Estate Tax Strategy Calculator: When Is It a Slam Dunk?

Estate tax strategy calculator: when is it a slam dunk?

The five-point test: when complicated becomes a no-brainer

Most of the time, simple wins: hold or 1031, and add a trust only if the estate tax is real. Selling one property, using its suspended losses, 1031ing the rest and funding a life insurance trust is worth the moving parts only when these line up:

1. The estate tax is real: $10,000,000 or more projected (roughly a married couple with $20,000,000 or more at 60).
2. Married, 50 to 60, preferred health. A second-to-die policy is the cheapest coverage per dollar of tax. At 65 it still wins but not safely; single, rated or 75 and older usually does not.
3. One separate property has suspended losses at least as big as its gain, so selling it costs about zero income tax.
4. That property earns little: 5% a year or less, rent plus growth. Think coastal California apartments.
5. You would sell or borrow anyway, or cash is tight, so the sale funds the policy instead of a loan.

Four or five true? Fill out the calculator above. It checks all five from your numbers and shows the dollars. Two or fewer: keep it simple.

A 1031 is dogma when the new property grows slowly and there is an estate tax problem

A 1031 defers income tax that the step-up at death would erase anyway. What it does not do is shrink the estate: every dollar stays inside it, and everything above the line loses 40% at death. If the property grows slowly, you carry a big estate tax bill on an asset that is barely growing.

Same married couple, both 60, $24,000,000 in total, an $8,000,000 building they might sell with $2,500,000 of suspended losses. Heirs compared with 1031 and hold until death:

The 1031 is not wrong. It is the right default for a growing property or an estate under the line. It turns into dogma when the replacement grows slowly and the estate tax is coming anyway.

Cash flow and interest count too. Rentals pay rent, and that is a real benefit. An installment note pays interest on the whole price, including money that would otherwise have gone to tax. The calculator shows each path's yearly return after tax next to the policy's return outside the estate, so you can see the trade in one table.

If this, then that

Illustrations from the calculator's engine for a married couple, age 60, with $24,000,000 ($8,000,000 property they might sell, $12,000,000 of other real estate, $4,000,000 of cash), W-2 income of $1,000,000, California, preferred health, policy paid over 10 years and second death at 90. Each line changes one thing.

Extreme deltas need several of these at once: a large estate, two healthy spouses in their 50s, suspended losses at least as large as the gain on one property, a low-earning property to sell, and a long life expectancy for the estate to grow into the tax.

Young and growing: $2,500,000 at 35

Estate tax is not only an old-money problem. Money that compounds for 40 or 50 years can outrun an exemption that only grows with inflation. Starting with $2,500,000 at 35, reinvesting everything, exemption indexed about 2.5% a year:

So the claim that most people with $2,500,000 at 35 will face estate tax in their 70s is true for a single saver netting 7% to 8% after tax and spending, and for a couple only at 8% to 10%.

The amount at 35 that reaches the line by 85 is about $1,700,000 single or $3,400,000 married at 7%, and about $1,100,000 single or $2,200,000 married at 8%. A policy bought young is cheap: run the calculator at 40 or 45 and compare.

Real estate growth is hard to predict

The same market gives very different answers depending on the years you look at. Home prices from the FHFA House Price Index, 2026 second quarter, average growth per year:

The 20-year window starts at the 2006 peak, so California looks weak; the 10-year window starts near the bottom, so it looks strong. Commercial property grew more slowly than homes: the NCREIF Property Index shows about 0.7% a year of apartment appreciation over 10 years after capital costs, with office and retail negative.

The calculator lets you pick a market and a growth basis or type your own number. Check whether the verdict changes between 2% and 6%. If it does not, the answer does not depend on guessing the market.

Real estate professionals get a different answer

If you qualify as a real estate professional under IRC 469(c)(7), with more than 750 hours and more than half your working time in real property businesses and material participation in the rentals, your rental losses are not passive. You deduct them against wages and other income every year.

