If you think your estate assets will be larger than $3,500,000 when you pass, you may want to consider taking advantage of one or more of the wealth transfer strategies outlined below. These options might not be available in the next year with the coming election and a push to return federal and gift estate taxes to their historic norms.

Image: Sean Dreilinger, licensed with CC BY-NC-SA 2.0.

Wealth Transfer Strategies

Large Gifts

Currently, the federal estate and gift tax exemption is set at $11.58 million per taxpayer. If the gift tax exemption returns the historic norm of $3.5 million per taxpayer, now may be the time to create an irrevocable trust for your children and make gifts to reduce the size of your estate. You can make your gifts now under the large exemption and if it is lowered in the future, what you’ve already given will fall under the $11.58 million exemption.

Irrevocable Life Insurance Trust

An existing insurance policy can be transferred into an irrevocable life insurance trust (ILIT), or the trustee of the ILIT can purchase an insurance policy in the name of the trust. The donor can make gifts to the ILIT that qualify for the annual gift tax exclusion, and the trustee will use those gifts to pay the policy premiums. Since the insurance policy is held by the ILIT, the premium payments and the full death benefit are not included in the donor’s taxable estate. Furthermore, the insurance proceeds at the donor’s death will be exempt from income taxes.

If you have money in an IRA that you want to pass along to your heirs, now might be the time to take out the money while interest rates are low and can fund an insurance policy that will go to your heirs tax-free.

Spousal Lifetime Access Trust

A spousal lifetime access trust (SLAT) is another type of trust you can create and use to take advantage of the current high exemption amounts to avoid adverse estate consequences at death. A SLAT is a trust you set up for your spouse, who will still have access to the funds you give them during their lifetime. Another advantage of a SLAT is that it in most cases, the funds are protected from credit claims and litigation.

Because the gift tax exemption is used, the value of the SLAT’s assets is excluded from the gross estates of both the donor and the donor’s spouse. An independent trustee administers the SLAT for the benefit of the donor’s beneficiaries. In addition to the donor’s spouse, the beneficiaries can be any person or entity including children, friends, and charities. The donor’s spouse may also execute a similar but not identical SLAT for the donor’s benefit.

Example: Karen and Chad are married, and they are concerned about a potential decrease in the estate and gift tax exemption amount in the upcoming years. Karen executes a SLAT and funds it with $11.58 million in assets. Karen’s SLAT names Chad and their three children as beneficiaries and designates their friend Gus as a trustee. Chad creates and funds a similar trust with $11.58 million that names Karen, their three children, and his nephew as beneficiaries and designates Friendly Bank as a corporate trustee (among other differences between the trust structures). Karen and Chad pass away in the same year when the estate and gift tax exemption is only $6.58 million per person. Even though they have gifted more than the $6.58 million exemption in place at their deaths, the IRS has taken the position that it will not punish taxpayers with a clawback provision that pulls transferred assets back into the taxpayer’s taxable estate. As a result, Karen and Chad have saved $2 million each in estate taxes assuming a 40 percent estate tax rate at the time of their deaths.

When Should I Talk to an Estate Planner?

If any of the strategies discussed above interest you, or you feel that potential changes in legislation will negatively impact your wealth, we encourage you to book a call with Mr. Berger to evaluate your options. We can review your estate plan and recommend changes and improvements to protect you from potential future changes in legislation.

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