The beginning of 2024 gives an opportunity to review opportunities for the year ahead. Here are a few of the planning opportunities and defensive strategies that we will be looking at for our clients over the course of this year. This is the first of a three-part series.

Estate Planning Opportunities in 2024 and 2025:

Maximizing Benefits Before the Sunset of the Tax Cuts & Jobs Act

In the ever-evolving landscape of estate planning, staying informed and proactive is key to effectively managing and preserving wealth for future generations. As we navigate through significant tax law changes, particularly with the anticipated adjustments to the federal estate tax exemption, it becomes increasingly important to explore and implement strategic estate planning techniques. The following article provides a comprehensive guide to navigating these changes. The first part of this article focuses on the unique opportunities presented in the years 2024 and 2025 before the sunset of the Tax Cuts and Jobs Act, highlighting strategies such as Roth Conversions and the use of trusts like DAPTs and SLATs. The second part of the article delves into additional estate tax avoidance techniques, emphasizing the importance of preparation for the forecasted reduction of the estate tax exemption to between $6 to $7 million. Together, these techniques offer a thorough understanding of the current estate planning environment and practical approaches to safeguarding one’s financial legacy amidst these impending changes. We recommend that you consider implementing Roth Conversions as soon as possible. Please consult with your financial advisor and/or your accountant/tax advisor and get their input. But overall, Roth conversions offer an opportunity to pat the income taxes trapped within your Traditional IRA, 401(k) or other qualified plan before tax rates increase by 2-4% automatically on January 1, 2026. Asset Protection techniques, like DAPTs or LLCs, should be implemented as soon as you understand the technique. Let us know if you would like to discuss these techniques. We usually charge a fee for the meeting, but the fee is waived if we are retained to create a DAPT or other asset protection device. Currently, we recommend that you learn about estate tax avoidance techniques now, but wait until 2025 to hire us to create them.

Section I

As we approach the sunset of the Tax Cuts and Jobs Act (TC&J) at the end of 2025, there exists a unique window of opportunity for strategic estate planning. This period is critical for individuals and families seeking to maximize the benefits of current lower income tax rates and prepare for potential increases in tax liabilities. This article delves into the key estate planning techniques, including Roth Conversions, Domestic Asset Protection Trusts (DAPTs), and Spousal Lifetime Access Trusts (SLATs), that individuals should consider to optimize their financial legacy in light of the impending changes.

Roth Conversions: Capitalizing on Lower Income Tax Rates

A Roth Conversion involves transferring assets from a Traditional IRA or 401(k) into a Roth IRA. This strategy is particularly attractive before the expiration of the TC&J due to the existing lower income tax rates. When assets are converted to a Roth IRA, the amount transferred is taxed as ordinary income. Therefore, executing conversions during these years of lower tax rates can result in significant tax savings.

The long-term benefit of Roth IRAs cannot be overstated. Roth IRAs grow tax-free, and unlike Traditional IRAs, do not require minimum distributions, allowing for more extended growth and a more flexible estate planning tool. Beneficiaries inheriting Roth IRAs also receive distributions tax-free, making it an excellent vehicle for wealth transfer.

Domestic Asset Protection Trusts: Shielding and Reducing Estate Size

DAPTs offer a robust asset protection strategy while facilitating estate size reduction. They are irrevocable trusts set up under the laws of states that permit self-settled asset protection trusts. The grantor, in this case, can be a discretionary beneficiary, providing a layer of asset protection against creditors, lawsuits, or divorces.

For estate planning, the use of DAPTs before the TC&J expires is a strategic move. By placing assets into a DAPT, the grantor effectively removes them from their estate, potentially reducing estate tax liability when the federal estate tax exemption lowers post-TC&J. Moreover, the growth of assets in the DAPT occurs outside the grantor’s taxable estate, fostering a more efficient wealth transfer process.

Spousal Lifetime Access Trusts (SLATs): Balancing Access and Transfer

SLATs offer a unique advantage for married couples. One spouse establishes the trust for the benefit of the other spouse, transferring assets into the trust and utilizing their gift tax exemption. The beneficiary spouse can have access to these trust assets, providing financial flexibility.

This strategy is particularly beneficial in anticipation of the TC&J’s expiration, as it allows for the use of the higher federal estate tax exemption before it potentially decreases. Assets transferred to a SLAT, along with their appreciation, are removed from the couple’s estate, mitigating future estate taxes. Given the lower income tax environment pre-TC&J expiration, SLATs can be funded with income-producing assets, maximizing the tax efficiency of transferred assets.

