What is Estate Planning?

B is correct. Annual gifts of $19,000 per child (the annual exclusion for both 2025 and 2026) remove assets from Margaret's estate without using her lifetime exemption. For larger transfers, an irrevocable trust removes the assets and their future growth from the gross estate while providing control over distributions, although gifts above the annual exclusion are taxable gifts that use part of her lifetime exemption. With a $22 million estate and a 2026 basic exclusion amount of $15 million, proactive gifting strategies reduce the taxable estate.

A is incorrect because revocable trusts do not provide estate tax benefits. Assets in revocable trusts remain in the grantor's taxable estate; revocable trusts only avoid probate, not estate taxes. C is incorrect because while the unlimited marital deduction defers estate tax, it does not minimize total estate taxes. When the spouse dies, their estate would include both estates and could exceed the exclusion, especially if no portability election preserved Margaret's unused exclusion. D is incorrect because powers of attorney terminate at death and cannot be used to manage assets after death. Estate administration requires an executor or trustee, not a power of attorney.

C is correct. The annual gift tax exclusion is $19,000 per recipient for 2026, the same as for 2025. This amount is indexed for inflation. An individual can give up to $19,000 of present-interest gifts to an unlimited number of recipients each year without using any portion of their lifetime exemption or filing a gift tax return; gifts of future interests do not qualify for the exclusion.

A ($10,000) was the exclusion amount in the late 1990s and early 2000s but has been increased multiple times due to inflation indexing. B ($15,000) was the exclusion amount from 2018-2021 but is outdated. D ($25,000) exceeds the current exclusion and would require using a portion of the lifetime exemption or paying gift tax on the excess $6,000.

B is correct. IRC Section 2035 imposes a three-year lookback rule for life insurance policies transferred to ILITs. Because Robert died within three years of the transfer, the full $3 million death benefit is included in his taxable estate. To avoid this rule, the ILIT should purchase a new policy rather than accept a transfer of an existing policy, or the insured must survive at least three years after the transfer.

A is incorrect because the three-year lookback rule causes the death benefit to be included in the estate when the insured dies within three years of transferring an existing policy. The irrevocable nature of the trust does not override this rule. C is incorrect because the lookback rule includes the full death benefit, not just the cash value at transfer. D is incorrect because there is no split. The entire death benefit is either included (if died within 3 years) or excluded (if survived 3+ years).

C is correct (the exception). All powers of attorney, including durable powers, terminate immediately upon the death of the principal. "Durable" means the power survives the principal's incapacity, not their death. After death, the estate is managed by the executor (if there is a will) or administrator (if no will), not by someone holding a power of attorney.

A is accurate: Revocable trusts avoid probate because assets are owned by the trust, not the individual. However, they provide no estate tax benefit because the grantor retains control and the assets remain in their taxable estate. B is accurate: TOD (Transfer on Death) designations allow securities to pass directly to named beneficiaries without going through probate, similar to POD (Payable on Death) for bank accounts. D is accurate: Irrevocable trusts remove assets from the grantor's control and estate, potentially excluding them from estate tax calculations if properly structured.

A is correct. Only statements 1 and 3 would effectively reduce the couple's taxable estate.

Statement 1 is true: Annual gifts of $19,000 per grandchild (each spouse can gift separately, totaling $38,000 per grandchild or $190,000 total annually to five grandchildren) permanently remove assets from the estate without using any lifetime exemption. Over multiple years, this strategy significantly reduces the taxable estate.

Statement 2 is false: Revocable living trusts do not reduce estate taxes. While they avoid probate and provide privacy, assets in revocable trusts remain in the grantor's taxable estate because the grantor retains full control and can modify or revoke the trust at any time.

Statement 3 is true: An ILIT that purchases a new policy (avoiding the three-year lookback rule) excludes the $8 million death benefit from the taxable estate. This removes a significant asset from estate tax calculation while providing liquidity to pay estate taxes or support heirs.

Statement 4 is false: The unlimited marital deduction defers estate tax by allowing tax-free transfers between spouses, but it does not reduce the total estate tax burden. When the surviving spouse dies, their estate includes both their own assets and those received from the deceased spouse, potentially resulting in a larger taxable estate. It delays but does not eliminate estate tax.