Upcoming Changes to Federal Transfer Tax Laws

The lifetime gift and estate tax exclusion amount is scheduled to drop from $13.99 million per person in 2025 to about $7 million per person on January 1, 2026. 

While Congress can preserve the larger exclusion amount by extending the Tax Cuts and Jobs Act (“TCJA”) of 2017, the budget reconciliation process (the most likely avenue for passing any extension) requires that tax cuts cannot be extended beyond a “budget window”, usually 10 years, unless they are offset by other sources of revenue or spending cuts. Extending all the provisions in the TCJA for 10 years would add an estimated $4.6 trillion to the federal budget deficit, with $189 billion of that attributable to extending the gift and estate exclusion amount for 10 years.

Why Act Now? 

If your estate is federally taxable, you should consider making gifts that use the larger exclusion amount before it has a chance to decrease from about $14 million to about $7 million. You could transfer as much as an extra $7 million free of the 40% estate and gift tax.

Securing Your Family Wealth With Irrevocable Trust Planning

If you are uncomfortable making large gifts, you could consider setting up an irrevocable trust now and waiting to fund it until Congress’s willingness to extend the larger exemption amount becomes more apparent.  You could then fund the trust if the exclusion amount is reduced.

If you make a gift of the entire exclusion amount now, the amount of the gift plus any future appreciation will be removed from your estate.   With compounding interest, this appreciation can be even more significant during your lifetime.

Putting one or more irrevocable trusts in place can maximize your remaining lifetime gift tax exemption, while still preserving assets for your spouse and your descendants.  If the generation-skipping transfer (GST) tax exemption is also allocated to an irrevocable trust, the trust can continue for multiple generations, with no estate or GST taxes due at the deaths of the beneficiaries.  As a general rule, it is best to put assets into an irrevocable trust that you expect not to need in the future (but see the exception below under option 2).  In addition, it is best practice to have an independent trustee serving as trustee of an irrevocable trust.

Irrevocable Trust Structures To Consider

1. “Standard” irrevocable trust - A “vanilla” irrevocable trust for the benefit of your children and grandchildren would allow each or both of you to make lifetime gifts to the trust that would use some or all of your gift tax exemptions.  Your children and grandchildren would be the beneficiaries of this trust.  The assets contributed to the trust would be removed from your respective estates and any future appreciation on those assets would eventually pass to children, grandchildren, or future generations free of estate tax. 
2. SLAT – If you are worried that you might need gifted assets for living expenses later in life, a potential solution might be for one spouse (the “donor-spouse”) to give his/her assets to a spousal lifetime access trust (“SLAT”) for the benefit of the other spouse (the “donee-spouse”) and your descendants.  The transfer of assets by the donor-spouse is considered a gift and would use some or all of that person’s gift tax exemption.  However, having the donee-spouse as a beneficiary of the SLAT preserves the option for the donee-spouse to benefit from those assets.  The unstated intention behind a SLAT is that the donee-spouse should not need to take distributions from the SLAT except in case of emergency.  The assets contributed to the trust, in addition to any future appreciation on those assets, would eventually pass to children, grandchildren, or future generations free of estate tax. 
3. ILIT – An irrevocable life insurance trust (“ILIT”) is an irrevocable trust, to which either or both spouses would contribute cash used to purchase life insurance policies on either the donor’s life and/or a second to die policy.  The trust would be drafted so as to exclude the death benefit and any other trust assets from each of your estates.  When funds are contributed to the trust to pay the insurance premiums, the trust would contain “Crummey” withdrawal rights (named after the court case) allowing the gifts to the trust to qualify for the annual exclusion from gift tax, which means that you do not have to use up as much gift tax exemption for those gifts (depending on the amounts of the premiums).  During your lives, the trustees would have the power to sprinkle the income and principal of the trust to or for the benefit of your children and descendants (and spouse, if the policies held were only on one of your lives).  Upon your death, or the death of the survivor of you, the principal of the trust would pass to continuing trusts for the benefit of your descendants.  Life insurance trusts can also be used to provide liquidity to your estate in order to pay estate taxes.
4. Grantor Trusts – A “grantor” trust treats the donor (or “grantor” of the trust) — as the owner for income tax purposes, but not for gift or estate tax purposes. This means that the grantor will pay the federal income taxes attributable to the trust income, thus allowing the trust assets to grow much faster. The grantor’s payment of the trust’s income taxes is not treated as an additional gift to the trust.

Important Considerations

Please note that any assets given to an irrevocable trust would no longer be owned by the donor at death, so they would not be entitled to a “step up” in basis at the donor’s death. Consider this loss of basis step up at death before making large gifts of highly appreciated assets.

Alternative Strategy: Intra-Family Loans

Finally, one additional strategy could be to make a loan now of up to $14 million to family members (or to a grantor trust of which your descendants are beneficiaries). Later, you could decide to forgive some or all of that loan, which would be treated as a gift at the time of forgiveness.

If you have any questions about upcoming tax law changes or questions or concerns related to your estate and trust planning, please do not hesitate to contact a member of Casner & Edwards’ Trusts & Estates practice.