Recent developments in estate planning

This annual update summarizes key changes advisers need to be aware of to ensure their clients’ estate plans remain effective and in line with their intentions. It covers developments in the estate planning area from July 2024 through June 2025.

Permanent increase of estate/gift and GST exemptions

Though the scheduled sunset of increased estate, gift, and generation–skipping tax (GST) exemptions at the end of 2025 ultimately did not take place, it remained a critical issue for estate planners and their clients throughout much of the period covered by this update. The Tax Cuts and Jobs Act (TCJA)¹ had significantly increased these exemptions, allowing individuals to transfer up to $13.99 million and married couples up to $27.98 million over their lifetimes as of 2025 without incurring federal estate or gift taxes.

The increased exemption amounts were set to expire to pre–TCJA levels of $5 million per individual and $10 million per married couple, adjusted for inflation, as of Jan. 1, 2026. As a result, for the previous several years, many planners and clients had adopted a “use it or lose it” mindset, knowing that the exemption amounts were set to expire if Congress did not act. Ultimately, Congress did act. On July 4, 2025, President Donald Trump signed into law H.R. 1, P.L. 119–21, commonly known as the One Big Beautiful Bill Act (OBBBA). Among many other tax provisions, the OBBBA permanently set the estate, gift, and GST exemption amounts to $15 million per individual ($30 million total for married couples) in 2026, adjusted for inflation after that.²

Although the term “permanent” may suggest long–term certainty, tax advisers should remain cautious. As the recent history of these exemptions demonstrates, what is legislatively “permanent” can still be reversed or restructured by future administrations, particularly in response to shifting political priorities and election outcomes.

Potential estate tax repeal

In February 2025, Sen. John Thune, R–S.D., introduced the Death Tax Repeal Act of 2025, S. 587, which proposes eliminating both the estate and GST taxes. The legislative path forward remains uncertain.

For tax advisers, the key message to clients is this: No tax law is truly permanent. History shows that transfer tax rules are revised roughly every decade, often in response to shifting political priorities. Advising clients to delay or abandon estate planning in anticipation of repeal or historically high exemptions could result in missed opportunities to implement long–term wealth transfer strategies. Estate planning encompasses far more than tax mitigation. It is a vital tool for preserving family values, ensuring business continuity, and securing multigenerational legacies.

Inflation adjustments

The IRS released Rev. Proc. 2024–40, which set forth 2025 inflation adjustments for the following estate planning–related items:

• Unified credit against estate tax: The basic exclusion amount is $13,990,000 for determining the amount of the unified credit against estate tax under Sec. 2010. (This will increase to $15 million in 2026, as discussed above.)
• Valuation of qualified real property in decedent’s gross estate: If the executor elects to use the special-use valuation method under Sec. 2032A for qualified real property, the aggregate decrease in the value of the qualified real property resulting from electing to use Sec. 2032A for purposes of the estate tax cannot exceed $1,420,000.
• Gift tax annual exclusion: The gift tax annual exclusion for gifts of a present interest is $19,000. The gift tax annual exclusion for gifts of a present interest to a spouse who is not a U.S. citizen is $190,000.
• Notice of large gifts received from foreign persons: The threshold amount triggering the reporting requirement for gifts received from certain foreign persons is set at gifts exceeding $20,116.
• Interest on a certain portion of estate tax payable in installments: The dollar amount used to determine the “2% portion” is $1,900,000.

The increased basic exclusion amount allows taxpayers greater flexibility in gifting assets during their lifetime. For decedents dying and gifts given in 2025, the basic exclusion rose by $380,000 compared with 2024. This provides additional flexibility for making gifts and allocating GST exemption — either to 2025 gifts or to trusts created in the past that are not fully GST–exempt.

Key updates in the IRS Priority Guidance Plan

The 2024–2025 Priority Guidance Plan, released on Oct. 3, 2024, outlines key tax issues that Treasury and the IRS will address through various forms of published administrative guidance, including regulations and revenue rulings. For estate and gift tax planning, many items remain unchanged from the 2023–2024 Priority Guidance Plan. A few developments are of note:

• Items added to the priority guidance plan:
  • Guidance regarding amounts qualifying as distributions of income exempt from estate tax under Sec. 2056A; and
  • Regulations under Sec. 2642 regarding the redetermination of the inclusion ratio on the sale of an interest in a trust for GST exemption purposes.
• Items on the priority guidance plan for which guidance has now been issued:
  • Proposed regulations under Sec. 2056A for qualified domestic trust elections on estate tax returns, updating obsolete references, were published on Aug. 21, 2024;³
  • Final regulations under Secs. 1014(f) and 6035 regarding basis consistency between an estate and a person acquiring property from a decedent were published Sept. 17, 2024;⁴
  • Final regulations under Sec. 2801 regarding the tax imposed on U.S. citizens and residents who receive gifts or bequests from certain expatriates were published on Jan. 14, 2025;⁵ and
  • Guidance updating the user fee for estate tax closing letters was provided on May 16, 2025.⁶
• Items still awaiting the issuance of guidance that were also listed in the 2023–2024 Priority Guidance Plan include:
  • Regulations under Sec. 645 pertaining to the duration of an election to treat certain revocable trusts as part of an estate;
  • Regulations under Sec. 2010 addressing whether gifts that are includible in the gross estate should be excepted from the special rule of Regs. Sec. 20.2010-1(c);
  • Regulations under Sec. 2032(a) regarding imposition of restrictions on estate assets during the six-month alternate valuation period;
  • Final regulations under Sec. 2053 regarding the deductibility of certain interest expenses and amounts paid under a personal guarantee, certain substantiation requirements, and the applicability of present-value concepts in determining the amount deductible; and
  • Regulations under Sec. 2632 providing guidance governing the allocation of GST exemption in the event the IRS grants relief under Sec. 2642(g), as well as addressing the definition of a GST trust under Sec. 2632(c) and providing ordering rules when GST exemption is allocated in excess of the transferor’s remaining exemption.

