The Millionaire, Deca Millionaire, and Centa Millionaire Estate Tax Planning Playbook For Uncertain Times and Changing Tax Laws (For Individuals or couples with a net worth of $5 Million Dollars or More – Who Want To Minimize or Avoid The 40% Federal Estate Tax)
This article doesn’t apply to very many people in the United States.
But it does apply to many many people who work with us and who want to protect their legacy, make sure it goes to the right people at the right time, and that the inheritance has the right level of asset, creditor and divorce protection.
There are quite a few families in Southeastern Pennsylvania (many who are our clients) and who have amassed very valuable estates through technology, pharmaceuticals, closely held businesses, farming, and/or real estate.
And many of you who have these large or extremely large estates could be subject to very high federal estate taxes and to Pennsylvania Inheritance taxes.
So, who specifically does this article apply to?
However, if you are over those limits or your estate may grow rapidly, then this article is vital and contains numerous topics that could radically alter how your planning is done and when and where you put attention on this vital issue.
Why?
Well, that’s a story you need to know.
Because the government might be ready to take away some important tax protections that could truly alter your family business, your family’s life, and your financial legacy.
Here’s why…
The current federal estate tax exemption is, for the moment, set at a historically high level of $13.61 million per individual ($27.22 million for married couples). But, that high level of protection (or technically the amount of assets and life insurance you can leave your heirs without tax) is a double-edged sword.
While it provides significant relief from estate taxes for many affluent and ultra-high-net-worth families, this generous exemption is scheduled to sunset automatically on December 31, 2025.
That’s right, on January 1, 2026, the exemption amount will (unless congress and the newly elected president act) revert to a much lower level of approximately $5 million per individual (adjusted for inflation).
So, barring any legislative action to extend or modify the current exemption levels, one day you can leave $13,610,000.00 (or double that if you’re married), and the next it could be less than half as much. And whatever value of your estate that’s over that amount will be taxed at 40%.
Worse yet? That tax is generally due within 9 months of the date of death.
This impending reduction in the estate tax exemption creates a critical window of opportunity for those with substantial assets to take advantage of available estate planning strategies to minimize their potential estate tax liabilities.
But failure to act within this time frame could result in missed opportunities and substantial tax consequences for estates exceeding the future lower exemption threshold.
The Urgency of Estate Tax & Liquidity Planning
For individuals and families with net worth approaching or exceeding the future $5 million exemption level, the need for proactive estate tax planning cannot be overstated.
Procrastination or inaction could lead to a significant portion of your hard-earned wealth being eroded by estate taxes upon your passing.
Effective estate tax planning is not a one-size-fits-all solution. And it can take quite a bit of time.
It requires a comprehensive evaluation of each family's unique circumstances, risk aversion, financial goals, charitable intent, and asset composition.
However, several proven strategies can be employed on an ongoing basis or over the next few months to leverage the current high exemption amounts and transfer wealth to beneficiaries in a tax-efficient manner.
Here are a few.
But before we go over each one, remember that these techniques require individual evaluation and planning.
This also isn’t legal advice or tax advice.
This article is designed to help you to become aware of the issues. Be sure to consult your own tax, legal, insurance, and financial advisers.
With all of that said, here are a few…
Spousal Lifetime Access Trusts (SLATs)
Who is this for?
Generally, for clients who are married with combined estates of over $10 million dollars.
What is it & How does it work?
One powerful tool in the estate planner's arsenal is the Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse and potentially their descendants.
By gifting money or assets to a SLAT, the donor spouse can remove those assets and their future appreciation from their taxable estate, utilizing the current high $13.61 million exemption amount.
Importantly, the beneficiary spouse can receive distributions from the SLAT during their lifetime, providing access to the trust assets while still achieving estate tax savings. Upon the death of the beneficiary spouse, the remaining trust assets can pass to the couple's children or other beneficiaries without incurring estate taxes.
SLATs are particularly well-suited for married couples with significant wealth who wish to provide for each other while minimizing estate taxes for their beneficiaries. They offer flexibility, access to trust assets during the beneficiary spouse's lifetime, and the potential for substantial estate tax savings.
But most couples don’t use this technique until their combined estates are large enough to provide for the spouse’s lifestyle even if the other spouse passes away and the assets go to the children or other heirs.
Grantor Retained Annuity Trusts (GRATs)
Who is this for?
GRATs are well-suited for individuals (or couples) with a net worth individually of $5 million dollars or $10 million jointly and with highly appreciating assets who are willing to transfer a portion of that appreciation to beneficiaries in a tax-efficient manner. They can be an effective way to reduce the value of an estate while retaining an income stream during the GRAT term.
What is it and How Does it Work?
