Under today’s laws, very few American families need to worry about the 40% estate tax being applied to their loved ones’ inheritances. An individual can pass $11.58M without estate tax and a married couple just over $23M.

However, under tomorrow’s laws (tomorrow being the end of 2025), more families will need to be creative to avoid estate tax – the exemption amounts are set to drop down to approximately $6M per person ($12M for a married couple). With increasing federal deficits and historically low tax rates, most commentators do expect the estate tax to move from hitting only the top half of the 1% to hitting the affluent more broadly.

Advanced Planning Opportunities:
With asset prices down over the past couple of months, some of our higher-net worth clients are considering making irrevocable gifts to their loved ones. The IRS has confirmed that if large gifts are made (e.g. Dad and Mom gift $10M to a trust for their children) and the estate tax exemption drops, the IRS will not “claw back” the gift.

We would typically do this advanced planning in the form of an irrevocable life insurance trust (“ILIT”) or potentially with a grantor-retained annuity trust (“GRAT”). The GRAT option is extra powerful during times when asset prices are down and interest rates are low (like now).

If you’d like to discuss these opportunities further, please let us know.

Basic Planning Opportunities: For those not ready to do irrevocable planning like making large gifts or putting assets in the name of other loved ones, there are two more basic opportunities – one of which is especially powerful right now.

  1. Low Interest Family Loans:
  • Each month, the IRS publishes interest rates known as the Applicable Federal Rate (“AFR”). Loans made between loved ones that are interest-free or have an interest rate below these amounts are considered to be gifts and subject to gift tax laws.
  • If loans between loved ones are made as bona-fide loans, in writing, with reasonable terms and a borrower and lender who complies with the term of the loans, they can be a powerful and simple estate planning tool.
  • Consider a generous mother with a net worth of $7M. She wants to help her responsible adult daughter purchase her first home. Her daughter can get a traditional loan from a bank at 3.5%. Mom can supplement the traditional bank loan with an “intra-family” loan at today’s HISTORICALLY low rates for the month of May:
    • 0-3 year loan: 0.25% interest
    • 3-9 year loan: 0.58% interest
    • 9+ year loan: 1.15% interest
  • If Mom trusts her daughter to repay the loan, Mom can receive more income than she would in a checking or many money market accounts and she can save her daughter tens of thousands of dollars in interest. We can do all of that while keeping Mom’s estate from growing over the estate tax exemption amount.
  1. Gifting
  • Each individual can give up to $15,000 per year of assets to any other individual without incurring taxes, impacting their estate tax exemption, or filling out any paperwork. For motivated clients who are consistent with this gifting over time, the effects can be powerful!
  • Consider a generous married couple with a net worth of $13M. They each gift $15,000 per year to each of their two children starting in the year 2020. Using overly simplified assumptions – little to no turnover in the portfolio and an annualized rate of return of 5%, at the end of the 10 years, the parents will have gifted $300K to each of the children and each of their children will have just under $400K. That $800K is out of the parents’ estate and not subject to a 40% tax!

We are happy to talk you through any questions on either of these simple strategies.