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Estate Taxes and Planning

Whether you are just beginning to start your estate planning process or reviewing your estate plan, it is important to keep up to date on the taxability of gifts, estates and generation skipping transfers. It’s easier to understand the current tax regulations if you are familiar with the changes over the years. You can skip the background section if you are already familiar with the recent history of the tax law changes.


The 2010 Tax Act (Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) included new gift, estate, and generation skipping transfer tax (GST) regulations to better align them. For years 2011 and 2012 the gift and estate tax basic exclusion amounts were $5M (indexed in 2012 for inflation). The maximum rate for both taxes were 35%. The 2010 Act created both gift and estate tax applicable exclusion portability. Portability is a big deal for wealthy married couples. How it works is any gift and/or estate tax basic exclusion left unused by a deceased spouse can be transferred to the surviving spouse. The 2010 Act provided for portability only for tax years 2011 and 2012. The GST tax exemption was not portable between spouses.

The 2012 Tax Act (American Taxpayer Relief Act of 2012) became effective in tax year 2013. This act permanently extended the $5M (indexed) gift and estate basic exclusion amounts and their portability, whereas the $5M GST tax exemption (indexed) was also made permanent, although not portable. To pay for these goodies the top gift, estate, and GST tax rate increased to 40%.

In 2017 the Tax Cuts and Jobs Act (TCJA) doubled the basic exclusion amount for gift, estate, and GST to $11.8M (which was indexed) effective 2018. These exclusions are $12.06M in 2022. The GST exclusion remains not portable between spouses. The TCJA has a sunset at the end of 2025, unless Congress extends it or makes changes to the tax laws. Upon sunset in 2026 the tax law will revert to what was in effect in 2017, although the exemptions will be indexed for inflation.

Portability of Exclusions

As described above, previously if one spouse did not use his or her entire gift and/or estate tax exclusion it would expire unless some trust tax strategies were used. These include a bypass plan where a couple divided assets between a marital trust and a credit shelter (bypass) trust referred to as an A-B trust plan. Under the recent Tax Acts the estate of a deceased spouse can transfer to the surviving spouse any portion of the unused basic exclusion amount. This is known as the DSUEA (deceased spousal unused exclusion amount). The surviving spouse applicable exclusion amount is increased by the DSUEA which allows the surviving spouse to use for lifetime gifts or transfers upon death. Here’s an example of how this works: At the time of Ricky’s death in 2011 he had made $1M in taxable gifts and had an estate of $2M. The DSUEA available to his surviving spouse Lucy is $2M. This is the $5M applicable exclusion amount less what he consumed which is the combination of the $1M excluded from gift taxes and the $2M excluded from estate taxes, so his unused portion is equal to $2M. Lucy now has $14.06M, which is her tax year 2022 $12.06M applicable exclusion amount, plus the $2M DSUEA from Ricky.

Now with the portability exclusions a married couple has $24.12M of assets to distribute free from gift and estate taxes. It effectively allows both spouses to exhaust $12.06M each. This removes the estate “marriage tax” and puts a married couple on par with two single individuals with a trailing advantage to the surviving spouse. On the surface it appears the A-B trusts are no longer needed for married couples, which may be the case for some taxpayers. There are some non-tax and tax reasons to maintain or install A-B trusts:

  • A credit shelter trust may protect the trust assets from claims of any creditors of your surviving spouse and the trust beneficiaries.

  • You can include a spendthrift provision to limit your surviving spouse’s access to trust assets. This preserves the asset values that will ultimately be distributed to your beneficiaries.

  • You control (from the grave) the assets placed in a credit shelter trust. Since the trust is irrevocable, your plan of distribution to specific beneficiaries cannot be altered by your surviving spouse after your death. This is an important decision couples should make because the surviving spouse could re-marry, and the new spouse (instead of your children) could end up inheriting your assets.

  • Your assets transferred to your surviving spouse, combined with your surviving spouse’s own assets may appreciate to the level of breaching the then current applicable exclusion amount. If the first to die spouse’s assets are placed in a credit shelter trust these assets are not included in the second to die spouse’s taxable estate.

