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Now may be a good time to create a trust, in order to lock in the 2024 estate tax, which expires at the end of the year. The estate tax exemption is $13.6 million until the end of 2024, after which it can revert to $7 million.
As we approach the end of 2025, a significant change is on the horizon for high net worth individuals regarding the federal estate tax exemption. Currently, as of 2024, the exemption stands at a generous $13.61 million per individual, allowing for a substantial portion of an estate to be passed on to heirs without being subject to estate taxes. However, this high exemption amount is set to sunset on December 31, 2025, and in January 1, 2026, the exemption will be reduced to approximately $7 million per individual.
The Importance of Acting Now
With the federal estate tax exemption set to be slashed from $13.61 million to approximately $7 million per individual on December 31, 2025, the window of opportunity to take advantage of the higher exemption level is rapidly closing. For those with assets exceeding the new $7 million threshold, failing to act before the end of 2025 could result in a significant estate tax liability for their heirs, as well as potential gift tax implications for future transfers.
The potential estate tax consequences of the exemption reduction cannot be overstated. Consider an individual with an estate valued at $15 million. Under the current $13.61 million exemption, their heirs would only be responsible for paying estate taxes on the remaining $1.39 million. However, after the exemption is reduced to $7 million in 2026, the taxable portion of the estate would increase to $8 million, potentially resulting in millions of dollars in additional estate taxes owed.
Moreover, the impact of the exemption reduction is not limited to the initial estate value. Any future appreciation in the value of assets, such as investments, real estate, or businesses, will also be subject to estate taxes if the total estate exceeds the new $7 million threshold. This underscores the urgency of taking action now to protect not only the current value of assets but also their potential future growth.
In addition to the estate tax implications, the impending reduction in the exemption level also raises concerns regarding gift tax implications for transfers made after December 31, 2025. Gifts or transfers to an irrevocable trust in 2026 that exceed the new, lower exemption level may be subject to gift taxes, further eroding the wealth intended for heirs.
By establishing an irrevocable trust before the end of 2025, individuals can effectively shield their assets from both estate and gift taxes. Transfers made to the trust before the exemption reduction will be covered by the higher $13.61 million exemption, avoiding any potential gift tax implications for transfers beyond the new, lower exemption level.
Benefits of Establishing an Irrevocable Trust
The primary benefit of establishing an irrevocable trust before the end of 2025 is the ability to lock in the higher $13.61 million federal estate tax exemption. By transferring assets into an irrevocable trust before the exemption is reduced, individuals can effectively shelter the full value of those assets, including any future appreciation, from estate taxes.
This strategy is particularly advantageous for those with estates valued well above the new $7 million exemption level that will take effect in 2026. Without taking action, a significant portion of their wealth could be subject to estate taxes upon their passing, potentially eroding the inheritance intended for their heirs.
Another key benefit of establishing an irrevocable trust before the end of 2025 is the removal of those assets from the individual's gross estate for estate tax purposes. By transferring assets to an irrevocable trust, individuals effectively remove those assets from their taxable estate, further reducing the potential estate tax liability and preserving more of their wealth for their heirs.
Furthermore, establishing an irrevocable trust before the exemption reduction can help individuals avoid potential gift tax implications for future transfers. Gifts or transfers made to the trust before December 31, 2025, will be covered by the higher $13.61 million exemption, allowing for more flexibility in future estate planning and wealth transfers without triggering gift taxes.
In addition to these tax benefits, irrevocable trusts can provide additional advantages such as asset protection, control over the distribution of assets, and the potential to minimize income taxes. Depending on the type of trust and the specific provisions included, trusts can be structured to achieve a variety of goals and objectives, ranging from protecting assets from creditors to providing for the ongoing care and support of beneficiaries.
It's important to note that not all irrevocable trusts are created equal, and the specific benefits and implications will depend on the type of trust established and the individual's unique circumstances. For example, some trusts may require the grantor to relinquish control over the assets, while others may allow for continued access or involvement in the management of the trust assets.