Several months ago, the authors were informed by IRS officials that a temporary hold was in place on issuing new guidance, which is consistent with the executive action released by Trump on Jan. 20, 2025.⁷ Similar slowdowns have occurred in the early months of other administrations. It may also be influenced here by large IRS staff reductions and broader budgetary constraints, which have limited the IRS’s operational capacity and flexibility. Additionally, Trump issued Executive Order 14219 directing federal agencies, including the IRS, to review and potentially withdraw certain regulations and guidance documents that meet any of eight criteria, including those raising “serious constitutional difficulties” or that are “based on unlawful delegations of legislative power,” according to the executive order. This may have led to a more cautious and selective approach to releasing new guidance.

IRS estate and gift examinations

The annual IRS Data Book offers a wealth of information and provides valuable insights into IRS enforcement activities, including audit rates and revenue collected from estate and gift taxes. The most recent IRS Data Book for the fiscal year ending Sept. 30, 2024, reveals a decrease in estate– and gift–related filings in 2024 compared with 2023.⁸

In the 706 series forms, estate and GST tax returns decreased from 49,633 in 2023 to 31,516 in 2024, a 36.5% decrease.⁹ Gift tax filings decreased from 516,991 in 2023 to 313,197 in 2024, a 39.4% decrease.¹⁰ Fiduciary income tax returns associated with trusts and estates decreased from 3,370,406 in 2023 to 3,165,460 in 2024, a 6.1% decrease.¹¹

Interestingly, the decrease in fiduciary and gift filings suggests that taxpayers may not have engaged in estate planning to the same extent as in prior periods to take advantage of higher exemption amounts ahead of the potential sunset of the relevant provisions of the TCJA. The decline in estate tax returns may indicate that more taxpayers are falling below the elevated exemption thresholds, reducing the need to file. It could also reflect that many individuals accelerated their planning in earlier years, leaving fewer taxable estates in the current cycle.

The IRS Data Book reports on closed examinations, meaning audits that have concluded. This means that the data does not reflect the many ongoing audits for recent tax years. The most recent data only reports on tax years 2014–2022. For tax year 2022, the audit rate for estates was 0.7% and the audit rate for gift tax returns was under 0.05%. This marks a continued decline from prior years. The trend reflects a steady decrease in enforcement in this area. Unfortunately, the IRS Data Book does not break out how many of the 29,198 estate tax returns filed for tax year 2022 were taxable estates resulting in estate tax liability.

Of the 203 tax year 2022 estate tax returns examined, 175 were still in process and 28 were closed.¹² The lack of detail as to whether the audited estates were taxable limits the ability to assess how effectively the IRS is targeting its audits or how representative the audit rate is for high–value estates. The low audit rates may give taxpayers a false sense of security, and advisers should continue to emphasize documentation and compliance, particularly for large estates and complex transfers.

Required minimum distributions from inherited individual retirement accounts: IRS releases final and proposed regulations

On July 19, 2024, the IRS released final regulations that incorporated changes under the Setting Every Community Up for Retirement Enhancement Act of 2019¹³ (SECURE) and the SECURE 2.0 Act of 2022.¹⁴ Planners should talk to clients who have inherited retirement accounts over the last five years, as they will be particularly impacted by these new rules.

The final regulations make clear that once required minimum distributions (RMDs) have started, they must continue except in the case of a surviving spouse. RMDs are subject to the 10–year cutoff rule for other designated beneficiaries. This means those beneficiaries who are not eligible designated beneficiaries and those who have not been taking RMDs must do so beginning Jan. 1, 2025, pursuant to the final regulations. If the account owner died on or after their required beginning date, annual RMDs are required in years 1–9 of the 10–year period, not just a lump sum in year 10.

Clarification was given regarding trusts for beneficiaries and as to which trust beneficiaries must be included in the calculation when determining the amount of the RMD. Although commentators had argued for some leniency, the final regulations make clear that in order for a trust to be a “conduit trust,” explicit language must be contained in the trust agreement that requires the trustee to immediately pay to, or for the benefit of, the beneficiary any RMD amount received. The IRS maintains that the determination of which trust beneficiaries are considered for RMD purposes is based on documentation provided to, and reviewed by, plan administrators and IRA custodians, who are required to obtain and reasonably rely on such documentation.