Gifting Prior to the TCJA Sunset

The TCJA temporarily lowered the ordinary income tax rates and doubled the gift, estate, and GST exclusions. This creates great opportunities for gifting now to your intended beneficiaries. By making gifts up to the exclusion amount ($12.06M in 2022, possibly $24.12M for married couples) this can drastically reduce the taxable value of your estate without incurring the gift tax. Tax free gifts now also avoid future appreciation of the gifted assets to your estate. Think of this choice as - can I afford to make this gift now and see my beneficiary(ies) enjoy 100% it or have them wait and receive potentially 60% or less of it because my estate may need to pay 40% in Federal estate taxes and potentially additional amounts of state taxes (depending on the state). Assets with the most potential to increase in value such as real estate, vintage cars, certain other antiques, high demand art, jewelry, closely held business interests, venture capital, etc. all have the potential to offer the best tax savings.

There are many different methods of gifting available. The most common is direct gifts to individuals. For 2022 the first $16,000 of any gift from one individual to another is gift tax free, this is known as the annual gift tax exclusion. Unlimited gifts of tuition payments, along with the payment of medical expense can also be made gift tax-free by the donor. Be careful not to give the cash to the person who incurred this liability, you the donor need to pay for these expenses directly to the institution who will or has provided the services.

Gifts can also be made in trust such as a GRAT (grantor retained annuity trust) or a QPRT (qualified personal residence trust). Intra-family loans can also be an effective estate tax planning tool. Creating a FLP (family limited partnership) is another technique that can leverage the high exclusion to potentially provide an even greater tax benefit due to the valuation discounts available for tax purposes.

Be aware that the person receiving the gift will not receive a step-up in tax basis to fair market value as is the case when the assets are transferred upon your death. By gifting while living, the person receiving the gift will also receive your current basis in the asset (not the fair market value). There are several issues you want to consider before implementing any gifting plan:

  • Do you have enough assets to ensure a successful retirement plan including the coverage of your longevity risk, i.e., are you confident you afford to make gifts now?

  • Do you anticipate your assets will be subject to estate taxes, i.e., are you expecting your asset levels to be above the estate exclusion amount when you die?

  • Is avoiding or reducing your estate taxes worth giving up control of the assets now?

  • Is the person receiving the gift able to manage the asset or put it to good use?

  • The tax question becomes is the transfer tax savings greater than the capital gains tax the recipient will pay upon disposition of the asset? Or better yet, does this matter to you?

Life Insurance Prior to TCJA Sunset

Married couples have additional estate planning opportunities, such as gifting to an ILIT (irrevocable life insurance trust). ILIT’s are also known as a wealth replacement trusts. Life insurance death benefits are exempt from income taxes (provided there has been no transfer for value), whereas these same death benefits are included in the decedent’s estate and are subject to estate taxes if the policy is owned by the insured. By having the ILIT own the policy for at least the three years prior to the insured’s death will reduce the size of the estate while providing liquidity to the estate. The life insurance premium payments are considered taxable gifts. By using up as much of the high gift tax exclusion now before the TCJA sunsets and the exclusion reverts to the much a lower level allows these insurance premium payments to be gift tax free.

All too often estates have little or no liquidity to pay the estate taxes and administration fees, therefore it is forced to liquidate assets sometimes at a substantial discount. To compound this problem, the IRS requires estates to use the assets’ fair market values, not the discounted “forced sale” values. This increases the benefits of an ILIT. For this to strategy to be tax efficient, the ILIT should have two important provisions to alleviate the unnecessary tax burden:

  1. Provide the trustee with the right to purchase assets from the estate of the insured.

  2. Provide the trustee with the right to loan money to the estate of the insured.

If the ILIT’s provisions are too restrictive, such as by designating the life insurance proceeds are to be used to pay the estate taxes, this could cause the death benefit to be included in the insured’s estate which would defeat the purpose. The trustee of an ILIT needs to be granted broad discretionary authority by the trust for the ILIT to be tax efficient. After the estate liquidity issues are addressed the ILIT can purchase assets from the estate (with the life insurance proceeds) and distribute them to the beneficiaries of the ILIT according to the grantor’s wishes.

In summary, there are several important estate planning opportunities available now that will expire upon the sunset of the Tax Cuts and Jobs Act on December 31, 2025.


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