High net worth individuals receive an incentive in the form of the estate and gift tax exemption. It offers a unique opportunity for passing money down through generations at its current level of $11.7 million per person ($23.4 million for married couples). However, the high exemption amount is scheduled to expire at the end of 2025, dropping to roughly $5 million per person, inflation adjusted.
Exploring estate planning techniques that could safeguard your financial assets and set up your estate for the future is essential, given that timeframe. Here are five approaches to think about:
1. Take Advantage of the Current Gift and Estate Tax Exemption
Utilizing the current gift and estate tax exemption before it expires in 2026 is the most straightforward option. This can entail transferring assets up to the exemption limit, either directly or through a trust. By doing this, even if the exemption is later decreased, you can lock in the present exemption value for those assets and minimize the size of your taxable estate.
2. Create a Spousal Lifetime Access Trust (SLAT)
A flexible method of using the current exemption amount while maintaining access to the funds is a Spousal Lifetime Access Trust (SLAT). You establish a trust and put assets into it, up to the exemption limit. As the beneficiary, your spouse is eligible to receive distributions from the trust, giving you a continuing source of income. The trust's assets are also taken out of your taxable estate at the same time.
3. Utilize Grantor Retained Annuity Trusts (GRATs)
Another effective approach is to use GRATs, especially when interest rates are low. A GRAT allows you to donate assets in exchange for a fixed-term annuity. The remaining assets transfer to your beneficiaries tax-free when the time period is over. The secret to a profitable GRAT is that the assets inside grow more quickly than the IRS's anticipated rate of return, allowing additional funds to transfer to your beneficiaries without utilizing any of your exemption amount.
4. Think About Giving Back To Charity
Giving back to charity is a good approach to lessen the size of your taxable estate if you're motivated to do so. There are several ways to do this, ranging from straightforward cash donations to creating a Donor-Advised Fund (DAF) or a Charitable Remainder Trust (CRT). These may offer tax advantages while you are alive and leave a long-lasting legacy.
5. Enhance Your Plan by Including Life Insurance
Your estate plan may need the use of life insurance. The proceeds of a life insurance policy are not subject to income tax and, with the right planning using an Irrevocable Life Insurance Trust (ILIT), they may also be exempt from estate tax. This can give you the money you need to satisfy any estate tax debt without having to sell other assets.
There are opportunities and challenges associated with the current estate tax exemption's nearing expiry. High net worth individuals can safeguard their wealth from upcoming tax changes and guarantee that it will benefit their family and communities for generations by taking action now. Individual situations differ, as they always do, therefore it's essential to collaborate with a skilled estate planning attorney or tax adviser to develop the optimal strategy for your situation.
With the right estate planning strategies in place, you can look ahead to the 2026 sunset with confidence, knowing that your estate is well-prepared for the future.
Authored by: Rob & Conor Armstrong
Investment advisory and financial planning services offered through Summit Financial, LLC, ("Summit") an SEC Registered Investment Advisor. Insurance may be offered through Summit Risk Management, LLC, an affiliate of Summit Financial LLC. Summit and its affiliates do not provide tax or legal advice. Please consult with your tax and/or legal advisors before taking any action that may have tax and/or legal implications. This material is provided for your information and guidance and is not intended as specific advice and does not constitute an offer or solicitation to buy any securities.