With the potential changes to estate and gift tax laws on the horizon, high-net-worth individuals, especially business owners considering an exit, may want to start planning now to protect their assets. If Congress doesn’t intervene before January 1, 2026, the current lifetime exemption of $13.61 million per individual (or $27.22 million for married couples) could be reduced by half, adjusted for inflation.
This shift poses a significant tax impact for those with substantial estates. Therefore, it may be wise to consider making large gifts before the exemption potentially decreases. The IRS has clarified that gifts exceeding the future exemption won’t be subject to a “clawback,” making this a “use-it-or-lose-it” opportunity unless Congress extends the current rules.
Strategic Planning is Essential
We believe aligning your legacy goals with the appropriate estate planning strategies is crucial to managing this transition effectively. These decisions are irrevocable, so careful consideration and collaboration with your wealth advisory team are essential to avoid future regret.
Trust Strategies to Maximize the Current Exemption
Several trust-based strategies can help maximize the current exemption. For instance, an Intentionally Defective Grantor Trust (IDGT) can move assets out of your estate, avoiding estate tax, while the trust’s income is taxed to you. This approach reduces the taxable estate over time.
For married couples, a Spousal Lifetime Access Trust (SLAT) builds on the benefits of an IDGT by allowing your spouse to access trust assets if necessary, offering flexibility while taking advantage of the current exemption.
What is a SLAT?
A SLAT is an irrevocable trust that one spouse creates for the benefit of the other. The primary benefit is that it allows couples to remove significant assets from their combined estate while still providing financial security for the beneficiary spouse. This strategy can be particularly useful for high-net-worth individuals who want to retain some level of access to the assets through their spouse while taking advantage of the current high exemption amount.
Why Now?
The potential sunset of the current exemption levels on the horizon also creates an urgency to act. It presents a unique window of opportunity for high-net-worth individuals to optimize estate planning strategies before the rules change. Delaying action could result in missed opportunities to transfer wealth efficiently and minimize tax liabilities.
Case Studies and Real-Life Examples
Consider the case of a business owner planning to exit their company. By establishing a SLAT, they could transfer significant business interests to the trust, reducing their taxable estate while still ensuring their spouse had access to the assets if needed. This approach helped safeguard their wealth and aligned with their long-term goals of supporting their family and philanthropic endeavors.
Incorporating Net Worthwhile®
At SignatureFD, we approach financial planning holistically, helping our clients identify and allocate their assets in ways that align with their values and goals. The strategies discussed here, including SLATs, can be powerful tools to help you Protect and Grow your wealth. They can also free up other assets for charitable donations or enhance your lifestyle goals so that you can Give to the people and causes that matter most to you and Live your Net Worthwhile®.
Additional Strategies to Consider
Charitable Giving
Charitable giving strategies, such as Charitable Remainder Trusts (CRTs), can be particularly effective in the current high-interest-rate environment. CRTs may allow you to receive an income stream while supporting charitable causes, with potential tax benefits. You can also use Donor-Advised Funds (DAFs) to make charitable contributions now and decide later which charities to support. This can also help maximize deductions under current laws.
Additional Exemption Amounts
For 2024, the lifetime estate and gift tax exemption has increased to $13.61 million per individual. Even if you’ve used your previous exemption, you now have an additional $690,000 per person to gift without incurring taxes. We recommend evaluating the opportunities to use this newly available exemption.
Create Liquidity for Future Estate Tax Liabilities
If you anticipate future estate tax liabilities, an Irrevocable Life Insurance Trust (ILIT) can help by funding potential taxes with life insurance proceeds outside your estate. This helps ensure your business interests or real estate holdings aren’t sold under duress to cover taxes.
Use All Available Gifting Opportunities
Beyond these more complex strategies, direct gifts can systematically reduce your estate’s value. The current annual exclusion allows you to give up to $18,000 per person annually, tax-free, with no impact on your lifetime exemption. Additionally, direct payments to medical providers or educational institutions for someone else’s benefit are also tax-free and don’t count against the exemption.
Special Considerations for Executives and Business Owners
If you’re a business owner or an executive with stock options, we recommend reviewing the specifics of your situation, such as the transferability of stock options or the gifting of business interests. These processes can be complex and time-consuming, so starting now may be necessary.
These strategies can be powerful tools for protecting your legacy but require careful planning and expert guidance. We recommend working closely with your wealth advisory team to navigate these complex decisions. Aligning your estate planning strategies with your long-term goals can help you prepare for the upcoming changes.
If you’re considering your estate planning options and want to ensure you’re taking full advantage of the current exemption opportunities, please contact wealth advisor Isabel Berbert by email or at 404-253-7688. Together, we can help you design a customized wealth management strategy that aligns with your goals and charts a course toward your Net Worthwhile®.
