Estate Tax Strategies for Today
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You know the adage. Nothing is more certain in life than death and taxes. What is uncertain is how much tax your heirs will pay when you die. With today’s estate tax exemption, you can transfer $11.7 million ($23.4 million for married couples) free of estate and gift tax. The bad news? These unprecedented levels won’t last.
The current limits are scheduled to ‘sunset’ on December 31, 2025, potentially being slashed in half to somewhere around $6.0 million.* Couple that with the fact that because of ongoing deficit spending, the federal government needs revenue, and it’s not hard to make the case that the estate tax exemption could be reduced even further, and even before 2026. If you’re a high net worth individual, you may be asking, “What am I supposed to do?”
Don’t wait and see
When you’re thinking about putting together your estate plan, one thing you don’t want to do is wait and see what happens with the estate tax exemption. That’s not a good approach. It’s like allowing the tax tail to wag the dog. You want to have a plan in place because you have heirs, people you love, and you want to pass along your assets to them in the most efficient manner possible.
If 2020 has taught us anything, it has taught us the fragility of life. And because of this, there is a resurgence in estate planning. Do you have yours in place? Is it up to date? If not, you have options you can act on right now.
Use it or lose it
A 2019 IRS ruling should prompt you to take action on your estate plan. The IRS stated that even when the lower estate tax exemptions kick in, you won’t be penalized if you make a large gift now, while the higher exemption levels are in place. In other words, your higher exemptions amounts won’t be “clawed back” when the lower amounts come to pass. This is basically a “use it or lose it” strategy.
A lot of high net worth people are doing just that. By making a gift today, and leveraging that gift with life insurance, they won’t be penalized by the IRS. This strategy is also advantageous to those who want to “set it and forget it,” through a large one-time gift to an irrevocable trust, instead of a series of smaller gifts. For example, would you rather make a single $1 million dollar gift today in a premium deposit fund, and file a one-time gift tax return and a one-time withdrawal notice, or make a series of ten $100,000 gifts and file a gift tax return and a withdrawal notice every year?**
In today’s estate tax environment, many people are choosing the large one-time gift to an irrevocable trust. If you own a business, you can gift the stock to the trust. No matter what, just set it and forget it – and you’ve created your legacy. But the keyword in this scenario is “irrevocable.” When you gift assets into an irrevocable trust, you’ve given up control of and access to those assets. And that sets up an estate planning roadblock for some people. They just don’t want to give up control of those assets. Fortunately, there’s a possible solution.
Spousal Lifetime Access Trust (SLAT)
A Spousal Lifetime Access Trust, or SLAT, is like any other trust set up for your heirs. But in this scenario, one spouse creates the trust and the other spouse is the trustee and beneficiary, along with the couple’s children or other heirs. The simple benefit of a SLAT is that if you need the money, your spouse, as both the trustee and a beneficiary, can access the cash and distribute it. In essence, a SLAT becomes a well-crafted irrevocable trust. While the goal remains to set up your SLAT for the benefit of your children, grandchildren, or heirs, it gives you the comfort of knowing your spouse can access the funds if needed.
You can see why SLATs are very popular these days, but there are drawbacks because the ability to access the funds in the trust is tied to your spouse. If he or she dies or becomes incapacitated, or if you divorce, your indirect access to the SLAT ends. You should speak to your trusted financial professional and estate planning attorney about ways to mitigate this risk.
Using life insurance in your trust
Whatever kind of trust you plan to set up, using life insurance as the funding vehicle can be a wise decision. You want the assets in your estate to be passed to your heirs in the most efficient way possible. Life insurance can be the vehicle to do that. It’s a cost-effective and tax-efficient source of cash. At your death, it can be used to pay off debt, taxes, estate settlement costs, bequests or any other liquidity need.
Best of all, when life insurance is set up properly in an irrevocable trust, the proceeds are income tax- and estate-tax-free, no matter what the estate tax exemption is when you die.
Now is the time to make a plan
We live in a very uncertain tax environment. And because of that, you shouldn’t be complacent when it comes to your estate plan. If you do have a large estate, the best gifting strategy today may be to make a one-time large gift, leveraging life insurance, through a SLAT. Estate planning can be complicated and you’ll probably have questions. That’s why it’s important to work closely with your trusted financial professional and estate planning attorney, who can help guide you to make the best decisions for you, your family or your business.
If you’d like to learn more about SLATs and using life insurance in a trust, please contact one of our financial professionals.
*On January 1, 2026, the federal exemption will revert to $5 million indexed for inflation, which is estimated to be between $6 and $6.5 million at that time.
** Based upon the tax court case, Crummey v. Commissioner, this is a letter sent to the beneficiaries of an irrevocable trust, informing them that a gift has been made to the trust, and their rights to that gift.
This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. Always consult your legal or tax professionals for specific information regarding your individual situation.
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