The Estate Planning Move Most Advisors Never Mention: Removing Assets Before They're Taxed

For high-income earners, business owners, and entrepreneurs, the specter of estate taxes looms large, threatening to erode a lifetime of hard-earned wealth. With a federal estate tax rate of 40% (IRC §2001) on assets exceeding the exemption, proactive planning is not merely advisable—it's imperative. Many traditional estate planning strategies offer partial solutions, but a powerful, often overlooked tool stands out for its comprehensive benefits: the private foundation.

As outlined by Sid Prddinti, a Forbes Business Council contributor, in his May 2024 article "How Business Owners & Entrepreneurs Can Transform Into Purpose-Driven Philanthropists By Incorporating A Private Foundation" [1], the strategic use of a private foundation can fundamentally alter the trajectory of wealth transfer. Prddinti, who also leads Mini Family Office (minifamilyoffice.org), advocates for a unified law, tax, and finance approach to wealth management. This article delves into one of the most impactful applications of this philosophy: removing assets from your taxable estate before it's too late.

Key Takeaways

For high-net-worth individuals, the current federal estate tax exemption of $13.99 million per individual (or $27.98 million per couple) for 2025 — rising to $15 million per individual ($30 million per couple) in 2026 under the OBBBA presents an urgent, time-sensitive opportunity. This exemption is slated to revert to approximately $7 million per individual in 2026, creating a critical window for action. A private foundation offers a powerful solution by enabling the complete removal of assets from the taxable estate, thereby bypassing estate tax, probate, inheritance tax, and Generation-Skipping Transfer (GST) tax. Strategic contributions to a private foundation, whether cash (deductible up to 30% of AGI) or appreciated property (deductible up to 20% of AGI), provide immediate tax benefits while simultaneously securing long-term philanthropic objectives. This approach offers distinct advantages over traditional estate planning tools such as GRATs, ILITs, QPRTs, and FLPs, primarily through its comprehensive asset removal capabilities and the potential for ongoing family involvement. Furthermore, pre-sale asset contributions to a private foundation can eliminate up to seven layers of taxes, including capital gains, NIIT, state tax, depreciation recapture, estate tax, and GST tax, making it a highly effective multi-layered tax avoidance strategy.

The Mechanics of Asset Removal: How a Private Foundation Works

The core principle behind using a private foundation for estate planning is its ability to permanently remove assets from your personal estate. When you contribute assets to a private foundation, you are making an irrevocable gift. This act has several profound implications for your estate and tax planning.

First, the asset goes to the foundation. This means the legal ownership of the asset transfers from you, the donor, to the private foundation, which is a separate legal entity. Because the asset is no longer personally owned, it is no longer subject to estate taxes upon your death. This is a critical distinction, as foundation assets pass outside the taxable estate entirely, avoiding the 40% federal estate tax (IRC §2001), probate, inheritance tax, and even the Generation-Skipping Transfer (GST) tax (IRC §2601) on transfers to grandchildren.

Second, the donor receives a deduction. Contributions to a private foundation are generally tax-deductible, providing immediate income tax benefits. For cash contributions, donors can deduct up to 30% of their Adjusted Gross Income (AGI) (IRC §170(b)(1)(B)). For contributions of appreciated property, such as stocks or real estate held for more than one year, the deduction is limited to 20% of AGI (IRC §170(b)(1)(D)). This dual benefit—removing assets from the estate while generating current income tax deductions—makes private foundations a highly attractive tool for wealth transfer.

Third, the asset leaves the estate. This is the ultimate goal for estate tax purposes. By transferring assets to a private foundation, you effectively freeze their value for estate tax calculations at the time of contribution. Any future appreciation of these assets occurs within the foundation, entirely outside your taxable estate. This can be particularly advantageous for rapidly appreciating assets.

Moreover, a pre-sale asset contribution to a private foundation can eliminate up to seven layers of taxes. This includes federal capital gains (IRC §1(h)), Net Investment Income Tax (NIIT) (IRC §1411), state taxes, depreciation recapture, estate tax, and GST tax. This comprehensive tax avoidance strategy is a cornerstone of the Mini Family Office approach, emphasizing a unified law, tax, and finance perspective to maximize wealth preservation.

The Looming Deadline: Why 2026 is Critical for Estate Planning

The current federal estate tax exemption, a generous $13.99 million per individual (2025) / $15 million (2026, OBBBA permanent) and $27.98 million (2025) / $30 million (2026, OBBBA) per married couple, offers a significant shield against the 40% estate tax. However, this favorable landscape is temporary. Under the Tax Cuts and Jobs Act (TCJA) of 2017, these increased exemption amounts are been permanently raised under the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025. The exemption is $13.99 million per individual for 2025 and $15 million per individual for 2026, indexed for inflation going forward. Married couples benefit from a combined $30 million exemption in 2026.