There are other important takeaways from the final regulations, and it remains imperative for planners and advisers to carefully consider differences in treatment based on the type of trust beneficiary and the type of account, as well as nuances in the drafting of the documents.¹⁵

The IRS also released proposed regulations related to SECURE 2.0 on July 19, 2024. Specifically, the proposed regulations correct a drafting error in SECURE 2.0, where individuals born in 1959 fell into two categories: (1) turning 73 before Jan. 1, 2033, which would require RMDs beginning in 2033, but also (2) turning 74 after Dec. 31, 2032, which would not require RMDs to be taken until age 75. The proposed regulations clarify that the applicable age for individuals born in 1959 is 73.

The proposed regulations also shed light on a rule regarding Roth accounts. For years beginning in 2024, individuals required to take RMDs during their lifetime from an employer–sponsored retirement plan no longer have to consider a designated Roth account balance when calculating the annual RMD. If a distribution is made from the designated Roth account, the proposed regulations clarify that such distributions are not counted toward the RMD for the pretax portion of their retirement plan account.

Basis-consistency regulations

On Sept. 17, 2024, the IRS issued highly anticipated final regulations on the requirement that the basis of property acquired from a decedent be consistent with the basis reported on the estate tax return. Generally, under Sec. 1014(f), a recipient’s basis in certain property acquired from a decedent must be consistent with the value of the property as finally determined for federal estate tax purposes. In addition, under Sec. 6035, executors and other persons must provide basis information to the IRS and to the property recipients.

The regulations apply to those estate tax returns filed after Sept. 17, 2024, that must file Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, and came eight years after proposed regulations were published in March 2016.¹⁶The final regulations address many of the concerns stated by the AICPA in its comment letter to the IRS.¹⁷ The IRS reversed its position on key issues in the final regulations.

The final regulations eliminated the requirement that beneficiaries take zero basis in assets not reported on a Form 706, United States Estate (and Generation–Skipping Transfer) Tax Return, prior to the expiration of the statute of limitation. The IRS was persuaded by commenters’ arguments that such a rule was unnecessary and would have undesirable practical effects.

Also, the final regulations clarified that executors are required to report assets on Schedule A only when such assets are “acquired” by the beneficiary. Assets acquired on or before the Form 706 is filed must be reported by the 30–day deadline, whereas assets acquired after the Form 706 is filed should be reported by Jan. 31 following the year of acquisition. Importantly, the final regulations define an asset as being “acquired” by a beneficiary when title vests in the beneficiary or when the beneficiary otherwise has sufficient control over the asset, thus removing the executor’s need to report all assets the beneficiary “may” receive.

Further, individual beneficiaries are not required to report subsequent transfers of inherited assets. Commentators expressed concern that this reporting requirement could continue for generations and thus be nearly impossible for the IRS to enforce — especially regarding individual beneficiaries who may not be aware of this reporting requirement. However, executors are still required to submit supplemental statements to the individual beneficiaries if the initial filing was incorrect, with a due date of 30 days after the information is available to the executor. Additionally, trustees are required to file supplemental statements for trust funding and all distributions of inherited property.

The final regulations make many other changes to the proposed regulations, and many of these changes address commentators’ concerns regarding enforceability, complexity, and fairness in applicability.¹⁸

Imposition of tax on certain gifts and bequests from covered expatriates: IRS releases final regulations under Sec. 2801

On Jan. 14, 2025, the IRS issued final regulations on the Sec. 2801 inheritance tax on a U.S. person’s receipt of a covered gift or bequest from a covered expatriate. These highly anticipated final regulations move the IRS one step closer to beginning enforcement of this provision included in the Heroes Earnings Assistance and Relief Tax (HEART) Act, P.L. 110–245, originally enacted in 2008. The Sec. 2801 inheritance tax acts as a backstop to the estate tax, gift, and GST taxes where they could be avoided through expatriation.

As the preamble to the final regulations explains, the final regulations provide that the tax is imposed on U.S. citizens, U.S. residents, domestic trusts, and electing foreign trusts that directly or indirectly receive gifts or bequests from covered expatriates on or after Jan. 1, 2025. The rate of the inheritance tax is a flat tax equal to the highest estate tax rate in effect at the time of receipt, currently 40%, of the total value of the gift or bequest. The recipient of the gift, not the donor, is required to pay the tax. As a result, the Sec. 2801 inheritance tax could surpass the transfer tax the donor would have owed as a U.S. resident, since there is no lifetime exemption.

Under the final regulations, a “covered expatriate” for purposes of Sec. 2801 has the same meaning as it does for purposes of the exit tax under Sec. 877A.¹⁹ The regulations create a rebuttable presumption that every gift or bequest received by a U.S. recipient from a foreign person is subject to the Sec. 2801 inheritance tax unless the living donor of the gift or the decedent’s estate authorizes the IRS to disclose the donor’s relevant information to the U.S. recipient. The IRS will provide further guidance on how to request information on the donor’s covered expatriate status and how to authorize such disclosure to the U.S. recipient. It is important for individuals who receive gifts or bequests from foreign persons to understand the donor’s past status as a U.S. citizen or long–term permanent resident.

