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September 14, 2021

Pending Estate Tax Exemption Decrease Creates Opportunity for Large Estates to Gift Now

The Tax Cuts and Jobs Act significantly increased the gift and estate tax exemption threshold. The current lifetime estate exclusion amount is $11,700,000 per taxpayer, or $23,400,000 for a married couple. Estates in excess of the exclusion are currently taxed at 40%. This record-high exemption limitation is set to sunset in 2025 but it could be changed by new legislation prior to that date. Some proposed legislation has set a $3.5 million exemption while many think it would probably land in the $5-6 million range. Individuals with future taxable estates may want to start thinking about gifting plans to reduce their overall taxable estates. Below we discuss four ways you can gift now to take advantage of the current lifetime estate exclusion.

Strategic Gifting

According to “anti-clawback” regulations published by the IRS, gifts made using today’s high exemption amounts are protected from future tax when the exemption amounts are reduced. These regulations offer a major incentive to use these high exemption amounts before it is reduced. Because of this, it would be especially advantageous to gift appreciated assets now while the lifetime exemption is at a record high. Careful consideration needs to be given to the practicality of giving away assets now. Grantors should be comfortable that they can live their accustomed lifestyles with money they have remaining after the gifts. Also, grantors want to make sure their current gifts are not below the expected future exclusion, which just uses future exclusion. Otherwise, it may make more sense to hold those assets in their estate and receive the step-up in basis at that point.

Using Irrevocable Trusts to Gift Now

One concern some may have with gifting now, rather than waiting for future years, is that the person receiving the gift is not yet mature enough to take on the responsibility of handling a large amount of money or assets. A popular way to gift those assets, while still ensuring they are not mismanaged, is to gift them into an irrevocable trust for the beneficiary. This allows the grantor to set the provisions of the trust including how the assets will be invested and distributed. Below are two specific types of irrevocable trusts that could prove useful in high net-worth individuals’ estate planning.

Spousal Lifetime Access Trusts

A Spousal Lifetime Access Trust, or SLAT, is an irrevocable trust created by one spouse for the benefit of the other. When a spouse gifts an asset to the SLAT, the spouse’s exemption is utilized and any post-transfer appreciation on the trust’s assets that is not distributed to the spouse is not subject to future gift or estate tax. An important benefit of a SLAT is that it still allows one’s spouse access to trust income and principal if required.

Grantor Retained Annuity Trusts

A Grantor Retained Annuity Trust, or GRAT, is an irrevocable trust that is created for a certain period of time. In order to create a GRAT, an individual must transfer assets into the trust. The individual may then receive the trust annuity payments from the trust for the duration of the term. The payments are set based on the AFR rate, which is currently relatively low. The individual receives these annuity payments for the remainder of the term, and upon the end, the remaining assets pass to the beneficiaries with no estate tax exemption used.

Although we don’t know what future tax legislation will look like, we have heard several proposals of lowering the lifetime exemption and possibly higher estate tax rates. We do know that current laws are set to expire after 2025. Therefore, it’s imperative for those with larger estates to contact advisors to start planning now to make sure your plan is in line with your overall objectives. Contact an Anders advisor below to discuss your estate planning options or learn more about Anders Family Wealth and Estate Planning.

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