CWG Insight Series: Estate Exemption Planning

Quick Summary

• Current estate exemption is $12.92M per person, $25.84M per couple
• At the end of 2025, this drops an estimated $6-8M per person, or $12-16M per couple
• Assets above that amount will be taxed at 40% upon death
• We need to act now to utilize the current exemption if your estate is above those thresholds

Just so we are on the same page, the federal gift and estate tax exemption is the amount of money an individual can gift to their heirs during their lifetime or at death without being subject to the gift or estate tax. Anything above that amount will be subject to a federal estate tax at 40%. In addition, some states have their own gift or estate tax, as well as an exemption threshold, which is often lower than the federal exemption, and so is the tax rate.

For the past few years, most US tax residents haven’t had to worry too much about estate tax. In 2017, with the passing of The Tax Cuts and Jobs Act (TCJA), the estate tax exemption was raised to an historical high of $10 million per person ($20M per couple). After adjusting for inflation, the exemption stands at $12.92M ($25.84M per married couple) in 2023, putting it out of sight for most estates. That is set to change as the TCJA expires at the end of 2025, bringing the estate tax exemption back down to an estimated $6-8M per person, or $12-16M per couple. Suddenly, the estate tax is an important consideration for many more households.

If your estate will be in this range in 2026 – or you think it has the potential to climb into this range in the years to come – you may want to use your exemption before the sunset, while it’s still at a historic high. Now is the time for us to form a strategy as waiting too long to implement it could be costly.

Top strategies for using the estate tax exemption before 2026

Strategic Gifting 

If your estate is valued at, or above $6M per person, or $12M per married couple, you may want to consider gifting strategies to reduce your taxable estate. Gifting strategies can include annual gifts, lifetime gifts, and charitable giving.

Annual gifts: You can make annual gifts of up to $17,000 per recipient (as of January 1, 2023) without triggering gift taxes or using your exemption. This means a married couple can give up to $34,000 to as many recipients as they like per year. These annual gifts are not limited to family members and can include friends or causes (regardless of their charitable status).

Irrevocable Trusts

Irrevocable trusts, specifically grantor trusts, are excellent tools for using the exemption and moving money out of estates. The Spousal Lifetime Access Trust (SLAT) is a particularly helpful vehicle for managing around the sunset. SLATs are irrevocable trusts in which the spouse may be the beneficiary, and assets in the trust, if properly transferred, are outside the settlor’s estate. However, by including a spouse as a beneficiary of the trust, the trustee may make distributions to that spouse if access to the assets is ever necessary (hence the moniker for the trust). This may alleviate the stress couples may feel when they are in a position where they should plan to minimize their estate and transfer taxes but not feel wealthy enough to part from the assets fully.

SLATs are best used when spouses are both physically healthy, and their marriage is healthy, too. In addition, it’s important to follow the rules to avoid the reciprocal trust doctrine and not to use these trusts as a “piggy bank,” invading the trust frequently.

The Half-Step

If you’re uncomfortable with gifting much or all of your exemption to a trust, you might take an intermediate step. Specifically, you can make a small seed gift to the trust, selling the remainder of the assets to the trust in exchange for a promissory note. This way you can test drive the complexity of the trust structure (or lack thereof) before fully committing the assets. If you are comfortable with the new structure, you may choose to forgive part, or all of, the notes up to your exemption limit at the time of that gift. This mechanism allows you to put all of the plumbing in place for a completed gift without having to complete the entire transaction.

Irrevocable Life Insurance Trusts (ILIT)

If giving up complete control of your assets isn’t desirable, or even possible, there are other ways to prepare for your future estate tax. A common first step many clients take is to create an Irrevocable Life Insurance Trust to hold a permanent life insurance policy. The Grantor of the trust purchases a permanent life insurance policy either on themselves, their spouse, or both. The ILIT owns the policy, pays the policy, and is the beneficiary of the policy. Annually, the Grantor makes a gift to the trust in the amount of the policy premium and the trust makes the premium payment to the insurance carrier. At death, the proceeds of the policy are paid into the trust, both income and estate tax free. The Trustee of the ILIT will use the cash in the most strategic way for the beneficiaries. Often, this cash is used to pay the IRS and state-imposed estate taxes so that the beneficiaries aren’t forced into selling any of the remaining estate’s assets.

This works well in situations where there’s a closely held business or real estate assets that the family does not want sold at death. The cash in the ILIT provides the liquidity for the family to make the estate tax payments to the IRS and state.

The time to act is now

If your estate is above the current exemption amount or will be above the reduced exemption amount come 2026, we have roughly 2.5 years to act. Doing so can save you millions in taxes, leaving a larger legacy for future generations…and less funding for the IRS. Working with your Crown Personal CFO, we’ll first fully update your net worth statement to determine your current estate value, project how this will grow or decline into the future, and determine if there is an estate tax issue to solve. If there is, we’ll work closely with an expert estate planning attorney to craft a plan that fits your unique situation.