone who relinquished their U.S. citizenship and met any of the following criteria:

• Tax liability test: Their average annual net income tax for the five taxable years preceding expatriation exceeded the applicable threshold (i.e., $206,000 in 2025). This amount is indexed for inflation.
• Net worth test: Their net worth as of the expatriation date was $2 million or more.
• Tax certification test: They failed to certify to the IRS on Form 8854 that they complied with all U.S. federal tax obligations for the preceding five years.

Notably, the recipient of the gift or bequest is responsible for determining whether the person making the transfer is a covered expatriate and whether the transfer is a covered gift or bequest.

Reporting covered gifts and bequests has been delayed pending the IRS providing the appropriate form. Just recently, the IRS released a draft Form 708. Once this form is finalized, reporting will be required.

Bona fide intra-family loans

On April 1, 2025, the Tax Court issued a taxpayer favorable decision in the Estate of Barbara Galli v. Commissioner, upholding a $2.3 million loan between mother and son. The transaction was supported by a signed promissory note payable over nine years at the appropriate applicable federal rate (AFR). The court determined the transaction was a bona fide loan, not a disguised gift, because the parties observed formalities: the borrower paid interest each year, the lender reported interest income, and the indebtedness was evidenced by a signed promissory note. The fact that the note was discounted on the lender’s estate tax return was not an admission of a gift.

This case reinforces that adherence to certain formalities is essential for intra-family loans to be treated as bona fide debt obligations. Courts will evaluate several factors, including whether there is:

1. Evidence of indebtedness,
2. Adequate interest charged,
3. Security or collateral,
4. A fixed maturity date,
5. Demand for repayment,
6. Actual repayment,
7. An ability to repay,
8. Appropriate records reflecting the transaction, and
9. Consistent federal tax reporting.

Satisfying as many of these factors as possible helps to avoid the presumption that transfers among family members are gifts.

Strict compliance for portability elections

In the Estate of Billy S. Rowland v. Commissioner (July 5, 2025), the Tax Court disallowed the deceased spouse’s unused exclusion (DSUE) claimed by the surviving spouse’s estate. The court concluded that the first decedent’s estate tax return was not complete and properly prepared; thus, the portability election was invalid.

The executor of the first estate reported estimated asset values rather than fair market values. While Treasury regulations allow the use of estimated values for assets passing entirely to the surviving spouse or charity on portability only returns, this does not apply if the value of the property is needed to determine the value passing to other beneficiaries. Because 55% of the residue of the first decedent’s estate passed to non-spousal and non-charitable beneficiaries, the estate was not eligible to report estimated values.

Executors filing for portability should be aware that strict compliance with the rules and regulations is required and, in some cases, full valuations of property may be necessary, particularly if there are percentage-based bequests.

Please reach out to a Baker Tilly advisor if you have questions about this topic or how it might impact your tax position.