Four Strategies to Plan for Concentrated Assets Ahead of the 2026 Estate Tax Sunset

November 2024

Author: Trent Burley

Estate planning is a crucial process that ensures that the right assets get to the right people and organizations at the right time. However, estate planning for concentrated assets, such as business interests, company stock, or real estate, can be more complex and requires careful consideration, especially ahead of the 2026 estate tax sunset.

The estate tax is a federal tax that is imposed on the transfer of estates with a value exceeding a certain threshold. Currently, the exemption stands at $13.61 million for individuals and $27.22 million for couples. However, this exemption is set to expire and reduce by 50% on December 31, 2025, and it is uncertain whether it will be extended beyond that date. This means that individuals with concentrated assets need to start planning for the 2026 estate tax sunset to ensure that their assets are protected and transferred to their heirs in the most tax-efficient manner possible.

Here are four strategies to plan for concentrated assets:

1. Sell the asset to an irrevocable trust. Selling a concentrated asset to a trust can have several advantages, including:

   • Diversification: Concentrated assets, such as a large position in a single stock or real estate, can be risky due to their lack of diversification. Selling the asset to a trust and using the proceeds to invest in a diversified portfolio can help reduce risk and potentially increase returns.
   • Asset Protection: Placing the asset in a trust can provide asset protection from creditors or legal judgments. This is especially important if the asset is a large part of the owner's net worth.
   • Estate Planning: Selling the asset to a trust can be an effective estate planning tool. The owner can transfer the asset to the trust, remove it from their estate, and potentially reduce their estate tax liability.
   • Control: By selling the asset to a trust, the owner can retain some level of control over the asset through their role as a trustee or by appointing a trusted individual or institution to manage the trust.

2. Consider fulfilling charitable goals & objectives.  Charitable trusts and donor-advised funds can be powerful tools for managing concentrated assets, providing benefits both for the owner and for charitable causes. Here are some ways charitable trusts can be used for concentrated assets:

   • Charitable Remainder Trust (CRT): A CRT allows the owner to transfer the concentrated asset to the trust, which can then sell the asset without immediate recognition of long-term capital gains taxes. The trust can then invest the proceeds in a diversified portfolio, providing the owner with an income stream for life or a specified term. At the end of the term, the remaining assets are distributed to one or more charitable organizations. This can provide significant tax benefits for the owner, including a current income tax deduction and potential estate tax savings.
   • Charitable Lead Trust (CLT): A CLT allows the owner to transfer the concentrated asset to the trust, which pays an income stream to one or more charitable organizations for a specified term. At the end of the term, the remaining assets are returned to the owner or their designated beneficiaries. This can provide tax benefits for the owner, including a current income tax deduction and potential estate tax savings, while also supporting charitable causes.
   • Donor-Advised Fund (DAF): A DAF allows the owner to donate the concentrated asset to a public charity, such as a community foundation or donor-advised fund sponsor. The charity then sells the asset and invests the proceeds in a diversified portfolio. The owner can then recommend grants to charitable organizations from the DAF over time. This can provide significant tax benefits for the owner, including a current income tax deduction and potential estate tax savings, while also supporting charitable causes.

3. Establish a Family LLC (Limited Liability Company). Establishing a family LLC (Limited Liability Company) can be a useful estate planning tool for managing concentrated assets, providing several benefits for the owner and their family members. Here are some ways a family LLC can be used for estate planning with concentrated assets:

   • Asset Protection: By transferring the concentrated asset to a family LLC, the asset may be able provide additional protection from creditors and legal judgements. This can be especially important if the asset represents a significant portion of the owner's net worth.
   • Management: The family LLC can be managed by the owner or their designated family members, providing control over the asset and potentially reducing management fees. This can also allow the owner to transfer management responsibilities to the next generation over time.
   • Tax Benefits: Depending on the structure of the family LLC, there may be significant tax benefits for the owner and their family members. For example, if the LLC is set up as a pass-through entity, the profits and losses of the LLC are passed through to the individual members and are taxed at their individual tax rates.
   • Estate Tax Liability Reduction: The owner can transfer ownership interests in the family LLC to family members over time, potentially reducing their estate tax liability. This can also provide a way to transfer wealth to future generations while maintaining control over the asset.  Non-voting shares may be eligible for gifting discounts for lack of control and marketability.
   • Investment Flexibility: The family LLC can invest in a diversified portfolio of assets, potentially reducing risk and increasing returns. This can provide more flexibility than holding a single concentrated asset.

4. Start planning now for liquidity. If your estate is heavily concentrated in illiquid assets, such as real estate or closely held business interests, it is important to plan for liquidity to avoid having to quickly liquidate assets to pay any estate taxes that may be due, typically within nine months of the date of death.  One tax-efficient strategy to create liquidity for any unmitigated estate tax liability is using life insurance held in an irrevocable trust (ILIT).  Here are some advantages of using life insurance for estate tax liquidity:

   • Tax-Free Proceeds: Life insurance proceeds are received tax-free by the beneficiaries, which can provide a significant source of liquidity to pay estate taxes without incurring additional tax liabilities.
   • Immediate Liquidity: Unlike other assets, life insurance policies can provide immediate liquidity to the estate upon the death of the insured. This can be especially important if the estate lacks sufficient cash or other liquid assets to pay estate taxes.
   • Flexibility: Life insurance policies can be structured in a variety of ways to meet the specific needs of the estate. For example, the policy can be set up to provide a specific amount of coverage or to increase or decrease coverage over time. The policy can also be owned by the estate or by an irrevocable trust, depending on the owner's goals and needs.
   • Cost-Effective: Depending on the age, health, and other factors of the insured, life insurance can be a relatively cost-effective way to provide estate tax liquidity compared to other methods such as selling assets or borrowing against them.
   • Protection for Heirs: In addition to providing liquidity for estate taxes, life insurance can also provide protection for heirs and other beneficiaries. The policy can be used to pay other expenses such as final expenses or to provide a source of income for the beneficiaries.

In conclusion, estate planning for concentrated assets requires careful consideration and planning of the 2026 estate tax sunset. By diversifying your holdings, using a trust, addressing philanthropic goals, and planning for liquidity, you can help ensure that your assets are distributed according to your wishes and minimize your estate tax liability. It is important to work with a qualified estate planning attorney in conjunction with our team to create a plan that is tailored to your specific needs and goals.

This publication is not intended as legal or tax advice. It must not be used as a basis for legal or tax advice and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer. Northwestern Mutual and its Financial Representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent tax advisor. Tax and other planning developments after the original date of publication may affect these discussions.

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