Estate and Gift Tax Update

September 2024

The increased estate tax exemptions (currently $13,610,000 per individual/$27,220,000 for a married couple) that were part of the 2017 Tax Cut and Job Act will expire on January 1, 2026 unless extended through further legislation. 

What does this mean for you? 

We have been writing in our newsletters since 2018 that the way to “lock in” the current federal estate and gift exemptions is to make gifts now so that they are “grandfathered” when the exemptions revert on January 1, 2026 (absent Congressional action) to their 2017 levels of $5,490,000 (indexed for inflation). In other words, if you gifted $5,000,000 of assets over the past years, now an individual has an additional $8,640,000 of exemption to use before January 1, 2026.  

Keep in mind one quirk of the federal estate tax law. All gifts over the annual exclusion amount ($18,000 for a single person and $36,000 for a married couple) are added back to your estate at your death. In other words, if you have an estate of $10,000,000 and you gift $5,000,000, the IRS will add back the $5,000,000 gift at death and estate tax you on $10,000,000 (less the current exemption).



So why gift? Because you are removing all of the future growth on the $5,000,000 from your estate. If you didn’t make the gift, you would be estate taxed on all of the appreciation as well.

In addition, if you make a gift prior to January 1, 2026 in an amount that it between $13,610,000 and the possible lower future estate tax exemption, you will not later be taxed on amount by which the gift exceeded the lower exemption (commonly referred to as “no clawback”). For example, if you make a gift now of $10,000,000 and the exemption decreases to $7,000,000 in 2026, you will not be taxed on the $3,000,000 by which the gift exceeded the exemption. You will have successfully passed an additional $3,000,000 of wealth to your heirs free of estate tax than you would have without the gift. 

One technique for using the increased exemption is through gifts to Spousal Limited Access Trusts (or SLATs). We discussed this in our Spring 2019 newsletter and can be found here. This has been the most popular and attractive technique for our clients due to its flexibility. It removes future appreciation from the estate while still giving the spouse access to money. In basic terms, Spouse 1 makes a gift to a trust in which Spouse 2 is the trust beneficiary. Spouse 2 has the right to receive the trust’s income (being dividends, interest, rent or K-1 profits from a business) and can have certain rights to principal. Spouse 2 will then create a reciprocal trust benefitting Spouse 1. Despite making completed gifts for estate and gift tax purposes, both spouses are still benefitting from the trust monies while both are alive – they don’t feel the pinch from making the gift.

One complication, however, in using SLATs is that these two trusts cannot be identical or implemented at the same time due to a principle called the “reciprocal trust rule”. However, if the trusts are drafted so that they are sufficiently different and are separated significantly in time, we can avoid this rule. We recommend separating the SLATs by one year, so with the federal exemptions schedule to expire in 2026, you need to act before the end of this year to implement this technique.

Grantor Retained Annuity Trusts (also called GRATs). These trusts are used in order to remove future appreciation in a short period of time, usually two years. The concept with a GRAT is to transfer assets to a trust which pays you an annuity equal to what you put into the trust plus a government interest rate (which now is approximately 4.8%). For example, if you put $1,000,000 in a 2 year GRAT, it will pay you $535,000 after year 1 and $535,000 after year 2. Then, you ask, why do this if the GRAT repays what you put in with some interest? The benefit is that any appreciation during the 2 year term in excess of the interest paid will be distributed to your heirs without having used any of your lifetime $13,610,000 estate and gift tax exemption.  

Please feel free to reach out to the estate planning partners at Danziger & Markhoff LLP, Michael Markhoff, Harris Markhoff or Christopher Miehl, with any of your questions. You can reach us at mmarkhoff@dmlawyers.com, hmarkhoff@dmlawyers.com and cmiehl@dmlawyers.com