Implementing These Strategies: Considerations and Timing

When considering these strategies, timing and individual circumstances play pivotal roles. For Roth conversions, the ideal timing would depend on current income levels and the projected income tax environment post-2025. DAPTs and SLATs require careful planning, especially around state laws for DAPTs and the structuring of SLATs to ensure compliance and effectiveness.

Professional guidance is crucial in these endeavors. Estate planning attorneys and financial advisors can provide tailored advice, considering factors such as state laws, current and future tax implications, and individual and family financial goals.

Conclusion: Proactive Planning as a Necessity

The lead-up to the expiration of the TC&J presents a critical juncture for proactive estate planning. Techniques like Roth Conversions, DAPTs, and SLATs are not merely opportunities but necessities for those seeking to optimize their estate planning in this transient tax environment. By taking strategic actions now, individuals and families can secure their financial legacy, maximizing benefits for generations to come.

As we navigate these final years of the TC&J, it’s imperative to engage in comprehensive planning, leveraging the current favorable tax landscape to build a robust and flexible estate plan that can withstand the impending changes in the tax environment.

Section II

Navigating the Changing Landscape: Estate Tax Avoidance Strategies in the Face of Lowered Exemptions

The estate planning arena is facing a significant shift with the anticipated reduction of the federal estate tax exemption from the current $13.61 million to a projected range of $6 to $7 million post-2025. This adjustment necessitates proactive measures for individuals with estates over $6 million to mitigate potential tax impacts. This article explores key estate tax avoidance strategies that should be considered and implemented before the end of 2025.

Lifetime Gifting: Utilizing the Current High Exemption

One of the most straightforward strategies is to take advantage of the current high exemption by making lifetime gifts. This involves transferring assets to beneficiaries now rather than waiting until death. By doing so, individuals can significantly reduce their taxable estate. It’s essential to consider the lifetime gift tax exemption in conjunction with the estate tax exemption, as they are often linked under the unified tax credit system.

Family Limited Partnerships (FLPs) and LLCs: Reducing Estate Value

Creating a Family Limited Partnership (FLP) or a Family Limited Liability Company (LLC) can be an effective way to lower the value of an estate for tax purposes. These entities allow you to transfer business interests or other assets to family members at a reduced tax cost. The value of the transferred interest can often be discounted for lack of marketability and minority interest, further decreasing the taxable estate.

Irrevocable Life Insurance Trusts (ILITs): Securing Liquidity Outside the Estate

An ILIT is a trust designed to exclude life insurance proceeds from the taxable estate. The trust becomes the owner and beneficiary of the life insurance policy. Upon the grantor’s death, the trust receives the insurance proceeds, which can then be used to provide liquidity for estate taxes, debts, and other expenses without increasing the taxable estate.

Grantor Retained Annuity Trusts (GRATs): Transferring Appreciated Assets

A GRAT is a financial tool used to transfer appreciated assets out of an individual’s estate at a reduced tax cost. The grantor transfers assets to the GRAT and retains the right to receive an annuity for a term of years. After the term, the remaining assets pass to the beneficiaries. The key benefit is that the appreciation of the assets over the annuity payments can be passed on tax-free.

Charitable Lead Annuity Trusts (CLATs): Combining Philanthropy with Tax Planning

CLATs allow individuals to make significant charitable contributions while also transferring assets to heirs with little or no gift and estate tax. The trust makes annual payments to a charity for a set period, after which the remaining assets pass to non-charitable beneficiaries. This strategy provides a charitable deduction and removes the asset’s appreciation from the estate.

Dynasty Trusts: Extending Wealth Across Generations

A Dynasty Trust is designed to hold assets for multiple generations while avoiding estate taxes at each generational transfer. These trusts can be structured to provide for descendants while keeping the assets within the trust and outside of each beneficiary’s taxable estate.

Conclusion: Proactive and Strategic Planning is Key

With the impending reduction in the federal estate tax exemption, it’s critical for individuals with estates over $6 million to act now. Employing strategies like lifetime gifting, FLPs/LLCs, ILITs, GRATs, CLATs, and Dynasty Trusts can significantly mitigate the impact of higher estate taxes. Each individual’s situation is unique, and these strategies should be tailored to fit specific needs and goals.

Given the complexity of estate tax laws and the nuances of each technique, consulting with estate planning professionals is crucial. A well-crafted plan will not only leverage the current favorable tax environment but will also establish a flexible framework that can adapt to future changes, ensuring the preservation and smooth transfer of wealth to future generations.