CURRENT PLANNING

PREPARED FOR
John Sample - INDIVIDUAL CURRENT PLAN

PRESENTED BY
Neil R. Covert, Attorney at Law
Neil R. Covert, P.A.


TABLE OF CONTENTS

• INTRODUCTION TO THE FEDERAL ESTATE TAX SYSTEM
• ASSUMPTIONS
• ILLUSTRATION 1 - NO PLANNING
  
  
  

* This letter is provided for informational purposes only and should not be considered legal, tax, or financial advice.  We are not responsible for any actions taken based on the information provided in this letter.

This illustration was prepared by Your Planner Name on October 5, 2025, and assumes residential property worth $1,000,000 growing at 4.00% and Business and Investment assets of $7,000,000 growing at 7.00%.

Assumes John lives until 2039

Disclaimer: Please note that this letter is based upon a number of assumptions which may be refined by your planner in our comprehensive module. Please ask your planner for further information.

INTRODUCTION TO THE FEDERAL ESTATE TAX SYSTEM

NOTE: This explanation and the projections below are in rough draft form, and have not been tailored to the individual client situations.  They are provided for illustrative purposes only, and do not constitute a complete or necessarily accurate depiction of the client's present or future expected scenarios.  We nevertheless believe that this sample explanation and its accompanying charts may be useful to facilitate understanding the estate tax system and how optional planning scenarios can affect John's estate tax liability and family.

Under the federal estate tax system, the value of a decedent's assets are determined, to include individually owned real and personal property, the proportionate share of jointly owned property, and the value of the decedent's rights in certain trusts, and any "incidents of ownership" held in life insurance policies on the decedent's life will be included in the total.

Deductions from the gross estate include funeral and administration expenses, the value of assets passing to qualified charities or a surviving spouse who must be a U.S. citizen to qualify an outright disposition for the marital deduction – but if not a U.S. citizen, then a lifetime income trust called a Qualified Domestic Trust (QDOT) will work. The unlimited marital deduction also applies to a trust that pays all income to a surviving spouse called a QTIP Trust – which can also be a QDOT if the surviving spouse is not a U.S. citizen.

Every U.S. citizen is entitled to a personal unified estate and gift tax exemption which may be used during life to offset taxable gifts with any exemption remaining at death to offset estate tax liability.  An Estate Tax Form 706 must be filed within 9 months of death if the decedent's total assets exceed the exemption amount, even if the net assets after liabilities are below the exemption amount.

No estate tax is due if the value of an estate minus allowable deductions is less than the decedent's remaining available estate tax exemption. However, filing Form 706 may still be necessary in order to report deductions or apply an available exemption against a potentially taxable gross estate or to make elections such as applying a deceased spouse's unused exemption (DSUE) or to elect to apply the alternate valuation date (if it results in lower overall valuation) as of six months after the date of death.

The illustrations under this letter do not take into account the IRS's position that a trust that holds assets that are not subject to estate tax will normally not receive a new fair market value income tax basis for its assets, meaning that there may be income tax costs to the heirs of an estate who are the beneficiaries of such a trust.  There are planning techniques that address such risk that are not discussed in this letter.

Further, some of the ways that the techniques under this letter may be used could be challenged by the IRS or “backfire” depending on how the strategy is used, the amount of discounts taken, the rate of return on investments, and how long a person lives.  There is no substitute for having an experienced tax planning professional or professionals and appropriate skilled and licensed lawyers design and draft proper documents for an estate plan, and for having a skilled and experienced Certified Public Accountant understand the plan and provide appropriate tax returns, financial statements and other services that are consistent therewith.

Once a plan is put into place it should be reviewed periodically and adjusted appropriately from year to year.

Federal Unified Estate and Gift Tax Exemption

Under current law, the federal unified estate and gift tax exemption is annually indexed for the Chained Consumer Price Index, which is lower than the Consumer Price Index and much lower than the actual rate of inflation.  In 2024 each individual's exemption is $13,990,000 per person. Additionally, a deceased spouse's unused exemption (DSUE) may be added to the surviving spouse's available personal exemption. This "portability" feature is elected on a timely filed Form 706 to entitle the surviving spouse to combine the Deceased Spouse's Unused Exemption (DSUE) with their personal $13,990,000 (net of the survivor's prior taxable gifts, adjusting for future annual inflationary adjustments).

For example, if Spouse A only used $1,000,000 of his or her $13,990,000 exemption either through lifetime taxable transfers or against his or her taxable estate, then surviving Spouse B may use Spouse A's unused $12,990,000 in addition to Spouse B's full $13,990,000 exemption, thereby giving Spouse B the ability to shelter $26,980,000 against future taxable gifts or against Spouse B's future estate at death.  The DSUE that transfers to the surviving spouse does not increase with inflation.

