Election Impact on Estate Planning

There has been a lot of discussion recently about the impact that the election might have on federal gift and estate tax law. This article provides a brief update of the current situation and identifies some of the planning opportunities that may be beneficial.

The current available estate and gift tax exemption is $11.58 million. Generally speaking, this is the amount that can be transferred during lifetime (by gift) or at death before transfer tax is imposed. Under current law, this exemption amount is tied to the rate of inflation and is therefore likely to gradually increase through 2025. If Congress does not act in the interim, then on January 1, 2026, the estate and gift tax exemption will reduce to $5 million, as indexed for inflation.

The Internal Revenue Service issued final Treasury regulations confirming that taxable gifts made between 2017 and 2026, in excess of the exemption amount available on the date of death, will not be “clawed back” into the gross estate for federal estate tax purposes. In other words, if a taxable gift of $11 million is made this year, and in the year of the transferor’s death the exemption amount is $5 million, the transferor’s estate will not pay transfer tax on the excess $6 million that was gifted when the exemption amount was $11 million. The anticlawback regulations provide unique tax planning opportunities to lock in the temporary increase in the exemption via gifting prior to its reversion.

As a result of the recent elections, the estate and gift tax exemption might be adjusted prior to January 1, 2026. There could also be an imposition of an additional tax on unrealized appreciation upon the transfer of assets by gift or at death and an increase in both marginal gift and estate tax rates. Obviously, we do not know what legislation might be passed in the coming years. Regardless, it seems prudent for those who potentially might have a taxable estate to monitor the situation and consider whether they wish to avail themselves of any planning opportunities before any possible changes are made.

Given the current situation, most people are drawn to strategies that allow them to make a gift in a manner that will (1) lock in the current $11.58 million exemption amount; (2) remove assets, and the appreciation thereon, from their gross estate; and (3) retain some use of the gifted assets after the gift. Some popular strategies that meet these criteria include spousal lifetime/limited access trusts (SLAT), grantor retained annuity trusts (GRAT), and qualified personal residence trusts (QPRT).

Spousal Lifetime/Limited Access Trust (SLAT): A SLAT is an irrevocable trust established by someone for the benefit of his or her spouse. The general concept is that the gifted SLAT funds remain available for the spouse (and possibly children) during the spouse's lifetime. A SLAT is structured so that it does not qualify for the marital deduction; thus it utilizes the transferor spouse's exemption. During the beneficiary spouse's lifetime, the beneficiary spouse retains use of the funds. When the beneficiary spouse dies, however, such access is lost, and the trust assets are distributed or held in further trust for designated beneficiaries.

Many people like to maximize this strategy by having both spouses create SLATs for the benefit of each other. This is permitted; however, such SLATs must be carefully structured to include enough differences so as not to be deemed reciprocal trusts.

Grantor Retained Annuity Trust (GRAT): A GRAT is an irrevocable trust that is established for a specific term of years. During the term, the grantor retains the right to receive an annual payment from the trust. The term of the GRAT and the amount of the payment can be modified based on how much of the exemption the grantor wishes to utilize. As long as the assets in the GRAT appreciate greater than the Section 7520 rate (currently only 0.4 percent), then there will be assets that can pass to beneficiaries tax-free at the end of the term. A grantor who wishes to utilize a larger portion of his or her exemption through a GRAT would reduce the size of the annual payment that comes back during the term of the GRAT.

Qualified Personal Residence Trust (QPRT): A QPRT is an irrevocable trust funded with the grantor’s personal residence (or secondary home) in which the grantor retains the right to use the residence for a term of years. Upon the expiration of such term (if the grantor survives the term), the ownership of the property will pass to the remainder beneficiaries, either outright or subject to continuing trust.

The establishment of a QPRT will be deemed a taxable gift of the remainder interest to the trust beneficiaries. The value of the taxable gift will be the overall fair market value of the transferred property reduced by the value of the retained interest (i.e., the term of years selected). This allows the grantor to transfer the full value of the residence using only the exemption equal to the value of the remainder interest. After the term of the QPRT ends, the grantor may lease the property back from the remainder beneficiaries for fair market value.

The federal income tax consequences of the aforementioned trusts should also be considered. Each of the trusts, at least for a period of time, is structured as a “grantor trust,” which means that the grantor is taxed on all the income earned by the trust during such time period. This may be beneficial because the income taxes paid by the grantor serve as an additional transfer of wealth to the beneficiaries, free of transfer tax. Another important income tax consequence is that when a gift is made during life, the recipient of the gift receives a “transferred basis” in the asset. This means that the recipient of the gifted asset has the same basis in the asset that the transferor held. Alternatively, if an asset is transferred upon death, the recipient’s basis would be adjusted to the asset’s fair market value, which is generally more desirable for income tax purposes. Therefore, the specific assets utilized for any gifting strategy must be carefully considered.

This is not an exhaustive list of options. For example, those who do not care to retain any interest in the gifted assets can continue to utilize outright gifting directly to a beneficiary or to a trust for the benefit of one or more beneficiaries. The gifted assets could consist of closely held business interests, which might qualify for a valuation discount. If you have previously loaned money to a beneficiary, you might consider forgiving the note and thereby triggering a gift. Some clients are also looking to refinance existing loans at lower current applicable rates. You should speak with your estate planning attorney to determine which techniques are appropriate for you. There are a multitude of options, depending on your intent, family structure, asset holdings, and market outlook.

For more information, please contact Jeffrey T. Troiano at (941) 329-6638 or jtroiano@williamsparker.com.

Jeff is a board certified wills, trusts, and estates attorney and leader of Williams Parker’s Estate Planning, Business Succession, Estate & Trust Administration practice.