That is a real benefit, but it means nothing is left suspended to shelter a sale. A sale is fully taxed, so a 1031 exchange held to death, with the step-up erasing the deferred gain, is usually the better income tax path, more of the time.

The estate tax test does not change. A real estate professional with an estate well over the line still faces 40% at death, and the ILIT decision runs on the same facts: size of the estate, age, health and marital status. Check the box in the calculator to see it.

Why suspended losses are found money, and when they are not

Most owners with high wages cannot use rental losses: the $25,000 allowance phases out between $100,000 and $150,000 of income. The losses pile up as suspended passive losses. They are freed when you sell the whole activity in a fully taxable sale (IRC 469(g)), first against the gain and then against any other income.

If you hold until death, they are allowed only to the extent they exceed the step-up in basis, which for appreciated real estate is close to nothing.

So if you would sell or borrow anyway, using the losses is found money: on an $8,000,000 property with $2,500,000 of losses and a smaller gain, the sale costs near zero income tax.

If you plan to hold to death and have the cash, the step-up would have erased that gain anyway, and the losses mostly buy you cash today without tax. A 1031 exchange frees no losses, even with a note in it, because not all the gain is recognized. Sell one separate property in full and exchange the others.

An installment sale does not release the losses all at once. Under IRC 469(g)(3) the losses are freed in proportion to the gain you report each year, so a long note spreads the release out, while a cash sale frees everything in the year of sale.

Losses that sit against passive gain still absorb it as it is reported, but note interest is not passive gain and they never absorb it.

That is why, when losses are at least as large as the gain, cash beats a note here: the note defers a gain the losses were going to erase anyway, and the losses arrive later. The calculator models this; do not stack the two expecting both benefits.

How the calculator scores each plan

Every plan is scored the same way: what your heirs keep after income tax on sales and note interest, federal and state estate tax, debt, and the death benefit of a policy owned by an ILIT (outside the estate and free of income tax under IRC 101(a) if the trust owns it from the start).

Holding and a 1031 to death give the same answer at death because of the step-up.

An installment note still owed at death gets no step-up (IRC 691): it is income in respect of a decedent, so it sits in the taxable estate and the heirs also owe income tax on the deferred gain as they collect it, with a deduction for the estate tax paid on it.

A cash seller does not face that, and heirs of held or exchanged property get the step-up. The calculator charges this to the installment paths. Gifts of premiums above the annual exclusion of $19,000 per beneficiary use up lifetime exemption.

The verdict is a slam dunk only if the best plan beats holding and paying at every age of death from 15 years earlier to 5 years later than your pick, by at least the premiums paid.

Assumptions and limits

This is a model, not a forecast. Read the results with these in mind.

• Growth and returns are assumptions you pick, held constant every year. Real returns vary, and the order of returns matters.
• The installment note is modeled as a fixed 6% stream. It is not an index fund. The comparison with cash uses the same 6% on both sides so the only difference is when tax is paid; the note holder also bears the credit risk of the buyer or the insurer behind the payments, cannot easily sell the note, and may give up price or pay fees to set it up. None of that is in the numbers. Interest is taxed yearly as ordinary income, which is a heavier tax than an index fund pays on growth.
• Policy prices are estimates from published rate tables and illustrations, not offers. Ten, fifteen and twenty year pay prices are scaled estimates; only lifetime pay rests on published rates. The death benefit depends on paying premiums and on the insurer's ability to pay, and state insurance-insolvency funds cap what they cover.
• The 2027 exemption of about $15,460,000 is our estimate. The IRS had not published it when this page was updated. Later years use 2.5% a year.
• Not modeled: generation-skipping tax, state gift tax, portability that is not elected on a timely Form 706, trust and attorney costs, and changes in the law.

Hans Goldstein is an Enrolled Agent, not an attorney or a securities professional. He is also a licensed life insurance agent (CA Insurance License #4273294) and may earn a commission if you buy a policy through him; he is not licensed to sell securities and does not recommend any investment. Education only. Not tax, legal, investment or insurance advice. Confirm with your own CPA and attorney.

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