For people with estates between $10 million and $20 million, selecting an appropriate estate planning strategy can provide substantial reductions in estate tax liability.

For individuals who have estates between $10 million and $20 million, taking advantage of the current laws could provide a substantial reduction in estate tax liability. Selection of an appropriate strategy depends on whether a person or family is looking to maintain access to the assets they are removing from their taxable estate, or whether they intend to transfer those assets to children and/or grandchildren.

Strategies that allow a person to benefit from assets and appreciation that are removed from the taxable estate:

SPOUSAL LIFETIME ACCESS TRUST (SLAT). A SLAT is an irrevocable trust set up for the benefit of a spouse that is funded by gift while the grantor-spouse is still alive. The ultimate goal is to move assets out of the grantor spouse’s name into a trust that can provide some financial assistance to a beneficiary-spouse, in a manner that shelters the property from the beneficiary spouse’s future creditors and taxable estate.

BENEFICIARY DEFECTIVE INHERITOR'S TRUST (BDIT). In short, a BDIT is an irrevocable trust that allows one to enjoy the benefits of a traditional trust without giving up control of their property. The BDIT is structured in a way that allows the beneficiary to continue managing and using assets without causing the assets to be included in his or her taxable estate.

Strategies that transfer assets and appreciation to future generations:

GRANTOR RETAINED ANNUITY TRUST (GRAT). A GRAT is an irrevocable trust that allows the grantor to freeze the value of appreciating assets and transfer the growth at a discount for federal gift tax purposes. The grantor contributes assets in the trust but retains a right to receive an annuity from the trust while earning a rate of return specified by the IRS. GRATs work best in a low-interest rate environment because the appreciation of assets over the set § 7520 rate goes to the beneficiaries, and at the end of the term, the leftover assets pass to the grantor’s designated beneficiaries with little to no tax impact.

GIFT OR SALE OF INTEREST IN FAMILY PARTNERSHIPS. Family Limited Partnerships (FLPs) allow for the transfer of assets, via partnership interest, from one generation to the next without giving up control of the property. These partnerships also have the opportunity to be transferred at a discount to net asset value, which can reduce gift and estate tax liability.

Strategies that benefit charitable interests while also benefiting grantors or heirs:

CHARITABLE LEAD TRUST. A CLT allows gifts to have immediate impact on charitable organizations during the grantor’s lifetime while providing eligibility for advantageous tax benefits for either the grantor or the grantor’s heirs. This trust works by paying a set annuity to a specified charity for a set term, and when it expires, the balance of the trust is available to the trust beneficiary. CLTs are most beneficial in a low-interest environment because a lower interest rate will reduce the taxable portion of a grantor’s gift to the remainder beneficiaries, and the assets in the CLT may appreciate at a higher rate.

CHARITABLE REMAINDER TRUST (CRT). A CRT is thought of as an inverse to a CLT. In a CRT, the grantor receives an income stream from the trust for a term of years, and a charitable organization receives the remaining assets at the end of a trust term. CRTs work best in a high-interest-rate environment because they assume the money in the CRT will grow quickly, leaving more for the charity when the income interest ends. The grantor receives an immediate income tax charitable deduction when the CRT is funded based on the present value of the estimated assets remaining after the annuity term ends.

Each of these strategies has nuances that should be examined carefully in consultation with an estate planning lawyer before being implemented. While the present opportunity for significant estate and gift tax savings is substantial, careful planning is required to ensure that each family’s objectives are supported by the wealth-transfer vehicle they employ.

While 2020 gave us a global pandemic, we should look at 2021 as the time to take proactive steps to preserve assets and advance the legacy you envision for yourself and your loved ones. If you have estate planning questions, give us a call at 253.858.5434 to set up an appointment today. We represent clients throughout Washington and Idaho and are available to meet in person, by phone, or via video conference.