Estate Planning Business Succession
The federal per person lifetime estate and gift tax exemption is now $12,060,000. This is the highest the exemption has ever been. It sunsets at the end of 2025, when it will be reduced by half. Now is the time for estate planning preparations for 2022 and beyond, says a recent article titled “The State of Estate Planning 2022” from the New Jersey Law Journal. Here are some planning strategies to consider.
Spousal Limited Access Trust, or SLAT. This is an irrevocable trust to benefit the spouse and accomplish a few different tax and non-tax goals. The grantor removes assets from their taxable estate and places them in the SLAT, while giving their spouse access. The beneficiary spouse may use the trust assets for joint expenses, which gives the grantor-spouse indirect access to the trust assets.
Initial SLAT beneficiaries may only include the beneficiary-spouse or the beneficiary-spouse and their descendants. If created as a grantor trust, the trust income will be taxable to the grantor-spouse rather than the trust itself. SLATs may also be drafted with Crummey withdrawal powers, so transfers to it qualify for the $16,000 gift tax annual exclusion.
A downside to consider: if the beneficiary-spouse predeceases the grantor-spouse, the grantor-spouse does not have access to the assets, which will then pass to the grantor’s descendants or other beneficiaries.
Creation of an LLC to Own Property or Business Interests. A Limited Liability Company can own real property, including vacation homes or business interests in the family. This lets parents pass future appreciation to children, free of estate tax. The LLC, which can have voting and non-voting membership, is created through an agreement between family members who own the assets being contributed. The first generation transfers the assets to the LLC in exchange for 100% of the voting rights.
The voting rights are of little economic value. However, this allows the first generation to manage and control the LLC. The first generation then gifts non-voting interests to the next generation, at which point the assets and any future appreciation are removed from the first generation’s estates for estate tax purposes.
Irrevocable Trust for Single Life or Second-to-Die Life Insurance Policy. This is often referred to as a Wealth Replacement Trust. It is a life insurance policy owned by an irrevocable trust. The proceeds of the policy are typically not subject to estate taxes upon the death of the insured. The trust is designed to own a single life or a second-to-die life insurance policy, protect the proceeds upon the death of the insured and administer the proceeds for the insured’s descendants.
The Generation Skipping Trust. A GST can be used for gifts made during life or transfers occurring at death to skip persons—a person who belongs to a generation that is two or more generations below the generation of the donor. For example, a grandchild is usually the skip person to the grandparent.
The GST tax is calculated on the amount of the bequest transferred to a skip person, after subtracting any GST exemption allocated to the bequest, at the maximum gift and estate tax rates. The current GST exemption is $12,060,000. Note this credit is separate from the $12,060,000 unified gift and estate tax exemption.
Speak with an experienced estate planning attorney about these and other strategies used to achieve the family’s goals and minimize tax liability.
Reference: New Jersey Law Journal (March 18, 2022) “The State of Estate Planning 2022
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