Regardless of the specific trust strategy employed, the overarching benefits of establishing an irrevocable trust before the end of 2025 are the potential to significantly reduce the estate and gift tax burden for heirs, preserve a greater portion of the individual's hard-earned wealth for future generations, and provide long-term certainty and stability in estate planning.
Types of Irrevocable Trusts
There are several types of irrevocable trusts that can be employed to take advantage of the higher $13.61 million estate tax exemption before it is reduced at the end of 2025. Each trust type offers unique benefits and considerations, making it essential to work with experienced estate planning professionals to determine the most appropriate strategy for an individual's specific circumstances.
Irrevocable Life Insurance Trusts (ILITs) are a popular option for those looking to leverage the exemption amount while providing liquidity for estate taxes. In an ILIT, the grantor transfers ownership of an existing life insurance policy or establishes a new one with the trust as the owner and beneficiary. This removes the policy's death benefit from the grantor's taxable estate and allows the trust to use the proceeds to pay any estate taxes due upon the grantor's passing.
Spousal Lifetime Access Trusts (SLATs) are another effective tool for those seeking to take advantage of the higher exemption while still retaining some access to the trust assets. With a SLAT, one spouse creates an irrevocable trust for the benefit of the other spouse and potentially their descendants. The grantor spouse can benefit from the trust assets during their lifetime, while the trust assets are excluded from their taxable estate. Transfers can be made to a SLAT, without tax implications, up to the value of the spouse's remaining exemption from federal estate tax.
Grantor Retained Annuity Trusts (GRATs) are particularly useful for transferring appreciating assets to heirs at a discounted value for gift tax purposes. The grantor contributes assets to the trust and receives an annuity stream for a specified term. At the end of the term, any remaining assets in the trust pass to the beneficiaries, potentially free of gift taxes if structured properly.
Qualified Personal Residence Trusts (QPRTs) are designed specifically for transferring primary residences or vacation homes to heirs while removing the future appreciation from the grantor's taxable estate. The grantor transfers ownership of the residence to the trust but retains the right to live in the home for a specified term. At the end of the term, the residence passes to the beneficiaries, potentially at a discounted value for gift tax purposes.
In addition to these common trust types, there are other specialized trusts that may be appropriate depending on the individual's goals and assets. These include Intentionally Defective Grantor Trusts (IDGTs), Charitable Remainder Trusts (CRTs), and Dynasty Trusts, among others.
It's important to note that each type of irrevocable trust has its own set of rules, requirements, and potential drawbacks. For example, some trusts may require the grantor to relinquish control over the assets, while others may have strict term limits or generation-skipping transfer tax implications.
Choosing the right trust strategy involves carefully evaluating factors such as the types of assets to be transferred, the grantor's desired level of control and access, the intended beneficiaries, and the overall estate planning goals. Working with an experienced estate planning attorney like us is crucial to ensure that the trust is structured properly and in compliance with all applicable laws and regulations.
If you have not yet reviewed your estate plan in light of the upcoming changes, now is the time to do so. Consult with us and explore the various irrevocable trust strategies available to lock in the current $13.61 million exemption. By taking proactive steps, you can provide long-term benefits for your family and heirs, ensuring that your legacy is protected and your wishes are carried out as intended.
Our firm understands the complexities of estate planning and establishing irrevocable trusts that can help save you estate and gift taxes. Contact us today if you need assistance in estate planning. The Law Offices of Albert Goodwin can provide you with personalized guidance that can help preserve and protect your property. We are located in Midtown Manhattan in New York, NY. You can call us at 212-233-1233 or send us an email at [email protected].
About the Author
Albert Goodwin Esq. is a licenced New York attorney with over 17 years of courtroom experience. His extensive knowledge and expertise make him well-qualified to write authoritative articles on a wide range of legal topics. He can be reached at 212-233-1233 or [email protected].