A “covered gift or bequest” is defined in the final regulations as any property acquired from a covered expatriate, regardless of the situs of the property or whether the property was acquired by the covered expatriate before or after expatriation. However, several types of gifts and bequests are not covered by the inheritance tax:

• Prior reported gifts on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return,or Form 709-NA, United States Gift (and Generation-Skipping Transfer) Tax Return of Nonresident Not a Citizen of the United States;
• Property subject to estate tax reported on a timely filed Form 706; Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of Nonresident Not a Citizen of the United States; or Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;
• Covered bequest previously subject to the Sec. 2801 tax as a covered gift;
• Qualified disclaimers;
• Transfers eligible for a charitable deduction under Sec. 2522 or 2055;
• Transfers to a spouse that qualify for the marital deduction under Sec. 2523 or 2056 — importantly, these gifts are only available to transfers to U.S. citizen spouses, but certain transfers to a qualified domestic trust may qualify for the marital deduction and be exempt from the Sec. 2801 inheritance tax.

U.S. recipients will report gifts and inheritances from a covered expatriate on Form 708, United States Return of Tax for Gifts and Bequests Received From Covered Expatriates. As of this writing, the IRS had not yet published the final Form 708. The final regulations permit taxpayers who reasonably conclude that a gift or bequest is not subject to Sec. 2801 to file a protective Form 708 to start the period of limitation for the assessment of any inheritance tax.

The final regulations are not retroactive, as they specifically apply to covered gifts and bequests from a covered expatriate received by the U.S. person on or after Jan. 1, 2025. Importantly, planners should be cautious of transfers initiated before Jan. 1, 2025, that eventually become completed gifts on or after this date or remain included in a covered expatriate’s estate, as these transfers may result in a Sec. 2801 inheritance tax.

IRS releases final ‘basis-shifting’ regulations, promptly rescinded by Trump administration

On April 17, 2025, the IRS released Notice 2025–23, which announced that Treasury and the IRS intended to publish a notice of proposed rulemaking to remove the “basis–shifting” final regulations published on Jan. 14, 2025.²⁰ The final regulations had adopted, for the most part, the proposed regulations issued on June 17, 2024.²¹

The notice provides immediate relief from Sec. 6707A(a) penalties for any failure to file a Form 8886, Reportable Transaction Disclosure Statement, that would otherwise be required to be filed pursuant to the final regulations. It also provides relief from Sec. 6707(a) penalties for failure to file a Form 8918, Material Advisor Disclosure Statement, and those penalties pursuant to Sec. 6708 for failure to maintain a list under Sec. 6112 that is otherwise required under the final regulations.

Additionally, the notice withdraws Notice 2024–54, which announced that the IRS had intended to propose two sets of regulations aiming to prevent tax–avoiding basis–shifting maneuvers within partnerships involving related parties (covered transactions). In the first set, the IRS had intended to propose regulations under Secs. 732, 734(b), 743(b), and 755 that would (1) provide the required method of recovering adjustments to the bases of property held by a partnership, property distributed by a partnership, or both, arising from covered transactions; (2) provide rules governing the determination of gain or loss on the disposition of such basis–adjusted property; and (3) include similar transactions involving tax–indifferent parties (for example, certain foreign persons, tax–exempt organizations, or parties with tax attributes that make them tax–indifferent) rather than related parties.

In the second set, the IRS had intended to propose regulations under Sec. 1502 to clearly reflect the taxable income and tax liability of a consolidated group whose members own interests in a partnership. These proposed regulations would provide for single–entity treatment of members that are partners in a partnership, so that covered transactions cannot shift basis among group members and distort group income.

Notice 2025–23 states that commentators had claimed that the regulations would “impose complex, burdensome, and retroactive technical rules on many ordinary–course and tax–compliant business activities, creating costly compliance obligations and uncertainty for businesses.” It also states that it was issued pursuant to a review under Trump’s Executive Order 14219 mentioned above. The notice permits taxpayers to rely on the guidance in Notice 2025–23 until the notice for proposed rulemaking is finalized.

Importantly, the notice did not revoke Rev. Rul. 2024–14, which was released along with Notice 2024–54 and the proposed regulations, in which the IRS ruled that certain related–party partnership transactions involving basis shifting, in which the goal is simply to shift tax burdens rather than achieve a genuine economic purpose, lack economic substance under Sec. 7701(o).

When advising clients on grantor trusts or related–party basis–shifting techniques, advisers should still be sure to discuss the possibility of future law changes that could reduce their effectiveness.

2024 Form 709 updates and potential 2025 e-filing

The IRS released the 2024 Form 709 to report transfers after Dec. 31, 2023, and prior to Jan. 1, 2025. Careful consideration should be paid to changes to line references for 2024 posted on Jan. 30, 2025.

The 2024 Form 709 changed the requirements for spouses electing to split gifts for gifts made in calendar year 2024. Specifically, Part 1, entries 12 through 18, were moved to a new Part III, “Spouse’s Consent on Gifts to Third Parties,” on the second page of the donor spouse’s Form 709. Additionally, the consenting spouse is no longer required to sign the donor spouse’s return on Page 1 but must instead sign a separate Notice of Consent to be attached to the donor spouse’s return. A careful reading of the 2024 Form 709 instructions should be taken to ensure that an effective split–gift election has been made for calendar year 2024.

