By Brandon Baiamonte, MS, CPA, CFE, CFM, Director of Tax Strategy at Mission Wealth
Both the lifetime gift tax exemption and the federal estate tax exemption are $11,700,000 this year. If you are married, then you would double the exemption amount to $23,400,000. This means that unless you have assets above this amount, your estate will likely not have to pay a penny in estate taxes. Unfortunately, this could change in the not too distant future.
As it stands, the exemption amount is set to revert to $5,000,000 ($10 million for a married couple) in 2026. This amount will be indexed for inflation, so it could be a little higher than that. In any event, it will be significantly less than the exemption amount we are enjoying right now.
President Biden is proposing tax law changes that would decrease the exemption amount to $3,500,000 ($7 million for a married couple). If that were to happen, then a lot more people might have to start worrying about planning for estate taxes.
What are a few estate planning strategies you should consider?
Spousal Limited Access Trust (SLAT)
A spouse creates an irrevocable trust and contributes property up to the remaining lifetime gift tax exemption. The gift is made for the benefit of the other spouse. This is a possible way to make an irrevocable gift, but still have some access to the funds. If done properly, both the gift and any future appreciation would be removed from the donor’s taxable estate.
Irrevocable Life Insurance Trust
You can purchase life insurance that can be used to pay future estate taxes. If the life insurance is purchased in an irrevocable life insurance trust, then the death benefits would not be included in the taxable estate. This can be an especially valuable strategy for estates with significant non-liquid assets, such as closely held businesses or farms. In some instances, married couples should consider a second-to-die policy to reduce the cost of the insurance. This type of policy pays the death benefit at the death of the second spouse.
Clawback Trust
This is an irrevocable trust that can be funded up to the current estate tax exemption. Even though this is an irrevocable trust, the assets held inside it will not be protected from the claims of creditors. This will cause the gift to be brought back into the estate; however, you are grandfathered into the current larger exemption amount. In other words, you are protected if the estate tax exemption amount does decrease. You end up gaining the benefit under the claw back regulations of the current and presumably larger exemption amount.
These are a few examples of estate planning techniques that can potentially reduce the amount of estate taxes eventually owed. Each situation is different and I highly recommend discussing your unique situation with an attorney who specializes in estate planning. Find more of our content surrounding Estate Planning here. Please contact us with any questions.
MISSION WEALTH IS A REGISTERED INVESTMENT ADVISER. THIS DOCUMENT IS SOLELY FOR INFORMATIONAL PURPOSES, NO INVESTMENTS ARE RECOMMENDED. ADVISORY SERVICES ARE ONLY OFFERED TO CLIENTS OR PROSPECTIVE CLIENTS WHERE MISSION WEALTH AND ITS REPRESENTATIVES ARE PROPERLY LICENSED OR EXEMPT FROM LICENSURE. NO ADVICE MAY BE RENDERED BY MISSION WEALTH UNLESS A CLIENT SERVICE AGREEMENT IS IN PLACE.
00415742 08/21