Under the current tax law, the federal Estate & Gift Tax exemption is $12,060,000 (2022). At the outset, this may appear to many that they do not need to worry about the estate tax. Without passage of further legislation, this law will remain intact until the year 2026, when it is scheduled to be cut in half.

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Under the current law, the federal Estate and Gift Tax exclusion will continue to grow with an index for inflation until the year 2026. Thereafter, the Tax Cuts and Jobs Act of 2017 will sunset and the exemption will return to $5,000,000 with an index for inflation. Many analysts expect that the exclusion amount will increase to about $13,100,000 by the year 2025 and then drop to about $6,800,000 in 2026. These figures are assuming a 3% inflationary index in each of the next three years.

For families with growing estates, the next couple of years should involve consideration of advanced estate planning strategies. Some of these strategies to combat future estate taxes include gifts to or note sales to either a Spousal Lifetime Access Trust (SLAT) for a spouse or an Intentionally Defective Grantor Trust (IDGT) for children. 

For clients that are married, a SLAT trust may be a good hedge against future inflation. In a SLAT trust, the Grantor’s spouse is a permissible beneficiary and often is the primary beneficiary sometimes along with children. If ever needed, the Trustee of the SLAT could distribute assets to the beneficiary spouse and bring back assets into the couple’s estate. 

But given the benefits of getting the contributed property to the SLAT out of the Grantor’s estate and the creditor protection benefits that the trust affords, any distributions to the spouse should be considered a last resort. As a further hedge, assets could also be sold to the trust rather than gifted, providing a means of continued access to trust assets (repayment of the note the Grantor over time and trust distributions to the beneficiary spouse).

The IDGT trust strategy holds similar benefits to that of the SLAT, but typically the primary beneficiaries are the Grantor’s children, grandchildren or other beneficiaries.

Two other strategies to help with optimizing taxes include ensuring that you have the proper marital tax funding formula in your trust if you are married and/or establishment of a charitable remainder trust if the intention is to sell a highly appreciated asset, benefit a charity, receive income payments and/or get a charitable income tax deduction.

If it’s time for you to do an update on your estate plan, discuss any of these advanced strategies or others or establish your estate plan, please call our office at 760-448-2220 and ask to speak to one of our intake specialists.

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