If the first dying spouse's gross assets are less than the estate tax exemption amount then the estate and surviving spouse have up to five years after the date of death of the first dying spouse to file a Form 706 Estate Tax Return that elects for the portability allowance to pass to the surviving spouse.

The Internal Revenue Code has provided relief to estates making late portability elections of DSUEs without requiring any user fee or a private letter ruling. This simplified method permits an extension of time under § 301.9100-3 of the Procedure and Administrative Regulations for the surviving spouse to make a portability election under I.R.C. § 2010(c)(5)(A) up to five years after a proper election should have been made on Form 706 from a deceased spouse's estate.

If a surviving spouse remarries, any properly elected DSUE is not necessarily lost. Rather, a surviving spouse may combine their own personal unused exemption with a properly elected DSUE from their last dying spouse in a new marriage to shelter lifetime taxable gifts or future estate tax liability. However, if the new spouse predeceases them, then the newly deceased spouse's unused exemption is applied.

Lifetime gifts exceeding an annual gift exclusion (currently set at $19,000 per Donee as of 2025, and further explained below) reduce a person's lifetime $13,990,000 exemption on a pro rata basis.

Annual Gifting

An individual may make certain annual gifts to other non-exempt persons or irrevocable trusts without incurring gift tax.  The annual excludable amount is indexed for inflation, and is presently set at $19,000 per Donee recipient (for 2025).  Spouses may elect (on a Gift Tax Return Form 709) to combine their annual excludable gifts, permitting a couple to make a gift in the amount of $38,000 per Donee recipient.  The individual or couple may make gifts to as many different people or properly drafted trusts as they wish each year, and often desire to follow an annual gifting schedule the same Donee recipients.

Gifts are commonly made to irrevocable Gifting Trusts also known as "Crummey Power Trusts" where beneficiaries have a temporary right to withdraw, in order to qualify contributions to be treated as if they were transferred to individuals.  The "Crummey Power" is named after a 1968 Ninth Circuit U.S. Court of Appeals case D. Clifford Crummey v. Commissioner of Internal Revenue which established that a beneficiary's right to withdraw contributions to the trust constitutes a gift of a present interest even when the beneficiary waives his or her right.  A "Crummey Notice" should be given to the beneficiary or guardian advising of the right to withdraw contributions for a limited time. Subsequent cases have held that beneficiaries who do not receive notice of contributions may still qualify if there was a legal right to make a withdrawal, especially if the beneficiary had general knowledge from the past that contributions were being made.

Gifts below the current $19,000 individual or $38,000 joint spousal threshold will not affect the lifetime exemption amount of $13,990,000. Gifts between spouses who are U.S. citizens are always estate and gift tax free, regardless of amount.

Annual gifting may be combined with various estate planning techniques to minimize allowable transfers that avoid federal estate tax.  Individual or joint gifts of values exceeding the current annual exclusion amount of $19,000 or $38,000 to an individual Donee require reporting on a Gift Tax Return (Form 709), where cumulative taxable gifts are subtracted from the Donor(s)' lifetime exemption amount available.

In other words, each individual is currently entitled to a maximum $13,990,000 exemption from gift or estate taxes. In each year that an individual makes taxable gifts exceeding the current $19,000 per Donee excludable amount, the excess value of those gifts are subtracted from the beginning balance of $13,990,000 on Form 709 which is filed with the IRS. Whatever balance remains unused at death becomes the amount available to shelter an individual's federal estate tax liability.

There are several ways to strategically utilize the first dying spouse's exemption to maximize the estate tax shield applied to the surviving spouse's estate. The illustrations produced by this software demonstrate how certain estate planning techniques may impact an estate plan and a family's legacy.

NOTE:  If Congress does not extend the current estate exemption legislation by 2030, then a living person's unused exemption will be proportionately reduced (based on the new lower lifetime exemption, minus any amounts previously utilized), but not less than zero. In other words, there will be no Congressional "claw back" for an individual's use of previous allowable exemption amounts that exceed a new lower threshold.

Illustrations in this program can show the impact of various strategies under the assumption that the current exemption of $13,990,000 will continue to be indexed for inflation AND whether the exemption will be reduced by approximately one half of what they would have otherwise been in 2030, when the current estate legislation is scheduled to "sunset."

In the event that one spouse dies before 2025 and leaves a portability allowance, then any such portability allowance will not be reduced if the surviving spouse later qualifies to use it.

