Estate Planning Isn’t Just For The Elderly

Happy, smiling couple in their sixties.

Use It Or Lose It: Time Is Running Out To Avoid The Federal Estate And Gift Tax – Part Two

By Stella King, Esq.

Part One of this article from January 2024 discussed how affluent New Yorkers who do not engage in estate tax planning could find themselves paying a combined federal and NY estate tax at a rate of 49.9% if and when the current law sunsets on December 31, 2025, and the federal estate and gift tax exemption drops to approximately $7M (from the current $13.61M) per person, and if the NY exemption remains at its present $6.94M per person. Outlined below are some estate and gift tax planning options that can avoid this result:

  1. Yearly gifts to friends/family in the amount of the annual exclusion (now $18K per person) are exempt from gift tax and do not reduce your estate and gift tax exemption. A consistent pattern of gifting over time can considerably decrease the size of your taxable estate.
  2. Charitable donations are exempt from gift tax, will eliminate the gifted funds from your taxable estate, and will provide you with a charitable deduction for income tax purposes. Charitable gifts can also be made by way of a Will, Trust, or by designating a charity as beneficiary of a retirement account.
  3. A surviving spouse may combine the unused portion of their late spouse’s federal estate and gift exemption with their own by filing a federal estate and gift tax return for the deceased spouse’s estate within five years of death (even if no taxes are due) and electing “portability.”
  4. As the IRS advised no “clawback” applies to transfers made prior to the sunset date, one can make taxable gifts to children/grandchildren or others before 2026. Such gifts can be made outright to the individual or to an irrevocable trust for their benefit, so the recipient cannot access income and/or principal until they reach a certain age or, in certain cases, for life.
  5. Transferring an existing life insurance policy to an Irrevocable Life Insurance Trust (ILIT)—or purchasing a new one in the ILIT’s name—allows the death benefit to pass to one’s beneficiaries without inclusion in one’s federal estate. (If ownership of an existing policy is transferred, the insured must live three years after the transfer for the death benefit to be excludible.)
  6. The value of a principal residence or vacation home can be excluded from one’s taxable estate by gifting it to a Qualified Personal Residence Trust (QPRT) pursuant to Treasury Regulation §25.2702-5(c). The gift is subject to the transferor’s right to reside for a specified term, but if the transferor survives the term, they will have eliminated a highly appreciating asset from their taxable estate.

Choosing the right estate tax planning strategy requires careful consideration of many factors, but by exploring each one alongside your goals, an effective plan can be created to ensure that your hard-earned money remains within your family long after your demise.

Enea, Scanlan & Sirignano, LLP