Estate Planning
summer 2025





Estate planning with family loans: details matter

Families frequently use intergenerational loans with terms that would never be found in a commercial alternative — including below-market interest rates, minimal documentation, relaxed repayment schedules, and the absence of security interests.

While these arrangements offer flexibility and potential tax advantages, their success in withstanding IRS scrutiny depends on proper implementation and administration, including consistent enforcement of loan terms.

The U.S. Tax Court’s recent order in Estate of Barbara Galli v. Commissioner (March 2025) serves as a reminder that, when using loans in estate planning, the devil is in the details.

Case overview

In 2013, Barbara Galli loaned her son Stephen $2.3 million via an unsecured nine-year promissory note with annual interest payments at the mid-term AFR (then 1.01 percent) and a balloon payment of principal.

While these arrangements offer flexibility and potential tax advantages, their success in withstanding IRS scrutiny depends on proper implementation and administration.

Stephen made timely interest payments for three years before Barbara’s death, after which the loan became part of her estate.

The estate valued the note at $1.624 million (discounted from face value), and Stephen inherited the note under Barbara’s estate plan.

The IRS challenged the arrangement, claiming the note resulted in an unreported and untaxed gift, creating increased estate tax.

It argued that the loan lacked commercial marketplace provisions, there was insufficient evidence of Stephen’s ability to repay, and the loan should be revalued to reflect “true fair market value.”

The Tax Court ruled in favor of the taxpayer on the gift tax issue, finding that the debt was legally enforceable, and the taxpayer showed compliance with the loan terms through regular interest payments.

The court also found the AFR was appropriate and sufficient for valuation. (Whether the estate can discount the note is still at issue.)

Key takeaways and guidelines

The case illustrates that several conditions must be met for a family loan to pass scrutiny: an appropriate interest rate, consistent payments, a clearly specified term, and proper execution.

To mitigate the risk of the IRS reclassifying the loan as a gift, families may wish to report it on a gift tax return.

Best practices include incorporating defined due dates for non-demand notes, prepayment rights, specific remedies for payment failures, and security provisions when possible.

To mitigate the risk of the IRS reclassifying the loan as a gift, families may wish to report it on a gift tax return.

Explicitly stating “not a gift” on the return initiates the statute of limitations, thereby providing a measure of protection against future challenges.

Power of family loans

Family loans can be powerful tools for transferring wealth.

They can help families move money efficiently, avoid gift taxes, and create investment opportunities.

Lenders reduce their estate while borrowers can invest loan proceeds, potentially earning returns higher than the interest rate — effectively transferring wealth tax-free.

Family loans can be powerful tools for transferring wealth.

However, the Galli case reminds us that these loans must be structured carefully.

That means having proper paperwork, using appropriate interest rates, and managing the loan consistently.

Consult an estate planning attorney for guidance.

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When death comes in quick succession: the Hackman-Arakawa case

The tragic circumstances surrounding the deaths of Oscar-winning actor Gene Hackman and his wife, Betsy Arakawa, highlight crucial lessons in estate planning.

Found deceased at their Santa Fe home, authorities concluded Arakawa, 65, succumbed to a rare infection approximately one week before Hackman, 95, died from complications related to heart disease and advanced Alzheimer’s.

Legal questions

News reports indicate Hackman had established a living trust naming Arakawa as primary trustee and an attorney as an alternate.

Unfortunately, the attorney passed away in 2019, and Hackman never appointed a replacement. With Arakawa gone, a judge’s ruling was required to appoint an interim successor.

In question is who will inherit the actor’s reported $80 million fortune.

Hackman also had a will naming Arakawa as sole beneficiary, omitting mention of his three adult children. Meanwhile, trust beneficiary details remain private.

Reportedly, Hackman’s son has hired an inheritance lawyer, signaling a potential legal challenge. If Hackman’s trust named Arakawa as the sole beneficiary, without naming successor beneficiaries in the event she predeceased him, his estate could end up in Probate Court — opening the door to the actor’s children as claimants.

Here are some key lessons that can be gleaned from this situation:

Simultaneous death provisions: Most states follow the Uniform Simultaneous Death Act’s “120-hour rule.” That means that if individuals who are beneficiaries of each other’s estates die within 120 hours (five days) of each other, they are treated as if they predeceased one another for the purposes of inheritance. That prevents the property from passing through both estates in rapid succession, which could lead to unintended consequences or unnecessary taxes and probate fees.

Nevertheless, individuals can specify their desired timeframe within wills and trusts. Arakawa’s will, for example, stipulated that if both spouses died within 90 days of each other, her entire estate would transfer to a charitable trust.

Keeping estate plans up to date: Hackman’s will was last updated 20 years ago. Although the actor reportedly had a strained relationship with his children, they were said to have reconciled. Whether his intentions toward his children had changed or not, the reminder here is to review wills and estate planning documents every few years and after significant life events.

Successor beneficiaries: Without clearly designated secondary beneficiaries, conflicts can occur. Identify alternates in case the primary beneficiaries predecease you. That also applies to roles such as trustees and power-of-attorney agents to avoid complications and costly court proceedings.

Privacy concerns: An attorney for the estate testified to the couple’s deliberate preference for privacy. Unfortunately, complications surrounding Hackman’s estate may force aspects into public view through legal challenges and potentially into Probate Court — underscoring the importance of careful and up-to-date estate documentation.