This illustration assumes that the surviving spouse will not have the benefit of any unused estate tax exemption of the first dying spouse under the portability rules which will sometimes allow a surviving spouse to have a larger estate tax exemption on the second death.

ASSUMPTIONS

Client
Name			John Sample - INDIVIDUAL CURRENT PLAN
Age			71
Sex			Male
Tobacco User?			No
Lifetime Gift Exclusion Used			$0
Projected Year of Death			2039
Annual Savings			$100,000 → $0 → $80,000
Transition Ages			Age 75 → Age 0
Savings Structure			3-Tier: Initial → Tier 2 → Rest of Life
Portability
Assume no portability?			Yes
Exemption Adjustment
Exemption Adjustment Option:			CPI adjustments only
Business and Investments
Current Value			$7,000,000
Annual Growth Rate			7.00%
Annual Investment Costs Rate			1.00%
Annual Investment Tax Rate (as % of assets)			0.20%
Personal Residence and Property
Current Value			$1,000,000
Annual Growth Rate			4.00%
Qualified Personal Residence Trust (QPRT)
Number of QPRTs			1
Percentage of Residence Value to QPRT(s)			100.00%
QPRT Residence Value			$1,000,000
QPRT 1 - Interest Rate			4.60%
QPRT 1 - Term			10
QPRT 1 - Exemption Used			$452,407
QPRT 1 - Annual Rent % After Possessory Term			8.00%
Existing Bypass Trust
Existing Bypass Trust Current Value			$0
Gifting
Initial Gifting Trust Value			$0
Exempt Gifts per year			1 Donees
Number of Years			0
Subsequent Gifts per year			1 Donees
Percentage of Gifts to Gifting Trust			100.00%
Percentage of Gifts using Discounting			100.00%
Discount Percentage for Gifting			30.00%
Life Insurance - Pre-planning
Insured		John Sample - INDIVIDUAL CURRENT PLAN		Second To Die
Life Insurance - Post-planning
Insured		John Sample - INDIVIDUAL CURRENT PLAN		Second to Die
Large Gift To Trust
Value Gifted	$1,980,000
Large Gift Discount Rate	30.00%
Large Gift Value After Discount	$1,386,000
Split Large Gift	No
Year to Toggle Off Grantor Status	Never
Installment Sale
Year One Gift Amount	$198,000
Year One Gift Discount Rate	30.00%
Year One Gift After Discount	$138,600
Sale Value before Discount	$1,980,000
Discount Rate	30.00%
Sale Value after Discount	$1,386,000
Total Sale Value	$1,386,000
Note Amount	$1,386,000
Note Interest Rate	4.68%
Note Payment Amount	$64,865
Type of Note	Conventional
Note Term in Years	11
Year to Toggle Off Grantor Status	N/A
Additional Income for Installment Sale Trust (Reduces Net Yearly Savings/Outgo)	$200,000
Number of Years of Additional Income for Installment Sale Trust	0
Note Discount On Death	0.00%
Annual Guarantee Fee Type (% or $)	Flat
Annual Guarantee Fee (Flat $)	$0
Annual Guarantee Fee Paid to Gift Trust?	False
Rates
Consumer Price Index Growth Rate	2.96%
Real Inflation	3.71%
Estate Tax Rate	40.00%
Adjust for Real Inflation	No
Additional Income for Installment Sale Trust (Reduces Net Yearly Savings/Outgo)	$200,000
Number of Years of Additional Income for Installment Sale Trust	0
Charity
Charity, CLAT or CRT?	CLAT
Charity Name	John Sample - INDIVIDUAL CURRENT PLAN Family Foundation
Percent of Residue to CLAT	100.00%
Percent of CLAT to Charity	60.00%
Number of Years	20

ILLUSTRATION 1 - YOUR CURRENT PLAN:  NO PLANNING

This first illustration assumes no annual gifting.

The first row shows John's assets in 2025.

The second row illustrates John's projected estate values at their death in 14 years leaving $19,193,061 worth of personal assets exposed to federal estate tax.

In this illustration the estate will be eligible to utilize a total exemption of $21,910,000.



John's net estate of $0 is subject to federal estate tax. Assuming a 40.00% estate tax rate, the estate tax would be $0 and is normally owed 9 months after the surviving spouse's date of death.

For estates substantially comprised of large closely held businesses, an executer may be entitled to make an election under I.R.C. § 6166 to defer the payment of estate taxes up to five years with interest-only payments, thereafter making equal payments over the following ten years. Such an election alleviates an estate's illiquidity and may avoid the need to sell assets at a disadvantageous time triggering a loss.