A nuanced approach for a couple with $ 30 million in wealth involves one spouse fully using their $ 13.61 million exemption by transferring assets either directly to beneficiaries or into trusts . This maximizes the current exemption of one spouse , ensuring that a significant portion of the estate is protected from future estate tax . The second spouse retains their exemption , which , even after the anticipated reduction , offers another layer of tax shelter . The second spouse could also use a portion of their exemption , thereby removing future appreciation from their estate . This strategy balances the benefits of current tax law with the need for financial flexibility and security .
Regardless of estate value , there are numerous techniques and account structures available to help your clients minimize estate tax consequences . Here ’ s a summary of the most common ones :
Lifetime And Annual Gifting
As essential tools in the estate planner ’ s tool kit , these strategies facilitate the transfer of wealth to the next generation while minimizing the estate ’ s tax exposure . Lifetime gifting removes assets from the estate , potentially shielding them from estate taxes on future appreciation . Concurrently , annual gifting takes advantage of the IRS ’ s exclusion amount , which is currently $ 18,000 per recipient ($ 36,000 per couple ), to systematically reduce an estate ’ s taxable value . Beyond the annual exclusion gifts , direct payments of tuition or medical expenses have no gifttax limitation at all . Thus , annual gifting offers a methodical approach to estate reduction that can have a significant financial impact on clients over time .
Spousal Lifetime Access Trusts ( SLATs )
Spousal lifetime access trusts , also known as SLATs , offer a strategic avenue for one spouse to support the other while also achieving estate tax savings . In this structure , assets are transferred into an irrevocable trust for the benefit of the spouse and possibly other family members . This move effectively removes the assets from the grantor ’ s estate , diminishing estate tax exposure . The beneficiary spouse can access the trust ’ s income — and , in certain situations , the principal for needs such as health , education , maintenance or support — without compromising the tax benefits . The grantor also has the option to pay the tax burden on the grantor trust , allowing the trust to grow tax-free and further reduce their future taxable estate . This trust allows for significant asset protection and growth outside the estate , enhancing future financial security for heirs .
Grantor-Retained Annuity Trusts ( GRATs )
Using a grantor-retained annuity trust , or GRAT , involves the grantor transferring assets to a trust and retaining the right to receive annuity payments for a predetermined period , typically two to 10 years . At the end of the trust term , any remaining assets pass to the designated beneficiaries ( often family members or heirs ).
GRATs are particularly effective in low-interest-rate environments or when assets are expected to appreciate substantially . The key advantage of this type of trust is the potential for asset appreciation that exceeds the IRS ’ s assumed interest rate ( found under Section 7520 of the tax code ), allowing the excess to pass to beneficiaries free of additional taxes . However , it ’ s also crucial to note that if the grantor passes away during the trust term , the remaining assets might be included in their estate , potentially negating some of the GRAT ’ s benefits .
Intentionally Defective Grantor Trusts ( IDGTs )
Intentionally defective grantor trusts are very effective tools for transferring wealth , especially for appreciating assets like family businesses or real estate . By designating a trust as “ intentionally defective ,” the grantor separates the income tax responsibility from the estate and gift-tax implications . This allows the assets within the trust to grow tax-free because of the grantor ’ s payment of the income taxes , which further reduces the estate size indirectly .
Transferring business or real estate assets to this type of trust in exchange for a promissory note allows the assets to grow outside the grantor ’ s estate while the trust repays the note with business income . This method effectively moves appreciable assets out of the estate without immediate tax consequences .
Another advantage of the IDGT , like other irrevocable gift trusts , is its “ swap power ,” which lets grantors swap assets of equivalent value between their personal estates and the trusts . By swapping non-appreciated assets to the trust for appreciated assets , the grantor can actively manage the trust ’ s holdings to ensure they receive a step-up in basis upon the grantor ’ s death , which will minimize the capital gains taxes for heirs .
Charitable Remainder Trusts ( CRTs )
Charitable remainder trusts are excellent vehicles for supporting charitable causes while providing income and tax benefits for the grantor or other named beneficiaries . By transferring assets into a CRT , the grantor secures an income stream for a term of years ( not to exceed 20 years ) or for life , with the remainder interest designated to charity at the end of the trust term or at the death of the last beneficiary . Additionally , these trusts offer immediate income tax deductions based on the present value of the remainder interest and potential savings on capital gains taxes , making them attractive options for those with appreciated assets . Notably , there are two types of charitable remainder trust : the charitable remainder annuity trust ( or CRAT ) and the charitable remainder unitrust ( or CRUT ). The CRAT provides beneficiaries with a fixed annual income based on a predetermined percentage ( e . g ., 7 %) of the initial fair market value of the assets . A CRUT provides beneficiaries with a variable annual income based on a predetermined percentage of the trust ’ s assets , which are revalued annually .
Dynasty Trusts
Dynasty trusts , also known as generation-skipping tax ( GST ) trusts , are designed for long-term preservation of assets across multiple generations , with
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