A GRAT is an irrevocable trust to which the grantor contributes assets while retaining the right to receive annuity payments from the trust for a specified term, typically 2-10 years.
At the end of the term, the remaining assets in the GRAT are distributed to the grantor's beneficiaries, such as children or trusts for their benefit.
If the assets in the GRAT appreciate at a rate higher than the prescribed IRS interest rate (known as the 7520 rate), the excess appreciation passes to the beneficiaries free of gift or estate taxes.
This leveraging effect makes GRATs particularly attractive in low-interest rate environments and when funded with assets expected to experience significant growth, such as closely held business interests or concentrated stock positions.
Optimizing Annual Gift Tax Exclusions
What is this?
The internal revenue code provides for the ability of each individual, including a husband and wife, to make a gift to any beneficiary of up to $18,000 per year without the need to file a federal estate tax return (Form 709).
These gifts can be combined with minority discounting and other estate planning techniques to move significant wealth from your estate to individual children or grandchildren, or to trust for their benefit that could protect them from divorces lawsuits, and other dangers.
The particulars are described below, and in the series of blog articles on our website. However, feel free to call us before committing to a gifting strategy.
Who is this for?
Many people (even those with the states below $5 million individually or $10 million as a couple) will use gifting in order to share the benefits of their wealth with their children or grandchildren during their lifetime’s.
However, there are better and worse ways to make gifts. This article is just designed to raise your awareness and you should be sure to get particular advice if you’re considering paying for a child or grandchild’s expenses, including but not limited to lifestyle, health support, maintenance, and education. There are many nuances to the ability to gift and your estate, attorney, and income tax advisors as well as your financial advisors should be able to help you.
By making annual exclusion gifts to children, grandchildren, or trusts for their benefit, individuals can gradually transfer wealth out of their taxable estates while leveraging the power of compound growth over time.
These gifts can be made outright or to appropriately structured trusts, providing additional control and asset protection benefits.
Again, annual gift tax exclusion planning is suitable for individuals of all wealth levels who wish to gradually transfer assets to beneficiaries in a tax-efficient manner. It can be particularly advantageous for those with longer life expectancies, allowing for greater wealth transfer through compounding over time.
However, making gifts can disqualify you from receiving Medicaid long term care benefits so if your net worth is below the federal estate tax limit be sure to get advice to protect you and the gift recipient.
“Defective” Grantor Trusts
What is this?
Defective trusts, also known as intentionally defective grantor trusts (IDGTs), offer a unique opportunity for significant estate tax savings. With a defective trust, the grantor is treated as the owner of the trust for income tax purposes but not for estate tax purposes.
Who is this for?
Typically, these trusts are created for those with larger estates (over $5 million individually or over $10 million dollars per couple) with highly appreciating assets, or in certain elder law planning to protect smaller estates from the high cost of long-term care.
How do they work?
By contributing appreciating assets to a defective trust, the grantor makes a gift and removes the assets from his or her estates but remains responsible for paying the income taxes on the trust's earnings, effectively allowing the trust assets to grow without being eroded by income taxes.
Paying the tax is not considered a gift and does not use your annual gift tax exclusion ($18,000) or any of your lifetime/death tax exemption of $13,610,000.
This tax-efficient compounding can result in significant wealth transfer to the trust beneficiaries without incurring gift or estate taxes.
Defective trusts are well-suited for individuals with highly appreciating assets and sufficient cashflow to pay the income taxes on the trust's earnings. They can be an effective way to maximize the growth and transfer of assets to beneficiaries while minimizing income and estate taxes.
They can also be used (with advanced planning) to remove assets from your estate in order to qualify for Medicaid long term care benefits while protecting the assets for your heirs.
Charitable Gift Tax Planning
Who is this for?
Charitable planning strategies are used by people with any level of wealth who want to make philanthropic contributions. However, they are well-suited for individuals with significant wealth, charitable goals, and a desire to minimize income and estate taxes.
They can be an effective way to support philanthropic causes while also achieving tax benefits and transferring wealth to beneficiaries.
How do they work?
For those with philanthropic inclinations or a desire to support charitable causes, incorporating charitable planning into their overall estate strategy can yield substantial tax benefits.
Techniques such as charitable remainder trusts (CRTs) and charitable lead trusts (CLTs), family foundations, and donor advised funds can facilitate the transfer of assets to beneficiaries while generating income tax deductions and removing assets from the donor's taxable estate.
These techniques are often used to shift assets that would otherwise be paid to the government as Federal Estate Taxes into charitable contributions that are deductible for income tax or estate tax purposes.
Estate Tax Liquidity Planning
Who is this for?
