Advanced Estate Strategies: Tax Planning and Wealth Transfer

Beyond the Basics: Strategic Estate Planning

Advanced estate planning isn't just for the ultra-wealthy. With federal estate tax exemptions potentially changing, state estate taxes starting much lower, and wealth transfer strategies that work at any level, understanding these tools protects what you've built.

Understanding Estate and Gift Taxes

Federal Estate Tax

How it works:

• Total estate value calculated at death
• Exemption amount subtracted
• Remaining amount taxed at 40%

Current exemption (2024): $13.61 million per person Married couples: $27.22 million combined (portability)

What's included in your estate:

• Everything you own
• Life insurance death benefits (if you own the policy)
• Retirement accounts
• Your share of jointly-owned property
• Assets in revocable trusts
• Gifts made within 3 years of death (some)

State Estate Taxes

12 states + DC have estate taxes:

State taxes can be 10-20% on top of federal. If you live in a state with estate tax, planning becomes important at lower wealth levels.

Gift Tax Basics

Annual exclusion: $18,000 per person per year (2024)

• Gift up to this amount to anyone without tax implications
• Married couples: $36,000 per recipient
• Unlimited recipients

Lifetime exemption:

• Gifts above annual exclusion use your lifetime exemption
• Same exemption as estate tax ($13.61M)
• Reduces amount available at death

Gifts not subject to gift tax:

• Tuition paid directly to institution
• Medical expenses paid directly to provider
• Gifts to spouse (unlimited marital deduction)
• Gifts to charity

The Unified Credit System

Estate and gift taxes are unified:

Example:

• Lifetime exemption: $13.61 million
• Taxable gifts during life: $2 million
• Remaining exemption at death: $11.61 million

Why gift during life?

• Remove future appreciation from estate
• Use annual exclusion strategically
• Current low exemption might expire
• See beneficiaries enjoy gifts

Irrevocable Life Insurance Trust (ILIT)

The problem: Life insurance you own is included in your estate for tax purposes.

$3 million policy + $11 million estate = $14 million estate Over the exemption = estate taxes on excess

The ILIT solution:

• Create irrevocable trust
• Trust purchases life insurance (or you transfer existing policy)
• You're not the owner
• Death benefit goes to trust, not estate
• Trust distributes to beneficiaries
• No estate tax on proceeds

ILIT requirements:

• Truly irrevocable (can't undo)
• Independent trustee often recommended
• Crummey notices for gift tax exclusion
• 3-year look-back for transferred policies

Family Limited Partnerships (FLPs)

How FLPs work:

1. Create limited partnership
2. Transfer assets (real estate, investments, business)
3. You (general partner) keep 1-2%, maintain control
4. Gift/sell limited partnership interests to heirs

Why it works:

• Limited partners lack control and marketability
• Interests valued at discount (20-40% typical)
• $1 million asset might transfer as $650,000 gift

Example:

• Family business worth $5 million
• Transfer 98% limited partnership interests
• 35% discount for lack of control/marketability
• Taxable gift value: $3.19 million instead of $4.9 million
• Saves significant gift/estate tax

Grantor Retained Trusts

Grantor Retained Annuity Trust (GRAT)

How it works:

1. Transfer assets to irrevocable trust
2. Receive fixed annuity payments for term (e.g., 2 years)
3. Whatever remains goes to beneficiaries
4. If assets grow faster than IRS interest rate, excess passes tax-free

The "zeroed-out GRAT":

• Structure so taxable gift is near zero
• All appreciation above IRS rate goes to heirs tax-free
• No gift tax used, no estate tax later

Best for:

• Assets expected to appreciate significantly
• Low interest rate environment
• Wealthy individuals maximizing transfer

Risk: If you die during trust term, assets return to estate.

Qualified Personal Residence Trust (QPRT)

How it works:

1. Transfer home to irrevocable trust
2. Retain right to live there for set term
3. After term, home passes to beneficiaries
4. Gift value discounted because of retained interest

Example:

• $2 million home
• 15-year QPRT term, age 55 grantor
• Gift value might be ~$800,000
• Home passes tax-free if you survive term

Considerations:

• Must survive the term
• After term, you're technically a guest
• Often arrange lease or purchase
• Works best with homes expected to appreciate

Charitable Planning Strategies

Charitable Remainder Trust (CRT)

How it works:

1. Transfer appreciated assets to trust
2. Trust sells assets tax-free (no capital gains)
3. You receive income for life or term
4. Remainder goes to charity at death
5. Get income tax deduction upfront

Types:

