Cautionary Tales - Dodging Tax Traps - Episode 192
- Jenny Rozelle, Host of Legal Tea
- 8 hours ago
- 7 min read
Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle! Today’s episode of Legal Tea is the “cautionary tales” topic. And on these “cautionary tales” episodes of Legal Tea, we normally talk about real-life cases with real-life clients that are things me or my office have worked on -or they are things that I think are generally good things to be aware of, so you don’t turn into a cautionary tale on my Legal Tea podcast one day! Well, today is going to be the latter because since it is Tax Day, we’re going to talk a little about the important numbers to know for 2025 (since many figures change annually) from an estate planning perspective, as well as walk through some common misconceptions when it comes to taxes in estate planning – specifically as it relates to gift taxes, estate taxes, and inheritance taxes. That way, maybe you’ll learn a nugget or two so you don’t mess up on something on this topic in the future!
So, for starters, in 2025, several key tax figures have been adjusted to reflect inflation and legislative changes, impacting both individual taxpayers and estate planning strategies. First up on our chat is … let’s start with gift taxes…
Gift tax applies when you transfer money or assets to another person without receiving something of equal value in return. However, because of the annual gift tax exclusion, most people never actually pay a gift tax. In 2025, you can give up to $19,000 per recipient without triggering gift tax consequences. If you’re married, you and your spouse can each give $19,000, meaning a total of $38,000 per recipient can be gifted tax-free.
If you exceed the annual exclusion amount to any one individual, you’re required to file a gift tax return (Form 709) with the IRS. However, even at that point, you typically still don’t owe gift tax unless your lifetime gift and estate tax exemption is exceeded. For 2025, this exemption is $13.99 million per individual (or $27.98 million for a married couple). This means that, unless your cumulative lifetime gifts exceed this amount, you won’t owe gift tax—you’re just required to report the excess gifts.
Now, there are some important-to-know exceptions to the gift tax which include: Payments made directly for medical expenses or tuition (if paid to the institution), Gifts to a spouse (as long as they are a U.S. citizen), Gifts to a political organization, Charitable donations (which may also qualify for an income tax deduction).
So, I think that’s about good on gift taxes … Now, let’s shift to estate taxes…
Estate tax applies when a person passes away (let me repeat that…it doesn’t super matter until someone dies), AND their estate exceeds the federal exemption limit. In 2025, that limit is $13.99 million per individual ($27.98 million for a married couple with something called portability). If your estate is valued under that threshold, no federal estate tax is owed. If it exceeds the exemption, the excess is taxed at 40%. If an estate exceeds the exemption, careful estate planning (such as gifting strategies, charitable giving, and irrevocable trusts) can help reduce or eliminate estate tax liability.
One key thing to note, which I’ve talked a bit about on here before, is that the current high exemption is scheduled to sunset at the end of 2025, meaning that unless Congress acts, the exemption will drop to approximately $5 million (adjusted for inflation) in 2026. This could subject more estates to federal estate taxes, making 2025 a crucial year for estate planning. However, as I mentioned in my podcast episode about this topic specifically, many people think that with Republican control of Congress and President Trump, that it will likely NOT end up sunsetting – paving the way to keep this incredibly-high exemption … incredibly high. We will see.
One last note on estate taxes -- In addition to the federal estate tax, which I just blabbed about, applying to estates exceeding $13.99 million in 2025, some states impose their own estate tax, and their exemption thresholds are often much lower than the federal level. So, yes – Some states have their own estate tax, which applies in addition to the federal tax. So, that is good to know and remember -- that, those really high amounts of $13.99 million per person in 2025, those are federal numbers and some states (but not a lot – it’s actually decreasing) have a state estate tax. Be sure to check if your state has a state estate tax. (If you’re in Indiana, which is where I am, we do NOT have a state estate tax. Just have to monitor and know about the federal number.)
Now, something really important to know is …that gift and estate taxes are somewhat linked and that is because the lifetime exemption applies to both. If you make large taxable gifts during your lifetime, those amounts count against your estate tax exemption at death. For example: If you give away $3 million in taxable gifts during your lifetime, your remaining estate tax exemption at death is reduced to $10.99 million ($13.99M - $3M). If your estate is worth more than that remaining amount at death, estate tax applies to the excess. This is why high-net-worth folks often use gifting strategies to reduce their taxable estate before they pass away.