Elder welfare: Elder care attorneys and care providers can help create plans to ensure someone is checking in on elderly clients. As Arakawa was 30 years younger than Hackman, the couple likely thought such contingencies were unnecessary.

Unfortunately, it’s believed that Hackman was alone for about a week without support. His case illustrates the need for check-ins or backup care, particularly when living alone or when one partner would be too incapacitated to call for help on their own.

Practical reminders

Drawing from the lessons above, consider the following recommendations for robust estate planning:

  1. Schedule regular reviews with an estate planning attorney.
  2. Document clear succession plans for all roles (trustees, executors, guardians).
  3. Create comprehensive health care directives.
  4. Consider care management for at-risk individuals.

Proper planning helps safeguard your intentions, shielding loved ones from confusion, public scrutiny, and legal disputes amid an already challenging situation.

Estate tax update: mixed signals as 2025 deadline looms

As we near the critical 2025 sunset date for current estate tax exemptions, recent congressional activity suggests competing visions for the future of wealth transfer taxation.

In February, the House narrowly passed a budget resolution that could pave the way for extending the Tax Cuts and Jobs Act’s exemption levels.

Exemptions or total repeal?

In a bolder move, Republican lawmakers have introduced the Death Tax Repeal Act of 2025, proposing to eliminate the federal estate tax entirely. The bill would maintain the step-up in basis provisions and establish a permanent lifetime gift tax exemption of $10 million (indexed for inflation).

Eliminating the death tax could come with an estimated $300 billion decade-long price tag, and analysts suggest the bill will face hurdles in the more moderate Senate.

Without congressional action, the current $13.61 million individual exemption will revert to roughly $7 million per person in 2026.

The most likely outcome? Industry observers anticipate the estate tax debate becoming a bargaining chip in broader discussions on tax reform. A compromise to permanently extend current exemption levels may prove more palatable than full repeal.

For now, the IRS has confirmed there will be no claw back of gifts made under current exemption levels, providing at least that level of planning certainty.

Why it matters now

The potential reduction in exemption levels could bring many previously unaffected families into the estate tax fold. Families with estates valued between $7 million and $13 million should stay informed.

Talk to an estate planning attorney to review your estate plan well before the 2025 deadline and ensure your wealth transfer strategy continues to be effective under any legislative outcome.

Ensuring your final farewell: protecting your body disposition wishes

As we navigate the important terrain of wills and estate planning, a deeply personal aspect often arises: our final arrangements.

While many are content to let their loved ones make decisions about their burial or cremation, others have specific wishes they’d like followed.

They may envision a particular type of memorial, a final resting place, emerging green burial options, or even the donation of their body to science.

It’s important to understand that even with these precautions, there are limits to posthumous control.

It’s natural to think that these desires can simply be stated in a will.

However, while your will serves as an essential document for distributing your assets, its effectiveness in dictating immediate post-death arrangements, such as funeral services and body disposition, can be limited.

The authority, not always the obligation

In many states, the legal concept of the “right of sepulcher” (or similar terminology) comes into play.

That right grants a specific individual — often a surviving spouse, adult children or parents — the authority to make decisions about your final arrangements.

That authority encompasses choices regarding burial, cremation, funeral services and more.

The crucial point to understand is that while this designated person has the legal power to make these decisions, they are not always legally obligated to adhere to your specific wishes if those wishes haven’t been formally documented through legal channels.

Imagine expressing a strong desire for cremation in your will, only for the person with the right of sepulcher to choose burial instead.

Your family may not agree with your wishes, and, without a binding directive, their choices hold legal weight.

Your family may not agree with your wishes, and, without a binding directive, their choices hold legal weight.

Taking control of your final arrangements

The good news is that, in most states, you can take steps to ensure your preferences for body disposition and funeral arrangements are respected.

State laws and legal tools may vary, but these are the options generally available:

1. Formally appoint a decisionmaker: Many states allow you to legally designate a funeral representative, agent or surrogate.

That person will have the legal authority to carry out your wishes.

2. Create a specific funeral directive: Instead of relying solely on your will, consider creating a separate document that outlines your specific wishes for your body’s disposition (burial, cremation, donation, etc.), funeral or memorial services, and any other related preferences.

3. Pre-plan your funeral: By making pre-need arrangements with a funeral home, you can specify your service preferences and final disposition and often pre-pay.

That guarantees your wishes are known and reduces financial stress for your loved ones.

4. Consider your health care power of attorney: In some jurisdictions, the person you designate as your health care agent may also have the authority to make decisions about your body after death, if explicitly stated.

5. Explore trust incentives: For those who want an additional layer of assurance, it may be possible to structure financial incentives within a trust.

That involves linking trust distributions to compliance with your body disposition and funeral wishes.

Consult with an experienced estate planning attorney who can advise on viability, legal precedent and structure.

Legal reality check

It’s important to understand that even with these precautions, there are limits to posthumous control.

Courts generally uphold testamentary freedom, but requests deemed illegal or overtly impractical might be invalidated.

The most effective plan will combine clear legal documentation, appropriate financial provisions, and the appointment of a committed advocate who understands and supports your wishes.

This newsletter is designed to keep you up-to-date with changes in the law. For help with these or any other legal issues, please call today. The information in this newsletter is intended solely for your information. It does not constitute legal advice, and it should not be relied on without a discussion of your specific situation with an attorney.