The rules regarding the split–gift election pursuant to Sec. 2513 have not been changed.

On Feb. 13, 2025, the AICPA submitted comments for clarification and improvement on Form 709. One of the comments included allowing e–filing of the Form 709. On May 30, 2025, the IRS announced it would begin accepting Forms 709 and 709–NA for electronic filing through the Modernized E–File system starting June 22, 2025.²²

Termination of QTIP trust triggers gift tax for remainder beneficiaries

In McDougall,²³ on Sept. 17, 2024, the Tax Court held that remainder beneficiaries of a marital trust for which a qualified terminable interest property (QTIP) election was made had made a gift to the surviving spouse under Secs. 2501 and 2511 by consenting to the termination and distribution of the trust assets.

Bruce McDougall’s wife died in 2011. Her will directed that upon her death, the residue of her estate was to pass to a marital trust for the benefit of McDougall, with their two surviving children as remainder beneficiaries. McDougall, as executor, elected to treat the trust as a QTIP trust under Sec. 2056(b)(7).

Five years later, in 2016, McDougall and the two children entered into a private agreement to commute the trust and to distribute all remaining assets outright to McDougall. McDougall subsequently sold some of the assets he received from the trust to separate trusts established for the benefit of the two children and their children in exchange for promissory notes. McDougall and the two children each filed gift tax returns and reported the transactions as reciprocal gifts that offset one another, resulting in no gift tax consequences.

The IRS subsequently examined the 2016 gift tax returns and issued a notice of deficiency to McDougall and the two children, determining that (1) the commutation of the trust resulted in a gift from McDougall to the two children under Sec. 2519 and (2) the agreement resulted in gifts from the two children to McDougall of the remainder interests pursuant to Sec. 2511.

McDougall and the two children filed for summary judgment on the issue of whether taxable gifts occurred, asserting that none had. The IRS filed for partial summary judgment on the issues of (1) whether the agreement to commute the trust resulted in a gift from McDougall to the children as a disposition of McDougall’s qualifying income interest under Sec. 2519, asserting that it did; (2) whether the agreement to commute the trust also resulted in a gift from the two children to McDougall of their remainder interests under Sec. 2511, asserting that it did; and (3) whether the two gifts were reciprocal, asserting that they were not.

The Tax Court held that there had been no gratuitous transfer from McDougall to the children because McDougall held his beneficial interest in the QTIP before and after the deemed transfer and he did not give away anything of value. Relying on Estate of Anenberg,²⁴ the Tax Court determined that the implementation of the nonjudicial agreement made between McDougall and the two children, coupled with the subsequent sale of the property, did not result in a gift from McDougall. In conclusion, McDougall did not make a gift because the assets had been distributed outright to him prior to the subsequent sale to the separate trusts for the children.

However, the Tax Court did hold that the children made a gift of their respective remainder interests in the trust when they had consented to the termination of the trust. This allowed the outright transfer of all assets to McDougall and constituted a relinquishment of their entire remainder interests.

McDougall highlights the gift tax consequences resulting from an agreement between the beneficiaries of a trust where the beneficiaries’ consent to a transaction modifies or shifts beneficial interests. The ruling in McDougall is consistent with the result in Estate of Anenberg, where the court held that the surviving spouse had not made a gift under Sec. 2501 because there was no gratuitous transfer. However, McDougall extends the analysis by addressing the issue not raised in Anenberg regarding the gift tax consequences for the remainder beneficiaries. McDougall concludes that by voluntarily surrendering their interests, the remainder beneficiaries of the QTIP trust incurred gift tax. The value of the gift made by the beneficiaries is the subject of ongoing litigation.

Planners and advisers should encourage taxpayers to report both gift and nongift transactions to start the statute of limitation on transactions that may subsequently be subject to IRS scrutiny. Planners should also be cautious when terminating a QTIP trust.

Life insurance proceeds not included in estate

On Sept. 24, 2024, the Tax Court held that life insurance proceeds were not included in a gross estate under Secs. 2031 and 2033 because the step–transaction doctrine did not apply.

In Estate of Becker,²⁵ Larry Becker created an irrevocable life insurance trust (ILIT) that held two policies on his life. The ILIT was both the owner and beneficiary of the policies, and at no point did Becker possess any incidents of ownership in either policy. The ILIT paid premiums by borrowing the money from Becker. Becker then borrowed from an insurance broker, and the insurance broker in turn borrowed from a third party. The third–party loan was repaid by the broker. For 30 months, the ILIT paid premiums on the life insurance policies using the loan proceeds. Becker ultimately assigned the ILIT’s repayment obligation to the broker, effectively satisfying the loan.

The broker transferred the promissory notes due from the ILIT to ALD LLC, which the broker owned 100%. ALD LLC then transferred the notes to JTR LLC — the opinion does not detail the terms of this transfer or the ownership of JTR LLC. The ILIT later entered into an agreement with LT Funding LLC, under which LT Funding LLC agreed to pay the future premiums on the policies owned by the ILIT in exchange for 75% of the total death benefit. Less than two years later, Becker died. The insurer paid the full death benefit on the policies to the ILIT.

