January 23, 2024Client Alert

ESTATE AND TAX PLANNING IN 2024: Techniques to Consider Before Heightened Exemptions are Reduced on January 1, 2026

IRS Inflation Adjustments: Each year, the IRS considers inflationary adjustments to the estate and gift tax exemption amount and gift tax annual exclusion amount.  As you contemplate your estate planning or making gifts during this new year, the following are the published numbers for 2024:

  • 2024 Exemptions: The estate and gift tax exemption amount has increased from $12,920,000 per person in 2023 to $13,610,000 per person in 2024.  The generation-skipping transfer (GST) tax exemption amount has also increased to $13,610,000 per person in 2024. However, unless changed prior to December 31, 2025, these heightened exemptions will revert to pre-2018 levels on January 1, 2026.  Projections show that the exemption would be approximately $7 million per person at that time ($5 million adjusted upwardly for inflation from 2011).  As discussed below, the current higher exemptions provide an excellent opportunity for planning lifetime transfers to minimize, or even eliminate, your estate tax exposure.
  • 2024 Gift Tax Annual Exclusion: Every year, you are allowed to make a gift to another person up to a certain amount without incurring any gift tax liability – this is called the “annual exclusion.”  In 2024, the annual exclusion is $18,000. It is a significant tax-saving tool because you can give up to $18,000 to an unlimited number of persons without using any of your lifetime gift tax exemption amount and without the obligation to file a gift tax return.  For example, married couples can give each of their children and grandchildren up to $36,000 in 2024 without incurring any gift tax liability and without using any estate or gift tax exemption.
  • January 2024 Interest Rates: While interest rates have remained relatively low over the past few years, they have steadily increased since historic lows in 2020. The IRS released the following adjusted applicable federal rates (AFRs) for January 2024: the annual short-term (under three years) is 5.0%; annual mid-term (three to nine years) is 4.37%; and annual long-term (more than nine years) is 4.54%.

Planning Opportunities:   Prior to their anticipated sunset at the end of 2025, certain estate planning and gifting techniques may take advantage of the higher exemption amounts that are now in place. Planning now for the anticipated sunset could yield significant benefits, especially for single persons with an anticipated gross estate in excess of $7 million and married couples with a combined anticipated gross estate in excess of $14 million. Some techniques to consider include the following:

  • Spousal Lifetime Access Trust (SLAT): A SLAT is an irrevocable trust created by one spouse who gifts assets to a trust for the benefit of the other spouse (the beneficiary spouse). The value of the property gifted to a SLAT is determined at the time the SLAT is funded and uses the estate and gift tax exemption available as of the date of such gift. So long as the gift to the SLAT is made prior to the sunset, in 2024 a donor spouse can transfer up to $13,610,000 (less any prior lifetime gifts) without incurring any gift tax liability. A SLAT also allows the beneficiary spouse to receive distributions from the trust, while at the same time the assets in the trust, including appreciation on those assets, are excluded from the beneficiary spouse’s gross estate and, therefore, are not subject to estate tax when the beneficiary spouse passes away.  A SLAT is usually structured as an IDGT (see immediately below).
  • Intentionally Defective Grantor Trust (IDGT):  Another transaction to consider is a sale to an IDGT.  This technique starts with an initial seed gift to the IDGT (typically 10% of the value of the property that will be sold to the IDGT), followed by a sale of assets to the IDGT in return for a promissory note with interest payable at the AFR. The IDGT is designed to exclude assets in the IDGT from the estate of the individual who created the trust, but it is “defective” for income tax purposes so that the income of the trust will be taxed to the individual creating the trust.  When the individual who created the trust pays the tax on the trust’s income, the higher and more compressed tax rates for trusts are avoided.  Also, more assets remain in the trust for the beneficiaries rather than being used to pay taxes.  As a result, income in the trust and appreciation on the value of the trust assets are preserved for the enjoyment of the trust beneficiaries.

    The use of the sale technique also provides flexibility in the event the existing heightened estate and gift tax exemptions are lowered before January 1, 2026. For example, if the estate and gift tax exemptions are reduced either before or at the end of 2025, an amount of the promissory note less than the taxpayer’s remaining higher gift tax exemption could be quickly gifted to the IDGT, thus cancelling the portion of the promissory note gifted. An outstanding promissory note also provides the flexibility to get low-basis assets from the IDGT back to the grantor of the IDGT who is owed the note. The swap of a portion or all of the note from the grantor in exchange for low-basis assets held by the IDGT of equal value allows the grantor to receive an income tax basis adjustment if the assets then remain in the grantor’s estate until death, but the estate tax effect is neutral because the value of assets in the grantor’s estate did not change as a result of the swap.

    If the IDGT is properly structured to take advantage of the GST tax exemption, it can continue for the benefit of multiple generations without incurring additional estate, gift, or GST taxes at each generational transfer. For this reason, these trusts are often referred to as a “Dynasty Trust” or an “Endowment Trust.” Many individuals also prefer trusts because they can protect assets from the reach of a beneficiary’s creditors, including a spouse in the event of divorce.
  • Intra-Family Loans:  Individuals can take advantage of lower AFRs by making loans to family members or refinancing existing loans.  Low interest rate loans can also be combined with gifts, resulting in larger transfers without incurring any taxes.   While the rates are not as attractive as they were several years ago, they may be lower than a family member might be offered from a bank.
  • Gifts to Family Members:  While the techniques discussed above are powerful tools to leverage the estate and gift tax exemption, taxpayers should not underestimate the simplicity and effectiveness of making direct gifts to family members.  This could entail transferring assets to them outright, making gifts to irrevocable trusts for their benefit, or forgiving outstanding intra-family loans.

There are slightly less than two years until the higher exemptions are scheduled to sunset.  While that seems far away, that day will come fast.  Let’s start the conversation now about tax-saving techniques that are available to you.  If you are contemplating making lifetime gifts and would like to discuss potential opportunities and implications, including tax consequences, a beneficiary’s ability to be a good steward of your assets, or maintaining your standard of living after making gifts, please contact one of Michael Best’s Wealth Planning attorneys. We are here to analyze your specific circumstances and help you develop and implement a gift plan that meets your objectives.

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