Estate Planning Considerations

We are once again facing uncertain times when it comes to estate planning.

Under current law, the federal estate tax exemption of $11.58 million in 2020 will be reduced to approximately $6 million per person, indexed for inflation, in 2026. The federal estate tax laws (exemption amount, tax rates, etc.) may also be changed at any time by new legislation. Here are some strategies to consider while the estate tax exemption remains high.

Gifts to intentionally defective grantor trust

Under current law, you can establish a “grantor trust” now for your children and grandchildren that is not included in your taxable estate. With a grantor trust, the existence of the trust is ignored for income tax purposes, but not for gift, estate, and generation-skipping transfer (GST) tax purposes. You, as the grantor, will report all items of income, gain, or loss on your individual income tax returns and be responsible for the taxes. These payments will further reduce the value of your gross estate and provide a considerable benefit to the beneficiaries of the trust while not being considered an additional gift. A grantor trust will also allow you to exchange highly appreciated assets in the trust with other, less appreciated assets of equal value to take advantage of the step-up in tax-cost basis that will occur at your death. The following trust strategies are often used:

Sale to grantor trust

One way to leverage your remaining gift and estate tax exemption is to sell (rather than gift) assets to grantor trusts. For example, you may use the "sale to grantor trust" technique to sell non-voting interests in a family entity (which could be discounted for lack of marketability and control).

A "sale to a grantor trust" allows you to transfer a portion of your ownership interest in the entity to the trust without triggering income tax/gain at the time of sale. The essential elements of a "sale to grantor trust'' are straightforward:

  • Form an irrevocable grantor trust so that the existence of the trust is ignored for income tax purposes, but recognized for gift, estate, and GST tax purposes.
  • Sell a portion or all your ownership interest to the trust. Because your trust may not initially have the funds necessary to purchase the ownership interest, an initial “seed gift” to the trust is often required. The sale transaction then occurs in exchange for a promissory note at the applicable federal rate.
  • Due to current market conditions as a result of the pandemic, many asset valuations have been reduced. The impact of the pandemic may also allow for enhancement to the discount for lack of marketability.

Spousal lifetime access trust (SLAT)

A SLAT is a trust designed to remove assets from your taxable estate and allow your spouse and children access to the assets. The trustee of the SLAT will have the discretion to make distributions of income and principal to your spouse and the other beneficiaries during your and/or your spouse’s lifetime. SLATs provide an opportunity to use the higher exemption amount now, as well as financial security, because your spouse continues to have access to the assets through the trust.

Irrevocable life insurance trust (ILIT)

Now might be the time to acquire life insurance, as rates may increase due to the pandemic, if you have any underlying conditions that could impact insurability. If the policy is held in an irrevocable trust, the death benefits (which are distributed income tax free) would not be included in your estate and would pass to your beneficiaries free of estate tax.

Importantly, the death benefit could be used to pay estate taxes, or to purchase illiquid assets (i.e.: family business) from your estate. This can provide your estate with the cash it needs to pay estate taxes, without having to sell the family business. An ILIT provides advantages beyond providing a tax-free death benefit. These advantages include protecting your insurance benefits from divorce, creditors, and legal action against you and your beneficiaries. Life insurance is a very complicated financial asset that needs to be designed and implemented by a sophisticated, interdisciplinary team. Not having the right team can create an expensive failure.

Family LLC as a tax-efficient investment

Creation of a limited liability company (LLC) as a vehicle to own and manage a portion of your assets can provide asset protection and provide opportunities for discounts on transfers of LLC interests. Care should be taken in structuring these entities to ensure they are not inadvertently includible in your gross estate.

Qualified personal residence trust (QPRT)

A QPRT is a trust that allows you to transfer real property (personal residence/vacation home) with significant value out of your taxable estate at a highly discounted use of your exemption. The property is placed in a trust and you retain the right to use and occupy the home rent free during the trust term. Once the term expires, you can continue to live in the home, but fair market value rent will need to be paid to the beneficiaries. This is yet another way to pass money to your children without using your lifetime exemption amounts. In general, this technique should be considered for valuable vacation or second homes rather than the grantor’s personal residence, as the payment of rent on one’s personal residence may not be desired.


Strategies that won’t use any of your lifetime exemption

Annual exemption gifting (currently $15,000 per recipient) and payments for health and tuition are still a very powerful and simple estate planning tool.

Grantor retained annuity trust

Another estate planning strategy is to establish one or more zeroed-out grantor retained annuity trusts ("GRAT"). A GRAT is a trust established during your life and is intended to terminate prior to your death. GRATs have the potential to transfer future appreciation out of your taxable estate and to your beneficiaries without using any of your gift or estate tax exemption. Thus, a GRAT is typically used to remove stock with high growth potential from the grantor's estate. There are some key differences between a GRAT and a defective trust, so proper planning is critical.

If you would like to talk through estate planning strategies, please reach out to your Rehmann advisor. You also may contact us at info@rehmann.com.


Rehmann is focused on providing practical guidance and insights to help empower organizations and individuals as we navigate through the uncertainty and complexity of this pandemic, together. Find resources and guidance at our COVID-19 Knowledge Center. Please click here to subscribe to our communications to ensure you remain up to date during these uncertain times.

Published in Tax

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