Estate Planning “201” and the Sunsetting Estate and Gift Tax Exemption
2 years. 24 months.
That is the runway we have under current law before the Estate Tax Exemption (currently $13.61M per person) will drop dramatically to $5M per person inflation-adjusted. For clients that either have a current Estate Tax issue, or don’t have one now but will starting January 1, 2026, there are several techniques that can be put in place to mitigate those issues.
The first one is an Irrevocable Life Insurance Trust (ILIT). Many clients don’t realize that the death benefit of life insurance proceeds are includable in their taxable estate. For clients that have large policies, that alone can bump them over the limit. Establishing an ILIT that owns and is the beneficiary of such policies can remove those death benefits from their taxable estate and 40% tax that would otherwise apply. Clients should also be aware of the 3-year pull back rule for policies gifted into ILITs. This rule states that if a client gifts a policy into an ILIT and passes away within 3 years of such gift, all the policy proceeds will be pulled back into the client’s taxable estate. Accordingly, for many clients, we structure this transaction as a sale of the policies into the ILIT to be protected from this pull-back.
The second technique is a Family Limited Partnership LLC (FLP). This technique involves forming an LLC with the North Carolina Secretary of State that would act as an investment company holding any number of a client’s investment assets. Clients still have full access to funds within the FLP as Managers of the LLC. The FLP is popular for at least 2 reasons. First, it provides lifetime protection of assets from creditors. If a client were to get sued in either a professional or personal capacity, the FLP can help shield assets from creditors. Second, and more importantly as it relates to the Estate Tax conversation, under current law, FLPs allow for discounted valuations for estate and gift tax purposes. Because clients own interest in an LLC instead of the underlying marketable assets themselves, clients can oftentimes get discounts ranging from 15-40% for estate and gift tax valuation purposes. Depending on the value held within the FLP, this could save clients millions of dollars in estate and gift taxes.
The third strategy is lifetime gifting into Spousal Lifetime Access Trusts and Children’s Trusts. A client creates an irrevocable trust for either their spouse and/or children. They subsequently gift assets into that trust and these assets can then grow outside of the Estate Tax system. There are 2 strategies to gifting. One is using the Annual Exclusion amount ($18,000 for 2024) as a long-term gifting strategy over many years. This is a slow-burn strategy that can gradually shift wealth to future generations without even touching a client’s available Estate and Gift Tax Exemption. The second strategy is a large gift of close to the full current exemption amount. This strategy is attractive for clients that have the wealth and assets to take advantage because the Estate and Gift Tax Exemption is a use-it or lose-it game. If a client doesn’t use their full exemption before that sunset period, they can’t go back and use it in the future. Additionally, SLATs and Children’s Trusts provide creditor-protection over assets they hold and give Grantors the option of paying all income taxes on trust income, which we recommend at least initially as this “supercharges” the amount that clients can legally give their family outside the tax system (enabling the trust funds to grow without the “drag” of income taxation).
Implementing these strategies far ahead of the sunset period can exponentially increase the amount of wealth passed to, and taxes saved for, future generations.
About the Author
John J. Long, Jr., JD
Partner