The end of one’s life is never easy to talk about. However, many clients may not have an optimal plan to ensure their assets pass efficiently when they are gone. Outside of basic wills and POAs, many higher-net-worth families can take advantage of the higher estate tax exemption from the Tax Cuts and Jobs Act (TCJA). This current law is set to expire at the end of 2025.

The estate and gift limits are unified, meaning that gifting above the annual exemption amount ($18,000) counts towards the limit, as do certain assets passed to heirs at death. Before the passing of the TCJA, the lifetime exemption for estates and lifetime gifting went from 5.49 million to $11.18 million and currently sits at $13.61 million in 2024. That is the amount per person. Remember that for a married couple, each spouse gets a $13.61 million lifetime exemption, and any unused amount is portable to the surviving spouse, meaning if a spouse dies and has not used any of their lifetime exemption amounts, the surviving spouse's exemption amount would double to $27.22 million in 2024. Below are a few estate planning strategies you can utilize to help higher-net-worth families transfer their wealth more efficiently.

Yearly gifting up to or under the annual exemption amount ($18,000 per individual) does not count as a taxable gift or towards the lifetime exemption limit. Individuals can make gifts up to $18,000 to as many people as they like. Spouses can donate $36,000 to an individual without triggering gift tax by electing gift splitting. This process is done by filing Form 709. Note that this is an all-or-nothing election and applies to all gifts made by the couple throughout the year. Clients often think that filing a gift tax return means the gifts are subject to tax. That is not the case, assuming they have not used their lifetime exemption amount. The filing of Form 709 does not result in tax being owed; rather, it tracks how much of the lifetime exemption has been used and will only calculate the tax due if all the exemption has been used.

A spousal lifetime access trust is something to consider for those who may or will be affected by estate taxes. A spouse creates the SLAT, and the spouse's partner spouse is named the beneficiary. The donor spouse can place several types of assets into the trust to benefit the beneficiary, thereby removing those assets from the donor spouse's taxable estate. Note that assets in the trust are irrevocable gifts, and the donor spouse loses “direct” access to those assets. The receiving spouse can request distributions, and though the money is considered property of the beneficiary/receiving spouse, as a married couple, it makes sense that the donor spouse could benefit from those distributions depending on what they are used for. It is not a foolproof strategy, however. If the beneficiary spouse passes, the assets are passed to the remainder of the beneficiaries. They do not return to the donor spouse. Additionally, assets placed in the SLAT do not receive a step-up at death, meaning beneficiaries receiving highly appreciated assets could be stuck with large capital gains.

Lastly, you could consider an irrevocable life insurance trust (ILIT). The trust will purchase a life insurance policy for the grantor, and when the grantor passes, the proceeds flow into the trust and then to the trust's beneficiaries. The power of the ILIT is that the death benefit is not a part of the decedent’s taxable estate. All the premiums used to pay for the policy are effectively moved out of the taxable estate, and considering that the premiums cost less than what the death benefit ends up being, it results in a very effective transfer of wealth to the beneficiaries. This process is not a strategy unique to the higher estate exemption limits but can effectively reduce an estate pushing up against the exemption limits.

Ryan Naples is a financial planner for The Hucko Group.

This article first appeared in the 2024 Q4 Financial & Retirement Planning Section newsletter.
Editor: Greg Filbeck, CFA, FRM, CAIA, CIPM, PRM, Samuel P. Black III, Professor of Finance & Risk Management, Penn State Erie, mgf11@psu.edu