By Stephanie P. Kalogredis, Esquire

With the U.S. election almost upon us, we should be aware that numerous federal estate and gift tax policies may change under a new administration. While we cannot predict election results or future tax law changes, you can plan now and take advantage of the current tax laws. Opportunities overlooked today could have a lasting impact on your estate plan.

Under current estate tax law (the Tax Cuts and Jobs Act of 2017), the unified federal estate and gift tax exemption is at an historic high. The current estate and gift tax exemption allows an individual to give away during his or her lifetime, up to $11,580,000 and a married couple to give away up to $23,160,000 without paying any federal gift tax. Transfers above the FET Exemption are taxed at a flat 40%. At death, an individual’s unused FET Exemption can be applied to transfers at death or, with minor planning, transferred to a surviving spouse to be used upon the spouse’s death.

Many people have become complacent with their estate tax planning because they believe their estates will fall within the federal estate and gift tax exemption. But it is important to remember that these exemptions are due to expire by the end of 2025 and return to the pre-2017 exemption amounts ($5,000,000 per individual and $10,000,000 for a couple, adjusted for inflation) unless extended or repealed by legislation enacted prior to that time.

There is also an additional tax on wealth transfer, known as the Generation Skipping Transfer tax. This is in addition to and on top of the federal estate and gift tax. It taxes transfers to grandchildren and other individuals who are at least 37½ years younger than the donor. It, too, has an exemption which is currently the same as the FET Exemption, although this has not always been the case. Transfers above the GST exemption are taxed at a flat 40 percent (additional). While not applicable to most people, it is something to be aware of.

In November 2018, the IRS fortunately provided some guidance clarifying that individuals who take advantage of the current gift tax exclusion will not be adversely impacted in the future if the exemptions return to the pre-2017 level or are otherwise reduced. This gives us the opportunity to “lock in” the benefit of the current exemption amounts without penalty. But this kind of planning is not for everyone. You will need to give up the use of, access to and control over anything you give away and the amount has to be in excess of the future (reduced) exemption.

While it is always important to review your estate plans, it is even more important now. There are many estate planning opportunities that, while currently available, may be eliminated and lost if you wait too long.

Some planning opportunities to consider are:

• Annual Exclusion Gift: Most people are familiar with the federal “annual tax free” gift.  Each individual has an annual gift tax exclusion of $15,000, that allows him or her to give up to $15,000 to as many people as he or she chooses without reducing his or her Federal Exemption (gifts above this amount reduce your remaining Federal Exemption). Married individuals can pool their annual free gift and double the annual tax-free gift. While outright gifts are the norm, there are other ways to utilize and maximize the effect of your annual tax-free gift.
• Dynasty Trust: A Dynasty Trust is a long-term irrevocable trust that allows you to pass wealth for multiple generations for as long as the funds stay in the trust. By allocating your current estate and gift tax exemption and your Generation Skipping Transfer Tax Exemption to a Dynasty Trust, the funds transferred to the trust (up to your exemption) along with all of the appreciation, will be available to your beneficiaries without having to pay estate or generation skipping transfer tax at each generation.
• Family Limited Partnerships: A family limited partnership (FLP) is a business that is owned by two or more family members and allows the family to share in the potential profits of the business venture. Often parents will establish a FLP and utilize their annual tax free gift and/or Federal Exemption when gifting limited partnership interests to their children, either outright or in trust. This allows future interest, dividends, profits and growth in the value of the gifted assets to be removed from the parents’ estate and shifted to the children without being considered an additional gift.
• GRATs and SLATs: Not everyone is comfortable with making sizable gifts without retaining something for themselves. To address this concern, we help our clients create GRATs (grantor retained annuity trusts), and SLATs (spousal limited access trusts). A GRAT is an irrevocable trust that pays the Grantor a predefined annuity each year for a set period of time.  After the specified time, the beneficiaries of the trust (but not the grantor) receives the assets, either outright or it is held in further trust for their benefit. For married couples who want take advantage of the current Federal Exemption but are not sure they want to or can give away so much wealth, a SLAT may be the answer. One spouse, the Grantor, gifts money to an irrevocable trust for the benefit of the other spouse (and if desired, their children) allocating Federal Exemption to the amount transferred. Depending on the terms of the SLAT, the beneficiary spouse can receive the income and/or principal from the SLAT. Any amount not distributed to the beneficiary spouse will be available to the other beneficiaries previously identified by the Grantor spouse, free from further federal estate tax.

We don’t have a crystal ball and can’t project the future of the federal estate, gift or generation skipping transfer tax laws. What I, and the other estate planning lawyers at Lamb McErlane, can do is help our clients plan for an unpredictable future. The time for planning is now.

For more information or to discuss your estate planning needs, please contact Stephanie P. Kalogredis at Lamb McErlane PC.

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ABOUT THE AUTHOR

Stephanie P. Kalogredis concentrates her practice in estate planning and estate and trust administration and wealth transfer and succession planning. She assists her clients in finding personalized solutions to meet their estate planning goals through the use of wills, trusts, gifting, and legal agreements, and when the time comes, she helps settle estates and administer trusts. Contact her at skalogredis@lambmcerlane.com or 610-701-4433. www.lambmcerlane.com.

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