The IRS argued that the two policies should be included in Becker’s estate under Secs. 2031 and 2033 because the step–transaction doctrine applied to the unique payment structure, and all the transactions should be collapsed because Becker’s estate had a cause of action to recover the proceeds under state law.

The Tax Court disagreed and held that the transactions should not be collapsed under the “end result” or the “interdependence” tests for determining whether application of the step–transaction doctrine was appropriate. The Tax Court found that the step–transaction doctrine did not apply under the end–result test because the transactions were not a series of formally separate steps that were prearranged parts of a single transaction intended from the outset to reach the ultimate result. The interdependence test did not apply because the policies were funded for the first 30 months at the outset and there was no requirement that Becker continue to fund the ILIT.

This case illustrates the importance of understanding the step–transaction doctrine and serves as a reminder that planners should use caution when structuring a series of related transactions.

Family limited partnership Sec. 2036(a) estate inclusion

On Sept. 26, 2024, the Tax Court held in Estate of Fields²⁶ that property transferred to a family limited partnership (FLP) caused estate tax inclusion under Secs. 2036(a)(1) and (2) at the date–of–death fair market value (FMV) of assets transferred to the FLP because the decedent retained applicable rights and interests in the assets until her death and the transfers were not bona fide sales.

Anne Milner Fields ran an oil business that she inherited from her deceased husband. She contributed approximately $17 million worth of assets into a limited partnership, AM Fields, of which she held a 99.99% limited partnership interest. The transfer was completed in 2016 by her great–nephew, Bryan Milner, who held the general partnership interest through his LLC, shortly before Fields’s death. Milner used a power of attorney to transfer the assets to the limited partnership.

Upon Fields’s death, Milner reported the discounted value of the FLP as $10.8 million, taking discounts for lack of control and marketability as to the 99.99% limited partnership interest held by Fields at her death. The IRS disputed the value and argued that Sec. 2036(a) applied to include the full, undiscounted date–of–death value of the FLP in Fields’s estate because of Fields’s retained applicable rights and interest in the partnership.

The Tax Court agreed with the IRS and determined that Fields did retain economic benefits because Milner, acting under the power of attorney, had authority to distribute income from the FLP for Fields’s benefit. The Tax Court also found that Fields retained the same control and enjoyment of the assets both before and after the transfer to the FLP, and as such, the full value of the transferred assets was properly included in her estate under Sec. 2036(a). Moreover, the transfer was not a bona fide sale because there was no evidence the FLP was formed for a legitimate nontax reason. The Tax Court assessed penalties under Sec. 6662(a) because it found insufficient evidence that the estate had reasonably relied on professional advice when reporting the discounted value on the estate tax return.

Fields should be a cautionary tale to planners and serve as a reminder to ensure clients have legitimate, nontax reasons for forming an FLP. Especially after gifting or related–party sales of FLP interests, the taxpayer must not retain any control over the FLP interest or access to its income. The FLP must be operated as a true partnership, and all actions should reflect the transferor’s complete relinquishment of the transferred interests.

Intrafamily notes

On March 5, 2025, the Tax Court held that an intrafamily note bearing adequate interest under Sec. 7872 with a specified repayment date was a loan and not a gift.

In Estate of Galli,²⁷ Barbara Galli loaned $2.3 million to her son in 2013 when she was 79 years old. The terms of the loan provided for a nine–year term with interest at the applicable federal rate (AFR) of 1.01%, payable annually and with repayment of the principal due at the end of the term. Galli’s son made annual payments of interest for three years until Galli died in 2016. Galli had not filed a gift tax return relating to the note and left a taxable estate that included the repayment obligation under the note, which the estate valued at $1,624,000.

The IRS argued that the FMV of the note was $869,000 higher than what the estate reported as of Galli’s date of death and that this excess amount was a gift and not a loan. The IRS argued that the note did not create a legally enforceable right in Galli to repayment from the son and that Galli failed to show that her son had the ability to repay the loan or whether Galli intended to be repaid.

The Tax Court determined that the estate provided sufficient evidence to classify the note as a loan rather than a gift. Specifically, the note was signed by both parties, included adequate interest at the AFR, specified a repayment date, and the son had actually made annual interest payments for several years.

Although this decision is favorable for taxpayers, planners should remain cautious when structuring intrafamily notes as bona fide loans that will hold up against IRS scrutiny. Clients should administer the note in a manner consistent with arm’s–length transactions by strictly adhering to the formalities of the note, including proper documentation, charging adequate interest, specifying a fixed repayment schedule, and ensuring that payments are actually made in accordance with the terms. Additionally, it is important to avoid any prearranged agreement between the family members that the note will be forgiven or not enforced.

Payment to stepchildren was not a claim against the estate

On May 16, 2025, the Eleventh Circuit filed its decision in Estate of Spizzirri²⁸ and affirmed the Tax Court’s decision that payments by a decedent’s estate made pursuant to a premarital agreement to his surviving spouse’s children from a previous marriage were not deductible as claims against the estate.

