Tax professionals work closely with clients each year, often reviewing their tax returns and balance sheets. These documents are more than compliance tools—they can expose looming estate tax risks that may otherwise go unnoticed.
So, before we examine the warning signs to look for in tax returns and balance sheets, it’s important to consider the current estate tax exemption landscape.
- For 2025, individuals and married couples benefit from a historically high federal estate and gift tax exemption—$13.99 million per person and $27.98 million for a married couple.
- Estates below these thresholds typically owe no federal estate tax; however, it is essential to consider the future growth of estates that are nearing the exemption threshold.
- Additionally, there is no guarantee that the exemption threshold will remain at this high level.
Legislative action continues to shape the estate tax environment for high-net-worth clients.
The One Big Beautiful Bill Act (OBBBA), recently passed, extended the increased exemption amounts beyond their previously scheduled sunset at the end of 2025.
For high-net-worth clients, the extension creates a valuable window of time to employ advanced planning strategies that utilize the elevated exemption; however, future congressional changes could always alter the outlook.
Proactive estate planning remains essential as long as this favorable exemption persists.
Turn risks into strategic advantages in collaboration with Baker Wealth Strategies.
Take a look at the following three sections and consider how we can collaborate to identify risks and deliver wins to your clients.
1. What to look for on the 1040: Income, giving, and investment signals.
High Adjusted Gross Income (AGI over $750,000 from W-2 or K-1)
Although income itself doesn’t trigger estate tax, it usually points to considerable wealth. Look for executives with deferred compensation, business owners who earn pass-through income, or individuals approaching retirement without a strategy for distributions.
Planning Response: A Grantor Charitable Lead Unitrust (GCLUT) can reduce current income taxes and, if the assets appreciate at a rate faster than GCLUT payments, provide the prospect of residual assets for clients.
Large Capital Gains or Dividend Income (Schedule D/B)
Significant investment income typically suggests a sizeable portfolio. Without proactive planning, client assets are unlikely to see the benefits of effective basis management.
Planning Response: Consider both of the following strategies: Grantor Retained Annuity Trusts (GRATs) or selling discounted interests in LLCs to Intentionally Defective Grantor Trusts (IDGTs).
Significant Charitable Deductions (Schedule A)
Frequent and substantial donations suggest that clients’ goals are philanthropic, opening up the possibility for tax-efficient deductions. Unfortunately, clients tend to choose less efficient methods like checks or donor-advised funds.
Planning Response: For clients with potential estate tax obligations, a grantor Charitable Lead Trust (CLT) can offer upfront tax advantages and facilitate the efficient transfer of assets upon the trust’s termination.
2. Identify balance sheet warning signs: Liquidity and asset mix
Concentrated Real Estate Holdings
Clients with significant real estate assets may have a high net worth but limited liquidity. In this scenario, the presence of these real estate assets can complicate the estate settlements.
Planning Response: Use LLCs for valuation discounts and pair them with life insurance or GRATs to create liquidity.
Large Closely Held Businesses (Over $10 Million)
Undiversified business holdings can unexpectedly push clients into the estate tax threshold. For instance, a business valued at $12 million without a succession plan could result in a substantial estate tax bill.
Planning Response: Options include installment sales to an Intentionally Defective Grantor Trust (IDGT), implementing freezing techniques, or gifting non-voting interests with discounts.
Substantial Retirement Accounts
IRAs and 401(k)s are included in the estate, and following the SECURE Act, non-spouse beneficiaries can no longer stretch distributions over their lifetimes.
Planning Response: Roth conversions and Charitable Remainder Trusts (CRTs) may help manage these dual tax challenges.
3. Leverage tax professional/client relationships
Tax professionals, with their long-term client relationships and annual financial reviews, are uniquely positioned to see estate tax risks before they become emergencies. There is a high probability that the warning signs discussed above apply to a portion of your high-net-worth clients. Take action by following the two-step process below:
- Start a conversation about the client’s legacy wishes, liquidity needs, and succession plans.
- Bring in BWS to design strategies that meet client goals and enhance your advisory role. Since BWS is not acting as the attorney (only doing the planning), there are no upfront fees to the client, and you can charge your consulting fees for the plan.
Transform data from tax and financial documents into opportunities for clients.
A careful review of the 1040 and balance sheet can serve as an early warning system for estate tax risks. You do not have to be an expert on the strategies introduced in this article to assist your clients. By collaborating with Baker Wealth Strategies, you not only protect your clients’ wealth but also reinforce your value as a trusted advisor.
If you’d like another perspective on a client file, we’re here to help. Contact us today to evaluate potential planning options and deliver results for your most valued clients.
– Justin Baker, JD, LL.M., MBA
Advanced Estate Planning Attorney, Baker Wealth Strategies
