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Top Estate Planning Tools and Strategies to Consider Now

Published on by Wendy Holloway in Tax Services

Top Estate Planning Tools and Strategies to Consider Now

There’s been a recent surge in discussions regarding trusts and estates – a noteworthy topic of discussion. Last year, we had anticipated changes in the estate exemption, and proposed legislation was in the pipeline. President Biden pushed strongly for these changes, but nothing came to fruition.

The federal estate tax exemption for 2023 is $12.92 million. The estate tax exemption is adjusted annually to reflect changes in inflation every year. The current exemption was doubled under the Tax Cuts and Jobs Act (TCJA) and is set to expire after 2025 unless statutorily amended. In 2020, less than 0.1% of estates had to file an estate tax return due to exceeding the exemption amount.

It’s important to note that the federal estate tax is closely intertwined with the federal gift tax and is not exempt from the generation-skipping transfer tax. The current estate tax exemption allows individuals to pass on certain assets to their beneficiaries tax-free.

However, it’s expected to decrease to approximately $6 million by the end of 2025, which implies that estates valued above this amount may be subject to estate taxes. This reduction is crucial for those with high net worth and those concerned with estate planning.

Therefore, planning for estates that fall into this range or above is essential to anticipate this change and reduce the estate exemption by half. The good news is that we have a little over two years to prepare for this change as well as any other policy changes.

As for individuals or families who don’t anticipate having a taxable estate, practical things can still be done to manage their estate and create a smooth wealth transfer mechanism.

Have a well-written will and testament.

Having a well-written will and testament that’s up-to-date with beneficiaries and assets is crucial. This ensures that an estate management plan is in place if something were to happen.

Consider creating a revocable living trust.

Some individually titled assets must go through probate when someone passes away, which can be a costly and time-consuming process that is best avoided. All assets will escape probate by creating a revocable living trust and putting assets into the trust. The trust document outlines what will happen to the assets and who will receive them. This avoids the need for the court to oversee the distribution of assets to estate beneficiaries, thus saving time and money.

Consider the possibility of diminished capacity.

Contemplate other legal documents that would protect you in case of your diminished capacity; these would include but are not limited to a Living Will, Health Care Proxy, and Power of Attorney.

Designated transfer-on-death beneficiaries

Remembering various accounts, including checking, savings, and brokerage accounts is essential when creating your estate planning. These accounts may have designated transfer-on-death beneficiaries, such as spouses or children. By setting up these accounts as TOD, the assets will pass directly to the beneficiaries upon death, bypassing probate. These three simple yet impactful measures effectively establish a solid estate foundation, particularly when a taxable estate situation is unexpected.

Estate planning tools to consider

As you work on your estate plan, here are some tools you may want to consider:

Revocable grantor trust

A revocable grantor trust can be a valuable tool when you have a taxable estate or anticipate having one. These trusts do not create a separate taxable entity; the assets are included in your personal tax return. However, you still retain control over the trust and have beneficiary powers. When you pass away, the assets in the trust are considered part of your estate.

We often work with privately held businesses whose assets may appreciate significantly over time, so it’s essential to take the proper steps now to manage estate exclusion and protection from an estate standpoint down the road. By doing so, we can facilitate wealth transfer and ensure your assets are protected for your loved ones.

Spousal Lifetime Access Trust (SLAT)

The Spousal Lifetime Access Trust, or SLAT, is gaining popularity with attorneys and CPAs. It allows a married individual to gift up to $12 million worth of marketable securities, privately held stock, or cash to their spouse. The assets are then put into a trust for the spouse’s benefit, while the individual retains access to certain benefits.

This gift is no longer considered part of the individual’s estate and is not subject to gift tax. The trust’s assets are passed on to beneficiaries, removing them from the estate and making any future growth estate tax-free. The SLAT freezes the asset’s value, preventing continued growth that can result in an estate tax issue.

Grantor Retained Annuity Trust (GRAT)

The Grantor Retained Annuity Trust (also known as GRAT) is another effective tool for individuals and families to transfer wealth to their heirs with the least tax burden. The process involves creating an irrevocable trust and transferring assets into it. The grantor receives an annuity payment at least once a year for a specific number of years. Upon the end of the trust term, the balance is passed on to the heirs outright or transferred into another trust.

The annuity payments are calculated using the IRS Section 7520 or hurdle rates. To be successful, assets in the trust must increase in value above the hurdle rate. If any remaining assets in the trust appreciate above the hurdle rate at the end of the term, they will pass to the heirs without gift and estate taxes.

The hurdle rate changes monthly based on an IRS-prescribed rate that depends on various economic factors. The hurdle rate has been at historic lows but is now increasing. GRATs work well for marketable securities and are often used on a three- and five-year basis to remove appreciation from balance sheets. Given the recent market volatility, it’s crucial to consider the best strategy for appreciation. Currently, SLAT and GRAT are popular estate planning techniques.

Gifting

By gifting during your lifetime, you can decrease the value of your estate for tax purposes, gain greater control over how your assets are distributed and to whom, reduce the amount of taxes due on your estate, spread out the transfer of your assets over time, give money to loved ones while you’re still alive, have more freedom in choosing an executor, trustee, or guardian for your estate, plan for the future needs of your heirs without having to liquidate your assets, donate to charities that may not be eligible for certain tax exemptions and transfer assets quickly, easily, and cost-effectively. Gifts need to be well thought out due to the complexity of the applicable laws and regulations.

Finding the right wealth strategy for your needs

Wealth strategy is a crucial component in protecting your family or business, reducing taxes, and ensuring your legacy carries on.

Get in touch with us to schedule a free consultation with one of our experienced estate and trust planning professionals. We’ll collaborate with you and your attorney to develop personalized plans that can assist you in maintaining a delicate balance of control and adaptability. This way, you can shape your family’s future while accommodating their evolving requirements.


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