The Act provides planning opportunities for taxpayers with varying levels of wealth. Clearly, very wealthy families should consider taking advantage of the significant increase in the estate, gift and generation-skipping transfer tax exemptions, particularly in light of the scheduled sunset of the higher exemptions beginning in 2026. For example, a married couple that has not made prior taxable gifts could gift up to $22,360,000 to their children in 2018. Gifts to trusts for grandchildren and later generations could also take advantage of the increased generation-skipping transfer tax exemption. Assets in these “generation-skipping” trusts would not be taxable in the children’s generation and potentially more distant generations. Gifts in trust can offer asset protection benefits, transfer tax savings and the opportunity for leveraged gifts, but gifts may also be made outright.
Sophisticated estate planning strategies allow you to leverage the tax savings available with the increased estate, gift and generation-skipping transfer tax exemptions.
These include gifts of business interests valued using discounts for lack of control and marketability, sales to “intentionally defective grantor trusts,” transfers to grantor retained annuity trusts (GRATs) and other strategies.
For married couples who are below the current estate and gift tax exemption amounts but still have significant assets and may have taxable estates if the exemption reverts back in 2026, there are planning opportunities to use the increased exemption without losing full control over the assets.
For example, you can fund one or more spousal lifetime access trusts (SLATs). The permissible beneficiaries of such trusts include your spouse and descendants (and perhaps other family members or charity). If structured properly, it is possible for each spouse to create and fund an SLAT. Direct gifts using exemption can be coupled with other estate freeze strategies such as GRATs and sales to “intentionally defective grantor trusts.”
Families with assets below the estate and gift tax exemption amount should focus on maximizing the income tax basis of assets held by a decedent at the time of death. In general, at death, your assets receive a “stepped-up” basis equal to the date of death value of the assets. This tax basis is used to determine the gain or loss on the eventual sale of the inherited assets, so a “stepped-up” basis will reduce the gain on the sale. Couples with assets below the exemption amount should therefore consider modifying their estate plans to include provisions under which family assets will receive a new “stepped-up” basis upon the death of the second spouse. If an “exempt” trust, as discussed above, has already been created upon the death of a spouse, the trustee and trust beneficiaries should consider a judicial modification or other change to the terms of the trust that would result in the inclusion of the assets in the second spouse’s estate and a new stepped-up basis.
