5 Ways to Plan For Estate Tax Law Changes

Pending no action from Congress, the exemption amounts will drop to about $7 million per person when the 2017 Tax Cuts and Jobs Act expires on December 31, 2025. If your estate exceeds that amount, you may want to speak with a wealth advisor and a team of estate and tax planning professionals to explore strategies to reduce your taxable estate. To maximize the amount of assets you can gift in ways that align with your values and wishes, here are five opportunities you can explore before 2026 rolls around.

1. Set up a trust designed for your needs.

• Spousal lifetime access trust (SLAT). A SLAT allows one spouse to gift assets into an irrevocable trust for the other spouse’s benefit. This gives the beneficiary spouse access to income and principal distributions from the trust during his or her lifetime while removing the assets from the grantor spouse's taxable estate. The trust’s terms will limit control of the assets, but often, it can provide the beneficiary spouse with income for things like health care, education, maintenance and support.
• Irrevocable life insurance trust (ILIT). An ILIT provides life insurance proceeds to beneficiaries outside of the insured’s estate. This trust is funded when insurance premium payments are made through the trust and are considered gifts to the beneficiaries.
• Irrevocable trust for children and descendants. As the name implies, an irrevocable trust is irreversible in nature and allows an individual to gift money outside of his or her estate for someone else’s benefit. The trust generally cannot be modified, amended or revoked except in specific situations and with the beneficiaries’ consent or a court order.

2. Review your charitable giving strategies.

• Charitable remainder trusts (CRT). This irrevocable trust provides income for the beneficiary (which may include the grantor or their heirs) for a specific period. After that, the remaining assets are distributed to charitable beneficiaries.
• Charitable lead trusts (CLT). Unlike a CRT, a CLT provides the income first to the charitable beneficiaries for a set period of time before distributing the remaining assets to non-charitable beneficiaries.
• Specific charitable bequests. An individual or couple can also include specific language to leave a precise amount or percentage of assets to charity at death. This strategy excludes the charitable amounts from the taxable estate.
• Qualified charitable distributions (QCD). This strategy allows you to give during your lifetime while lowering your taxable estate. To make QCDs, one must be over 70½, and the funds must be paid directly from an IRA. The direct transfers cannot exceed $100,000 per year.
• A foundation or donor advised fund (DAF). Setting up a foundation or DAF allows you to support charitable causes by gifting assets during your lifetime to assist with ongoing charitable giving.

3. Maximize annual gifting to family members.

Gifting to children and descendants now can be a way to decrease one’s taxable estate. Individuals can gift $18,000 to any person in the year 2024 (increasing annually with inflation) without paying any tax. Married couples can double this amount.

4. Make direct payments for education costs and medical costs.

Paying education and medical costs can be another effective way to decrease one’s taxable estate. The key is ensuring all payments go directly to the medical or educational institution. These payments do not count against the annual gifting exclusion noted above. For example, a married couple could cover their grandchild’s tuition by paying the university bill and still gift the grandchild $36,000 with no tax due to the giver or receiver.

5. Take advantage of family limited partnership (FLP) valuation discounts.

This is another popular estate planning tool that provides a number of benefits, including asset protection and possible tax savings. FLPs allow valuation discounts at death, which can result in a reduced estate tax liability.

Conclusion

As we near the sunset of the 2017 Tax Cuts and Jobs Act, the above strategies can help limit the amount of estate tax you may need to pay. If you have additional questions about estate tax changes and how you can prepare, please reach out to your wealth advisor. If you are not working with one or would like a second opinion, please schedule a phone call or virtual conversation with our Client Development team.

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