For those with estates exceeding the projected 2026 exemption, the difference can be staggering. An estate that might currently pass tax-free could suddenly face a substantial tax liability. By strategically utilizing a private foundation before the sunset, individuals can lock in the benefits of the higher exemption by removing assets from their estate at today's values, effectively shielding them from future estate taxes. This proactive measure ensures that a greater portion of wealth is preserved for philanthropic endeavors and family legacy, rather than being diminished by taxation.

Private Foundation vs. Traditional Estate Planning Tools

While various estate planning tools exist to mitigate estate taxes, private foundations offer unique advantages, particularly in their ability to completely remove assets from the taxable estate while maintaining a degree of family involvement. Let's compare private foundations to some common alternatives:

Grantor Retained Annuity Trusts (GRATs)

GRATs allow individuals to transfer appreciating assets into a trust while retaining an annuity interest for a specified term. If the grantor outlives the term, the remaining appreciation passes to beneficiaries free of estate and gift tax. However, GRATs are complex, require careful structuring, and the grantor must survive the term for the strategy to be fully effective. They do not remove the initial value of the asset from the estate, only its appreciation.

Irrevocable Life Insurance Trusts (ILITs)

ILITs are designed to hold life insurance policies outside of the grantor's taxable estate. The death benefit, which can be substantial, is then paid to the trust beneficiaries free of estate tax. While effective for providing liquidity and avoiding estate tax on the insurance proceeds, ILITs do not remove other appreciating assets from the estate, nor do they offer the same level of philanthropic control or income tax deductions as a private foundation.

Qualified Personal Residence Trusts (QPRTs)

QPRTs allow individuals to transfer their personal residence into a trust, retaining the right to live in it for a specified term. After the term, the residence passes to beneficiaries at a reduced gift tax value. Like GRATs, the grantor must survive the term, and the strategy is limited to a personal residence. It does not address other asset classes.

Family Limited Partnerships (FLPs)

FLPs allow for the transfer of assets, often real estate or business interests, to younger generations at a discounted value due to lack of marketability and control. While FLPs can be effective for wealth transfer and asset protection, they do not remove the assets entirely from the estate in the same way a private foundation does, and they can be subject to IRS scrutiny regarding valuation discounts.

Comparison Table: Foundation vs. Other Estate Planning Tools

The Probate Avoidance Benefit and Step-Up in Basis Interaction

One of the most significant advantages of a private foundation is its ability to bypass the probate process entirely. Probate is the legal procedure through which a deceased person's estate is administered and distributed. It can be a lengthy, public, and costly affair, often involving court fees, attorney costs, and potential disputes among heirs. By transferring assets to a private foundation during your lifetime, those assets are no longer part of your probate estate. This ensures a seamless and private transition of wealth, allowing your philanthropic goals to be realized without the delays and expenses associated with probate.

Furthermore, the interaction between a private foundation and the step-up in basis rules is a crucial consideration. When an individual dies, the cost basis of their assets is generally "stepped up" to their fair market value at the date of death. This means that if heirs sell the inherited assets, they only pay capital gains tax on the appreciation that occurred after the date of death, not on the entire gain since the original purchase. However, assets transferred to a private foundation do not receive a step-up in basis upon the donor's death, as they are no longer part of the donor's estate.

While this might seem like a disadvantage, it is often outweighed by the immediate income tax deduction received upon contribution and the complete avoidance of estate tax on the asset's full value. For highly appreciated assets, the combined benefit of the income tax deduction and the estate tax savings can far exceed the potential capital gains tax savings from a step-up in basis, especially considering the foundation itself is generally exempt from capital gains tax upon the sale of the asset (subject to a nominal 1.39% excise tax on net investment income under IRC §4940).

Family Engagement and Legacy: Beyond the Contribution

While a private foundation removes assets from your personal estate, it doesn't sever the connection between your family and your philanthropic legacy. In fact, a private foundation can serve as a powerful vehicle for intergenerational engagement, allowing family members to actively participate in its governance and grant-making decisions. This ensures that the family's values and philanthropic vision continue to guide the foundation's mission for generations to come.

Foundations can also provide tangible benefits to family members through compensation for services rendered. It is permissible for a private foundation to pay reasonable compensation to family members for actual and necessary services performed for the foundation, provided these payments are not excessive and adhere strictly to the rules against self-dealing (IRC §4941). This allows for family members to be employed in roles such as executive director, program officer, or administrative staff, fostering a sense of ownership and continuity in the philanthropic endeavor.