Finally, let’s talk about inheritance taxes…
Unlike estate tax, which is a tax on an estate (therefore after someone dies) before distributions are made to heirs, inheritance tax is a tax imposed on the recipient of an inheritance. However, inheritance tax is only charged at the state level—there is no federal inheritance tax in the U.S. Good news is that very, very few states still have inheritance tax and bad news if you are in one of those states. (Again, since I’m in Indiana, I can confirm Indiana is not one of the few states that have an inheritance tax.) Though, not so fast, because if you do not live in one of these states, inheritance tax could potentially still apply if the person leaving you the inheritance lived in one of them. Usually, in most states, the amount of inheritance tax owed depends on your relationship to the deceased and the specific tax rates of the state. All of that to say … hear me loud and clear and estate tax and inheritance tax are two DIFFERENT things. People think they are one-and-the-same all the time – and they are most definitely not.
Maybe talking through some of this tax craziness through a made-up story would help? Let’s do it…
Meet John Reynolds. John was a successful entrepreneur who built a thriving business and accumulated a net worth of $20 million. He always intended to pass his wealth to his two children, Sarah and Michael, without burdening them with unnecessary taxes. However, he never seriously engaged in tax planning. For years, John’s financial advisor encouraged him to gift assets gradually or establish an irrevocable trust to reduce his taxable estate. But John assumed the generous $13.99 million federal estate tax exemption (in 2025) would always protect his children from a hefty tax bill.
Unfortunately, John passed away in 2026, after the estate tax exemption reverted to around $6.5 million (due to the scheduled sunset of the 2017 tax law). This meant that instead of his estate being largely tax-free under the 2025 rules, about $13.5 million of his estate was now taxable at the 40% federal estate tax rate. Oh no, ouch! So, what happened? Sarah and Michael were stunned to learn that they owed $5.4 million in federal estate taxes, plus additional state estate tax in Massachusetts (which has a $1 million estate tax exemption). Worse yet, most of John’s wealth was tied up in his business and real estate—leaving them cash-poor but tax-heavy. To pay the estate tax bill, the children were forced to sell part of the family business, liquidate investment properties (some at a loss due to market conditions), and dip into personal savings.
What could he have done to avoid this outcome? Well, had John engaged in proper estate and tax planning, he could have significantly reduced or even eliminated this tax burden. Some simple strategies that could have saved his children millions: (1) Annual Gifting Strategy – By gifting $19,000 per child per year, he could have moved assets out of his taxable estate over time; (2) Irrevocable Life Insurance Trust (ILIT) – A properly structured life insurance policy in a trust could have provided tax-free liquidity to pay estate taxes; (3) Grantor Retained Annuity Trust (GRAT) – This would have allowed him to transfer business shares tax-efficiently while maintaining some income; (4) Charitable Trusts or Foundations – Donating a portion of his assets would have reduced his taxable estate while supporting causes he cared about. It seems like a lot of work (and would it have been), but it would have saved his estate, quite literally, millions of dollars.
So, what are some good takeaways from this episode? First, it’s that tax numbers change relatively often – and typically, many change annually – so it is critical that you “keep up” with the numbers and stay “in the know.” Second, if you are high net worth OR live in a state which has lower tax thresholds, as I discussed, it may be even more important to explore your options so you don’t turn out like my example with John and his kids. You probably do not want to leave that kind of legacy! Lastly, I think this probably goes without being said, but I’ll say it anyway – a lot of these numbers are SUPER high and honestly, most of my clients are not in that type of estate value, but these numbers can come down, my friends. When I first entered into the legal profession, these numbers were drastically lower, so while you may think, “Oh these numbers are for rich people!” please know they CAN go lower. While it is unlikely, it is possible.
Alrighty, let’s shift to a sneak peak of next week, which we’re circling back to the “current trends” topic where we talk about things that are going on currently that impact my estate and elder law world – or maybe, things that I have stumbled upon on the news or social media that is relevant to this podcast. Well for next week, we are going to talk about Medicaid … and there’s a lot of talk about what the future may look like for Medicaid (Medicaid – not Medicare), and specifically if there will be budget cuts. That’s the word on the street, so let’s dive into the topic and get some factual information out there. Tune in for that next week, Legal Tea Listeners, so until then, be well and talk soon!
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