Richard Spizzirri entered into a prenuptial agreement with his fourth wife, Holly Lueders. The agreement, as later modified, required Spizzirri’s estate to pay $6 million to Lueders and $3 million to her three children from a prior marriage upon his death.

After Spizzirri’s death, his estate paid the stepchildren $1 million each and claimed a deduction for these payments as claims against the estate under Sec. 2053(a)(3). The IRS disallowed the deduction, and the estate petitioned the Tax Court for review. The Tax Court found, and the Eleventh Circuit affirmed, that the payments to the stepchildren were not deductible, as they were not contracted for bona fide, adequate, and full consideration in money or money’s worth as required by Sec. 2053(c)(1)(A). The Eleventh Circuit agreed with the Tax Court that the payments to the stepchildren failed the “bona fide” requirement. The court found evidence of donative intent, including Richard’s history of making gifts to his stepchildren. The court noted that such a “transfer that is essentially donative in character (a mere cloak for a gift or bequest)” is denied an estate deduction.²⁹

Planners should note that payments to family members, especially those arising from prenuptial or similar agreements, will be closely scrutinized by the IRS to determine if they are truly bona fide or merely disguised gifts or bequests. For a claim to be deductible, there must be clear evidence of a bona fide, arm’s–length agreement supported by adequate and full consideration in money or money’s worth. Planners should carefully structure and document any such arrangements, ensuring that they meet the strict requirements of Sec. 2053 and the accompanying regulations to avoid disallowance of deductions and potential estate tax exposure.

Missed QTIP election resulted in loss of marital deduction

In Estate of Griffin,³⁰ the Tax Court held that a $2 million marital bequest was not QTIP because a QTIP election was not made on the estate tax return, but a $300,000 marital bequest that created a separate trust qualified for the marital deduction even though that bequest was not QTIP.

Martin Griffin had created the Martin W. Griffin Trust (the revocable trust) in 2012 and amended it in 2018. Griffin also created the MCC Irrevocable Trust in 2018 for the benefit of his wife, Maria Creel. The revocable trust, as amended, provided for a distribution of $2 million to the MCC Irrevocable Trust, and from this amount, the trustee was required to pay Creel a monthly distribution to be determined between Creel and the trustee as a reasonable amount, not to exceed $9,000. The revocable trust provided for a second distribution of $300,000 to the MCC Irrevocable Trust to be held as a living expense reserve for Creel and for the trustee to distribute $60,000 per year for up to 60 months, with any undistributed amount to be distributed to Creel’s estate. The $300,000 bequest was directed by the revocable trust to be paid to Creel at the rate of $5,000 per month until her death, when any residual amount would pass to her estate.

The MCC Irrevocable Trust stated that no beneficiary should be able to appoint any part of the trust estate to the beneficiary, the beneficiary’s estate, the beneficiary’s creditors, or to the creditors of the beneficiary’s estate.

Griffin died in 2019. The executor of the estate timely filed Form 706 but did not list any property from the estate as QTIP. The form’s Schedule M indicated that “all other property” included the specific bequest of $2.3 million to Creel. The IRS sent a notice of deficiency to the estate and maintained that both bequests, the $2 million and the $300,000 bequest in the revocable trust, were not eligible for the estate tax marital deduction.

The Tax Court determined that the $2 million bequest was a terminable interest and therefore includible in Griffin’s estate because the estate did not make the required valid QTIP election. The Tax Court noted that a terminable interest does not qualify for the marital–deduction exception unless the QTIP election is made.

The Tax Court determined that the $300,000 was not a terminable interest under Kentucky law because Griffin intended the bequest to create a separate trust. Specifically, the use of the phrase “living expense reserve” and the distribution provision to Creel’s estate upon her death that conflicted with the terms of the MCC Irrevocable Trust allowed the Tax Court to hold that Griffin intended to create a legally distinct trust and the distribution was not a terminable interest. Thus, this bequest qualified for the marital deduction.

Planners should pay close attention when drafting marital trust agreements to ensure they will qualify for the estate tax marital deduction. Executors must make a valid QTIP election for most marital trusts to qualify for the estate tax marital deduction. It is essential for planners to carefully review and consider applicable state law to ensure that the trust agreement and any QTIP election will achieve the intended tax and dispositive outcomes, as state law can significantly affect the administration and taxation of trusts.

Income tax considerations when terminating trusts early

In Letter Ruling 202509010, the IRS determined that, while the termination of a grandfathered trust did not have any negative gift or generation–skipping transfer tax (GSTT) consequences, there were unfavorable income tax consequences, specifically, taxable gain for the holder of a lifetime beneficial interest in the trust.

The trust at issue was created prior to Sept. 25, 1985, and thus was not subject to GSTT.³¹ The trust paid out an annual annuity to the settlor’s grandchild (“third generation,” or “G3”), and that was the only current distribution permitted during G3’s lifetime. Upon the death of G3, the annuity was to be divided per stirpes among the grandchild’s descendants, specifically, the grandchild’s two adult children (“G4”) and four grandchildren (“G5”). The trust would terminate upon the last to die of 10 specified individuals in the trust agreement, including G3.

