Estate and Tax Planning

Tax planning helps coordinate decisions about income, gifts, trusts, and inheritances with your family’s financial goals. Milvidskiy Law Group P.C. advises individuals, business owners, and real estate investors on federal and state taxes that affect their estate plans.

We consider income and capital gains taxes alongside estate and inheritance taxes, so a decision made for one purpose supports the overall plan.

Understanding the Different Types of Tax

The cornerstone of effective tax and estate planning is recognizing the variety of taxes that can affect an individual or a family. Some taxes come into play while you are alive—like income and capital gains taxes—whereas others become relevant upon death, such as federal and state estate taxes or inheritance taxes. To make informed decisions, it is important to understand how these taxes function and where their primary impact lies.

Income Tax Considerations

Most people are familiar with income tax, which applies to wages, salaries, business profits, interest, dividends, and other categories of earned or investment income. Federal income tax rates are progressive, meaning higher levels of taxable income lead to higher marginal tax rates. On top of that, states including New Jersey and New York impose their own income taxes. While income tax planning is usually an annual exercise, it intersects with estate planning when considering retirement accounts, annuities, or ongoing business income that may pass to heirs. Thoughtful planning can sometimes shift income or reallocate it among various entities so that it is subject to more favorable treatment under current law.

Capital Gains Taxes and Step-Up in Basis

Capital gains tax is assessed when you sell an asset for more than its original basis. This often arises in real estate transactions, stock sales, or the liquidation of a closely held business. If an asset has appreciated significantly over time, capital gains taxes can be substantial. Careful planning—whether through gifting, trust structures, or certain deferral strategies—can sometimes mitigate the amount of capital gains recognized in a single year. Long-term capital gains rates may be lower than ordinary income tax rates, but the precise impact depends on your overall income and the nature of the asset.

One of the most significant tools for addressing capital gains at death is the step-up in basis. Under current federal law, many inherited assets receive a basis adjustment to fair market value as of the owner’s date of death. This step-up can substantially reduce the heirs’ future capital gains exposure if they later sell the inherited property. However, it is not universal; retirement accounts and certain other asset types do not enjoy this basis step-up. Individuals who hold highly appreciated assets often incorporate strategies to preserve this benefit. For instance, deciding whether to gift assets during life or transfer them upon death can hinge on preserving a step-up in basis for one’s beneficiaries. Each decision should be reviewed in conjunction with estate tax considerations, as well as state-level taxes.

Federal Estate Taxes

Federal estate taxes apply if the value of your estate exceeds the federal exemption amount, which is $15,000,000 per person in 2026 and indexed for inflation. Estates surpassing this threshold incur a 40 percent tax on assets above the exemption. The unified gift and estate tax system means that large lifetime gifts also reduce the available estate tax exemption. Strategies to manage federal estate tax exposure include irrevocable trusts that remove future appreciation from your estate, outright gifts to family members, or the use of marital deduction planning. Each of these options has distinct requirements and consequences.

New York Estate Taxes

In addition to the federal estate tax, certain states impose their own estate tax. New York maintains a state-level estate tax with an exclusion of $7,350,000 for deaths in 2026, less than half the federal exemption, and rates of up to 16 percent. A notable aspect of New York’s system is the “cliff”: once an estate exceeds the exclusion by more than five percent, the entire estate is taxed, not merely the amount above the limit. This structure necessitates careful coordination to determine whether lifetime gifting, trust funding, or other strategies can help align the total estate value with available exemptions.

New Jersey previously had both an estate tax and an inheritance tax, but the estate tax was phased out for decedents dying on or after January 1, 2018. Therefore, estates in New Jersey no longer face a direct estate-level tax, though other levies, such as inheritance tax, may still apply depending on the beneficiary relationships involved.

New Jersey Inheritance Taxes

Unlike an estate tax that targets the total estate, an inheritance tax is assessed on beneficiaries who receive assets, based on their relationship to the decedent. New Jersey retains an inheritance tax system: Transfers to spouses, children, and certain immediate family members are exempt, but siblings and children-in-law pay 11 to 16 percent above a $25,000 exemption, and nieces, nephews, and unrelated individuals pay 15 percent on the first $700,000 and 16 percent above that. Determining whether the inheritance tax applies involves classifying the beneficiary into one of several categories and calculating the tax accordingly.

New York does not currently impose an inheritance tax. Nonetheless, New York residents who pass assets to family or friends in other states should remain mindful of those states’ regulations, as a beneficiary’s own place of residence can occasionally introduce complexities.

Planning Tools and Strategies

Trusts, gifts, and business entities serve different planning purposes. The appropriate combination depends on the assets involved, your family’s needs, and the tax consequences.

Marital Deduction Planning

Married couples can take advantage of the unlimited marital deduction to shift assets to a surviving spouse without incurring federal estate tax at the first death. Nevertheless, after the second spouse’s passing, estate taxes could apply if the combined estate exceeds the then-current exemption. Common arrangements, known as A/B (or sometimes A/B/C) trusts, divide the estate into separate parts upon the first spouse’s death. The “A” trust remains available for the surviving spouse, while the “B” (or bypass) trust uses the deceased spouse’s exemption, preventing large taxable amounts at the second spouse’s death. These arrangements can become more complex if one spouse is a non-U.S. citizen, since certain special trusts—known as Qualified Domestic Trusts—may be necessary.

