ESTATE PLANNING
Regardless of estate value , there are numerous techniques and account structures available to help your clients minimize estate tax consequences .
the benefit of avoiding 40 % estate and generation-skipping transfer taxes with each generational transfer . For example , a grantor establishes an irrevocable trust and transfers assets into it , removing these from his or her taxable estate and taking advantage of the $ 13.61 million exemption in 2024 ( the generationskipping transfer tax exemption amount is the same as the estate and gift-tax exemption ). By electing to use the $ 13.61 million generation-skipping transfer exemption on the gift , the assets avoid estate taxes that would otherwise be incurred when the assets pass to each future generation . However , special rules apply to the inclusion ratios and applicable fraction formulas , depending on the type of trust receiving the generationskipping transfer . Additionally , a dynasty trust can provide income and support to the grantor ’ s children during their lifetime , while the remaining assets pass to the grandchildren or other beneficiaries upon the children ’ s deaths . The grantor can impose certain restrictions , such as limiting access to the funds until a beneficiary graduates from college . Beyond tax benefits , generation-skipping tax trusts provide a shield for assets against potential future liabilities , such as divorce settlements among beneficiaries , ensuring that the wealth remains within the family .
Irrevocable Life Insurance Trusts ( ILITs )
Irrevocable life insurance trusts serve as a crucial tool for estate liquidity and preserving family wealth . When a life insurance policy is owned within an irrevocable trust , the proceeds from the policy aren ’ t included in the estate , and thus they ’ re not subject to estate taxes . This ensures beneficiaries receive the full amount of the life insurance benefit taxfree , which provides essential liquidity for estate obligations without diminishing an estate ’ s value .
Typically , ILITs are funded with new life insurance policies so clients can avoid the three-year look-back period associated with the transfer of existing policies . For couples , second-to-die policies within an ILIT offer lower premiums and / or higher coverage given a couple ’ s longer joint life expectancy . Premiums can be paid through gifts to the trust , typically classified as “ present interests ” to qualify for the annual $ 18,000 gift-tax exclusion .
Financing life insurance policy premiums is a very effective method of paying for a large up-front premium or a series of premium payments for five to 10 years . A
loan from a bank or premium financing company allows the policy owner to borrow the cash necessary to pay the insurance premium . By borrowing , the grantor doesn ’ t have to liquidate assets , which means they can avoid an unfavorable taxable capital gains event . It also leaves appreciating assets in the portfolio available for other higher yielding investments . The loan is repaid either before the grantor ’ s death out of the cash values of the life insurance or out of the life insurance proceeds when the grantor dies , leaving the interest paid on the debt as the only cost of setting up the ILIT .
Family Limited Partnerships ( FLPs )
By transferring ownership interests in closely held family businesses or investments to family limited partnerships , individuals can leverage minority ownership and non-voting valuation discounts as high as 35 %, effectively reducing the taxable value of their estates even further . FLPs are used to facilitate family business succession planning and asset protection , allowing for wealth transfer among families .
Proactive Planning In Times Of Uncertainty
Beyond the higher estate and gift-tax exemptions , many other favorable tax changes are also set to expire under the Tax Cuts and Jobs Act at the end of 2025 . Also sunsetting will be the lowered marginal tax rates , expanded tax brackets , and the 20 % qualified business income deduction for pass-through entities .
While the future of the act ’ s provisions remains uncertain , proactive and strategic estate planning can help . An advisor ’ s planning strategies may include the optimized timing of income and deductions ; retirement contributions ; Roth conversions ; loss harvesting ; charitable giving ; and perhaps a re-examination of a client ’ s business structures , recognizing that the 21 % C corporation tax rate was made permanent by the legislation . Additionally , integrating lifetime gifting , trusts and family limited partnerships into your estate plan can offer robust protection against shifting tax policies and help curb the impact of expiring tax provisions and potentially higher tax rates after 2025 .
Of course , it ’ s imperative for CPAs , financial advisors , tax professionals and estate attorneys to ensure these strategies align with their clients ’ broader financial goals , so they can maximize the benefit to their heirs , minimize tax liabilities , and secure and preserve a legacy for generations to come .
DANIEL F . RAHILL , CPA / PFS , JD , LL . M ., CGMA , is a wealth strategist at Wintrust Wealth Management . He ’ s also a former chair of the Illinois CPA Society Board of Directors and is a current officer and board member of the American Academy of Attorney-CPAs .
58 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2024 WWW . FA-MAG . COM