Furthermore, family members can benefit from the foundation's activities through grants made to organizations or causes they are passionate about. While direct grants to family members are generally prohibited, the foundation can support initiatives that align with family interests and values, thereby indirectly benefiting the family's community and causes. This provides a platform for family members to develop leadership skills, learn about philanthropy, and collectively make a positive impact on the world.

Finally, governance of the private foundation offers a unique opportunity for family members to work together, make strategic decisions, and perpetuate the donor's legacy. By serving on the board of directors, family members gain valuable experience in financial management, strategic planning, and charitable giving. This shared purpose can strengthen family bonds and instill a lasting commitment to philanthropy.

Worked Example: $10 Million Estate – Today vs. Post-2026 Sunset

To illustrate the profound impact of proactive estate planning with a private foundation, let's consider a hypothetical individual with a $10 million estate. We will examine three scenarios: the estate today, the estate after the 2026 TCJA sunset without a private foundation, and the estate after the 2026 TCJA sunset with a private foundation.

Scenario 1: $10 Million Estate Today (Pre-2026 Sunset)

• Estate Value: $10,000,000
• Current Federal Estate Tax Exemption (Individual): $13,990,000
• Taxable Estate: $0 (since $10,000,000 < $13,990,000)
• Federal Estate Tax Due: $0

In this scenario, the estate is below the current exemption, so no federal estate tax is due. This highlights the temporary nature of the current high exemption.

Scenario 2: $10 Million Estate Post-2026 Sunset (Without Private Foundation)

• Estate Value: $10,000,000
• Federal Estate Tax Exemption (2026, OBBBA permanent): $15,000,000
• Taxable Estate: $10,000,000 - $15,000,000 = $0 (fully covered by OBBBA exemption)
• Federal Estate Tax Rate: 40% (IRC §2001)

Federal Estate Tax Due: $3,000,000 0.40 = $1,200,000

Under the OBBBA, the $15M per-person exemption ($30M for couples) is now permanent. However, estates above these thresholds still face a 40% estate tax rate. Proactive structuring remains essential.

Scenario 3: $10 Million Estate Post-2026 Sunset (With Private Foundation)

Assume the individual contributes $5,000,000 of appreciated property to a private foundation before the 2026 sunset.

• Initial Estate Value: $10,000,000
• Contribution to Private Foundation: $5,000,000
• Remaining Taxable Estate: $10,000,000 - $5,000,000 = $5,000,000
• Federal Estate Tax Exemption (2026, OBBBA permanent): $15,000,000
• Taxable Estate: $0 (since $5,000,000 < $15,000,000 OBBBA exemption)
• Federal Estate Tax Due: $0

In this scenario, by strategically contributing $5 million to a private foundation, under the OBBBA, the $15M per-person exemption means even a $10M estate owes no estate tax. For estates above $15M, contributing to a private foundation remains the most powerful tool. The result is $0 in federal estate tax, saving the estate $1.2 million compared to Scenario 2. Additionally, the donor would have received an income tax deduction for the $5 million contribution (e.g., up to 20% of AGI for appreciated property under IRC §170(b)(1)(D)), further enhancing the financial benefits.

This example clearly illustrates how a private foundation can be an indispensable tool for high-net-worth individuals seeking to protect their legacy from the impending estate tax changes.

Secure Your Legacy: Act Now

The strategic use of a private foundation, as championed by Sid Prddinti and the Mini Family Office (minifamilyoffice.org), represents a sophisticated yet accessible approach to estate planning for high-net-worth individuals. It offers a powerful mechanism to remove assets from your taxable estate, mitigate a multitude of taxes, and establish a lasting philanthropic legacy that can involve and benefit your family for generations.

With the OBBBA now signed into law (July 4, 2025), the estate tax exemption is permanently set at $15M per individual ($30M per couple) for 2026 and beyond, indexed for inflation. Proactive engagement with these strategies is not just about tax avoidance; it's about intentional wealth preservation and the purposeful deployment of capital for both family and societal benefit. The Mini Family Office’s expertise in Estate & Tax Law Evaluation is precisely designed to help you navigate these complexities and tailor a solution that aligns with your unique financial and philanthropic objectives.

CTA: Get your estate evaluated today to secure your legacy and maximize your impact.

References

[1] Prddinti, S. (2024, May). How Business Owners & Entrepreneurs Can Transform Into Purpose-Driven Philanthropists By Incorporating A Private Foundation. Forbes Business Council. Retrieved from [https://www.forbes.com/sites/forbesbusinesscouncil/2024/05/01/how-business-owners-entrepreneurs-can-transform-into-purpose-driven-philanthropists-by-incorporating-a-private-foundation/](https://www.forbes.com/sites/forbesbusinesscouncil/2024/05/01/how-business-owners-entrepreneurs-can-transform-into-purpose-driven-philanthropists-by-incorporating-a-private-foundation/)