Qualified Personal Residence Trust (QPRT)

For individuals whose primary or secondary residence has appreciated greatly, a QPRT can help reduce the property’s overall taxable value. Under this arrangement, you transfer the residence into an irrevocable trust while retaining the right to live there for a set term. After that term ends, ownership shifts to designated beneficiaries, typically children or a trust for their benefit, at a reduced gift tax valuation. A QPRT can be an effective means of reducing estate tax if structured properly and the grantor outlives the trust term.

Grantor Retained Annuity Trusts (GRATs) and Grantor Retained Unitrusts (GRUTs)

GRATs and GRUTs allow you to shift appreciating assets from your taxable estate at a potentially reduced gift-tax cost. You transfer assets into a trust and retain an annuity (for a GRAT) or a payment based on a percentage of trust assets (for a GRUT) for a predetermined term. If the assets grow at a rate higher than an IRS-prescribed interest rate, the excess appreciation passes to beneficiaries free (or largely free) of gift tax implications. GRATs and GRUTs are especially useful for funding with assets expected to rise significantly in value, such as stock or business interests.

Charitable Remainder Trusts (CRATs and CRUTs)

CRATs (Charitable Remainder Annuity Trusts) and CRUTs (Charitable Remainder Unitrusts) are for individuals who wish to blend philanthropic goals with estate and capital gains tax planning. You transfer highly appreciated assets into one of these trusts, receiving an income stream for life or a term of years. At the end of that term, the remaining trust assets go to a designated charity. This approach may generate an immediate income tax deduction and help manage capital gains exposure. Furthermore, the assets transferred to a CRAT or CRUT are typically removed from your estate for estate tax purposes.

Intentionally Defective Grantor Trusts (IDGTs) with Promissory Notes

An IDGT is structured so that the trust’s assets are not counted in your estate, even though you continue to pay the income taxes on its earnings. By doing so, you effectively allow those assets to compound without depleting the trust’s value to pay taxes. Funding an IDGT often involves selling assets to the trust in exchange for a promissory note, for example a Self-Cancelling Installment Note (SCIN), which can freeze the asset’s value for estate tax calculations. Future appreciation accrues to the trust beneficiaries rather than increasing your taxable estate. The trust’s “defective” status for income tax purposes is what allows this arrangement to remain beneficial when properly administered.

LLCs and Family Limited Partnerships (FLPs)

Forming an LLC or FLP is a popular method of centralizing management of family investments or real property while also providing asset protection features. As the managing member or general partner, you can maintain control over decision-making while gifting limited interests to children or other beneficiaries. Due to lack of marketability and control, these limited interests may be valued at a discount when calculating gift or estate tax. Such valuation discounts must be carefully substantiated, but can be an effective strategy for transferring business or real estate interests over time.

Non-Grantor Trusts, BDOTs, and BDITs

In a grantor trust, income is generally reported by the grantor. Income from a nongrantor trust may be reported by the trust or its beneficiaries, depending on the applicable rules and distributions. These classifications offer different planning options. In some instances, it may be beneficial to establish a Beneficiary Deemed Owner Trust (BDOT) or a Beneficiary Defective Inheritor’s Trust (BDIT) to shift income tax obligations, protect assets, or accomplish multi-state planning objectives. These structures require adherence to specific rules to maintain their intended tax treatment, including the appointment of out-of-state trustees in certain circumstances.

Dynasty Trusts for Multi-Generational Planning

Dynasty trusts enable assets to be preserved across multiple generations, thereby reducing estate or transfer taxes at each generational level. They are often used alongside the federal Generation-Skipping Transfer Tax (GSTT) exemption, which equals the estate tax exemption of $15,000,000 per person in 2026, to pass significant wealth without repeated taxation. In New Jersey, there is no strict rule against perpetuities, making it theoretically possible for a trust to continue indefinitely. New York, however, retains more restrictive rules, so setting up a New York-based dynasty trust requires additional planning. In some cases, grantors look to other jurisdictions known for flexible trust laws (e.g., Delaware or Nevada) to extend the life of the trust and enhance creditor protection.

Potential Pitfalls and Legal Considerations

While these strategies can be highly effective, they also come with complexity and potential drawbacks. Family dynamics can complicate the best-laid plans, especially if beneficiaries have differing needs or if conflicts of interest arise among siblings. Some assets, like closely held businesses, may require additional governance structures to ensure continuity. Furthermore, trusts that are not funded properly—meaning the ownership of assets is never transferred—provide no benefit. Entities like LLCs and FLPs must comply with formalities or risk losing the liability protections and valuation discounts they might otherwise offer.

Implementation errors, such as misusing a trust’s income, failing to observe formalities in an FLP, or neglecting record-keeping, can erode the intended tax benefits. In extreme cases, taxing authorities can challenge discounts or reclassify a trust arrangement if they deem its structure to be improperly executed. Continual oversight and, where appropriate, professional fiduciary services can mitigate these risks.

Tax Planning Tools and Services

Additional wealth-transfer options include irrevocable life insurance trusts, spousal lifetime access trusts (SLATs), installment sales to trusts, beneficiary deemed owner trusts (BDOTs), and beneficiary defective inheritor’s trusts (BDITs).

How Our Firm Can Help

We review your assets, family circumstances, and existing documents to identify tax-planning priorities. Our work includes comparing lifetime gifts with transfers at death, drafting trusts and business arrangements, and coordinating federal and state requirements.

We also help trustees administer the resulting plan, including records, required filings, and communication with beneficiaries. Contact us to discuss a proposed transfer, an existing trust, or a review of your estate plan.