An agreement among the parties was entered into to terminate the trust, contingent upon receiving a favorable letter ruling from the IRS, and upon termination, the remaining trust property would be distributed to G3, G4, and G5, according to the actuarial value of each individual’s beneficial interest.

The IRS found that the termination and proposed distribution did not cause beneficial interests to be shifted to another beneficiary in a lower generation than the beneficiaries who held the interests prior to the transaction. As such, the trust and any distributions from it were not subject to GSTT pursuant to Sec. 2601.

Additionally, the IRS found that, assuming the actuarial value was an accurate representation of each beneficiary’s beneficial interest under the trust, the beneficial interests, rights, and expectancies of the beneficiaries would be substantially the same both before and after the termination and proposed distribution. Thus, no beneficiaries were found to have made taxable gifts pursuant to Sec. 2501.

However, the IRS applied the substance–over–form doctrine and found that although actuarial values were used to determine distributions of the trust upon termination, in substance it was a sale by G3 and G5 to the G4 beneficiaries and an exchange between the G4 and the other beneficiaries. Further, the IRS applied the “no basis rule” under Sec. 1001(e), which disregards the basis in the income interest when the entire interest in the trust is not transferred to a third party, resulting in the entire amount realized being recognized as long–term capital gain under Sec. 1222(3).

Review plans for potential developments

The estate planning items discussed above underscore the need for tax advisers to engage proactively with their clients. With new legislation as a result of the OBBBA, estate planning is at a pivotal crossroads. Advisers who initiate timely conversations and help clients navigate this evolving landscape can offer not only technical guidance but also strategic reassurance. By highlighting the potential impact of recent developments on clients’ estate planning strategies, advisers reinforce their value as forward–thinking, trusted professionals.

¹The Tax Cuts and Jobs Act, P.L. 115-97.

²Sec. 2010(c)(3) and §70106 of the OBBBA.

³REG-119683-22.

⁴T.D. 9991.

⁵T.D. 10027.

⁶T.D. 10031.

⁷The White House, “Regulatory Freeze Pending Review.”

⁸IRS Data Book, 2024, Table 2, Number of Returns and Other Forms Filed, by Type, Fiscal Years 2023 and 2024.

⁹Id.

¹⁰Id.

¹¹Id.

¹²IRS Data Book, 2024, Table 17, Examination Coverage and Recommended Additional Tax After Examination, by Type and Size of Return, Tax Years 2014–2022.

¹³Division O of the Further Consolidated Appropriations Act, 2020, P.L. 116-94.

¹⁴Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328.

¹⁵For further discussion, see Brennan et al., “Current Developments in Taxation of Individuals: Part 2,” 56-4 The Tax Adviser 36 (April 2025).

¹⁶REG-127923-15.

¹⁷AICPA comment letter, IRS ProposedRegulations Regarding Consistent Basis Reporting Between Estates and Beneficiaries (June 1, 2016).

¹⁸See also Strausfeld, “Final Regs. Issued on Consistent-Basis and Basis-Reporting Rules,” Journal of Accountancy (Sept. 16, 2024); Akers, “Long Awaited Final Regulations; IRS Reverses Course Regarding Three Very Controversial Provisions in Proposed Regulations,” Bessemer Trust (September 2024).

¹⁹Expatriates are individuals who relinquished U.S. citizenship and long-term residents who ceased to be lawful permanent residents of the United States on or after June 17, 2008. Covered expatriates are those expatriates who meet the tests stipulated in Sec. 877(a)(2).

²⁰T.D. 10028.

²¹REG-124593-23. For more information regarding the proposed basis-consistency regulations, see Warley, Waldman, and Cain, “Recent Developments in Estate Planning,” 55-10 The Tax Adviser 32 (October 2024).

²²IRS, New Modernized e-File (MeF) Assurance Testing System (ATS) (May 30, 2025).

²³McDougall, 163 T.C. No. 5 (2024).

²⁴Estate of Anenberg, 162 T.C. 199 (2024).

²⁵Estate of Becker, T.C. Memo. 2024-89. See also Beavers, “Life Insurance Proceeds Not Includible in Estate,” 55-12 The Tax Adviser 84 (December 2024).

²⁶Estate of Fields, T.C. Memo. 2024-90.

²⁷Estate of Galli, T.C. Nos. 7003-20 and 7005-20 (March 5, 2025).

²⁸Estate of Spizzirri, No. 23-14049 (11th Cir. 5/16/25), aff’g T.C. Memo. 2023-25.

²⁹Regs. Sec. 20.2053-1(b)(2)(i).

³⁰Estate of Griffin, T.C. Memo. 2025-47.

³¹I.e., before the effective date of Subtitle B, Chapter 13, of the Code and thus grandfathered as exempt from GSTT.

Contributors

Carol Warley, CPA/PFS, J.D., is a partner in Houston; Amber Waldman, CPA, M.Acc., is a senior director in Melbourne, Fla.; and Alexa Larson, J.D., LL.M., is a supervisor in Denver, all with RSM US LLP’s Washington National Tax Practice. Warley is also chair of the AICPA Trust, Estate and Gift Tax Technical Resource Panel. For more information about this article, contact thetaxadviser@aicpa.org.

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