October 27, 2023
As we come to the end of 2023, specific planning considerations should be given to the estate and gift tax provisions in the 2018 Tax Cuts and Jobs Act that will end Dec. 31, 2025.
In 2024, the adjusted federal lifetime time estate and gift tax exemption will be $13.61 million, but with the end of these tax rules, the federal lifetime estate and gift tax exemption is scheduled to go back to $5 million with adjustments for inflation.
The question over the next two years is how to use this elevated exemption. This will involve complex plans that may take up to two years to implement, so planning in 2024 will be necessary to be ready for the end of 2025.
Advisers are likely to pull out the alphabet soup of planning options to navigate through these next few years. You will likely see plans using instruments such as a SLAT (Spousal Limited Access Trust), IDGT (Intentionally Defective Grantor Trust), GRAT (Grantor Retained Annuity Trust), BDIT (Beneficiary Defective Irrevocable Trust) and SCIN (Self-Cancelling Installment Note).
A Beneficiary Defective Inheritance Trust is an irrevocable trust where the beneficiary sells assets to the trust and is able to receive benefit from those assets at the discretion of the trustee.
The Spousal Limited Access Trust is an irrevocable trust that can be used to make assets available to a spouse but remove the assets from the estate of both the grantor and the spouse for the estate and gift tax calculations.
An Intentionally Defective Grantor Trust is structured so the transfers are completed gifts for estate and gift tax purposes but are incomplete for income tax allocation. This allows a grantor to sell assets to this trust and not recognize income tax consequences from the transfer.
The Grantor Retained Annuity Trust is used to minimize the gift value of a transfer by setting up an annuity payment to the grantor for a period of years with the underlying asset transferring the beneficiary after the annuity period is over.
The Self-Cancelling Installment Note is a promissory note often used by a grantor to sell assets to a beneficiary trust. This promissory note is designed with terms that allow the note to cancel on the death of the grantor.
The goal for each of these estate plan tools is to find ways to transfer assets, without triggering gift or estate taxes, while also creating options to make assets and income available to the various parties.
Balzarini is an attorney at law with Hellmuth & Johnson PLLC. Contact him at [email protected].
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