No matter the size of your estate, planning for the liquidity to pay inheritance taxes to the state, federal estate taxes, and mortgage and debt obligations is vital. But because the federal estate tax can be so large, and is due so soon after death, liquidity planning for estates over $5 million dollars is vital.
Even with effective estate tax mitigation strategies and charitable giving strategies in place, some estates may still face significant tax liabilities of millions, tens of millions or even more of estate tax upon the owner's passing.
In these cases, liquidity planning becomes crucial to ensure that sufficient liquid assets are available to pay estate taxes without the need to sell illiquid assets, such as closely held businesses or real estate, at inopportune times or at discounted values.
Life insurance can play a vital role in liquidity planning by providing a tax-free death benefit to the estate or an irrevocable life insurance trust (ILIT).
Alternatively, strategies like lifetime gifts of appreciating assets, gifts, or installment sales to intentionally defective grantor trusts (IDGTs) or leveraging low-interest rates through promissory notes can be employed to “freeze” the value of appreciating assets and facilitate the transfer of future estate growth to the beneficiaries. Trusts for the beneficiaries can also be used to limit future estate taxes, and to protect the assets from lawsuits and divorces.
Liquidity planning strategies are essential for individuals with significant illiquid assets, such as closely held businesses or real estate, to ensure that estate taxes can be paid without disrupting or devaluing those assets. They can provide peace of mind and preserve the value of the estate for beneficiaries.
The Potentially “Closing” Window of Opportunity
The impending reduction in the federal estate tax exemption from $13.61 million to approximately $5 million per individual creates a sense of urgency for those with significant wealth to review and update their estate plans.
Failing to take advantage of the current high exemption levels could result in substantial (and potentially avoidable) estate tax liabilities.
It is essential to work closely with experienced estate planning professionals, including attorneys, accountants, and financial advisors, to evaluate the suitability and implementation of these strategies within the context of your unique financial situation, goals, and family dynamics.
Procrastination or inaction in the face of this looming deadline could prove costly, as opportunities to transfer wealth tax-efficiently may be lost forever. The time to act is now, while the window of opportunity remains open, to preserve your hard-earned wealth for future generations.
What should you do now?
- You already know that your estate is over $5 million dollars ($10 million dollars for married couples) and you need to review it.
If that’s the case, call 610-933-8069 and get set for a strategy and review session to update your planning and to discuss possible gifting, trusts, and liquidity planning.
In that case, just look at the insert to the UTBF summer 2024 newsletter…or look below if you’re reading this elsewhere for the Estate Planning Tax Reduction Quiz. That quick quiz will let you know how urgent it is for you to get a review/strategy session.
The Window May Be Closing…
Remember, while congress and the President may act, (before or after the election) the window is set to close, and these techniques take time to consider and to implement.
To ensure that you’re thinking about and understand the solutions that are right for you book a strategy session before the end of 2024. After that it might be too late.
What To Do Next:
If you’re interested in reviewing or updating your existing plan, making gifts, or creating trusts while the window is still open (remembering that congress and the president could still solve this problem before 2025), then read on…
What You Get:
You will have a customized 75 to 90 minute review of your estate (you prepare our Estate Planning Questionnaire in advance) and your existing documents and you’ll receive a specific set of recommendations and a roadmap to reducing federal estate taxes, protecting your spouse and/or heirs, and a written review of the proposals and strategies that you can review with your other advisers as well.
The Price:
No one wants to pay legal fees, but in this case, the protection of assets and tax savings could be massive or worth many times the cost of implementing these techniques.
The cost of the update/tax strategy session is $1,750 for new clients and is discounted to $750 for existing clients. It will be billed to your card at booking or can be paid by check.
NOTE: If we recommend any trusts or other strategies or techniques requiring legal services, you’ll be quoted a flat fee for such work. However, some techniques require appraisals, consultations with accountants and other hard costs.
Again, these costs usually pale in comparison to the benefits your heirs receive.
This sounds like a lot but remember that at a 40% tax rate even one good strategy can save your heirs hundreds of thousands or even millions of dollars.
Any reduction in these taxes coupled with planned liquidity to pay the remaining tax due could save your estate from having to sell assets in a bad market or from selling assets you wanted your heirs to keep.
WANT THE STRATEGY SESSION/CONSULTATION FOR FREE?
This strategy session/consultation fee will be applied to any legal fees billed by this firm for work you select and moving forward as a result of the consultation.
But you are under no obligation to act after the consult.
You’ll decide, knowing any and all costs for legal services in advance…and not based on an hourly fee that could go out of control.
To Book A Strategy Session/Consultation With David M Frees, III JD or Douglas L. Kaune, JD: Simply Call 610-933-8069 to set up an in person or Zoom session.