• CRAT (Annuity): Fixed dollar amount annually
• CRUT (Unitrust): Percentage of trust value annually

Example:

• Transfer $1 million of stock (cost basis $100,000)
• Sell inside trust: no $180,000 capital gains tax
• 5% unitrust: ~$50,000 annual income
• Partial income tax deduction now
• Charity receives remainder at death

Great for:

• Highly appreciated assets
• People who want income
• Charitable intentions
• Converting concentrated positions

Charitable Lead Trust (CLT)

Opposite of CRT:

• Charity receives income first
• Beneficiaries receive remainder
• Reduces gift/estate taxes on transfer

Use when: You want to transfer assets to heirs but reduce transfer taxes through charitable giving first.

Donor-Advised Fund (DAF)

Simpler charitable tool:

• Contribute appreciated assets
• Immediate tax deduction
• Advise grants to charities over time
• Separation of tax benefit and giving

Estate planning uses:

• Make large contribution in high-income year
• Name successor advisors (children)
• Teach philanthropic values
• Simplify year-end giving

Dynasty Trusts

Traditional trust: Benefits end at certain generation or time Dynasty trust: Can last perpetuity (in some states)

How it works:

• Create irrevocable trust
• Fund with assets (using exemption)
• Trust provides for generations indefinitely
• Assets protected from estate taxes at each generation

Key features:

• Located in favorable state (Nevada, South Dakota, Delaware)
• Generation-skipping transfer tax exemption used
• Trustee in favorable state
• Can benefit many generations

Best for:

• Substantial wealth ($5M+)
• Long-term family legacy goals
• Asset protection concerns
• Desire to minimize taxes over generations

Generation-Skipping Transfer Tax

The problem estate planners faced: Transfer to children → estate tax Children transfer to grandchildren → estate tax again

The GST tax: Imposes tax on transfers skipping generations (direct to grandchildren or further).

GST exemption: Same as estate tax exemption ($13.61M in 2024)

Planning implications:

• Allocate GST exemption carefully
• Dynasty trusts use GST exemption
• Once exempt, assets stay exempt for generations
• Complex—requires professional planning

State-Specific Strategies

Domicile Planning

If you spend time in multiple states:

• Establish clear domicile in favorable state
• State estate taxes vary from 0% to 20%
• Income taxes also affected
• Documentation critical

Factors courts consider:

• Where you vote
• Driver's license state
• Where you spend most time
• Club memberships
• Where doctors/banks are
• State declarations

State Trust Situs

Even if you live in a taxing state:

• Create trust in favorable state
• Nevada, South Dakota, Delaware popular
• Must have trustee in that state
• Can provide:
  • No state income tax on trust
  • Better asset protection
  • Dynasty trust possibility

Asset Protection Strategies

Domestic Asset Protection Trusts (DAPTs)

Available in 19+ states:

• Self-settled trust
• You're a beneficiary but assets protected
• Must be in favorable state
• Irrevocable with waiting period

Limitations:

• Creditor must sue in trust state
• Fraudulent transfer rules apply
• Not bulletproof

Spousal Lifetime Access Trust (SLAT)

Popular current strategy:

• Create irrevocable trust for spouse
• Remove assets from your estate
• Spouse can receive distributions
• Indirect access for you (through spouse)

Use case: Lock in current high exemption while maintaining some family access.

Business Succession Planning

Buy-Sell Agreements

Types:

• Cross-purchase: Owners buy each other's shares
• Redemption: Business buys departing owner's shares
• Hybrid: Combination

Funding: Life insurance often funds buy-sell agreements

Estate planning impact:

• Sets value for estate tax purposes
• Provides liquidity to estate
• Ensures business continuity

Grantor Trusts for Business Transfer

Intentionally Defective Grantor Trust (IDGT):

1. Create irrevocable trust (estate tax purposes)
2. Grantor pays income taxes (income tax purposes)
3. Sell business interest to trust
4. Payments frozen, appreciation goes to trust
5. Grantor paying taxes = additional tax-free gift

Putting It All Together

When to Act

Urgent if:

• Estate exceeds state estate tax threshold
• Current exemption matters to your planning
• You own life insurance with significant death benefit
• Owning appreciating assets
• Health concerns

2025 planning window: Current high exemption sunsets after 2025. If exemption drops to $6-7 million, many more families face estate tax. Using current exemption through gifts or irrevocable trusts locks in benefit.

Working with Professionals

Your estate planning team:

• Estate planning attorney: Document creation, strategy design
• CPA: Tax implications, compliance
• Financial advisor: Investment of trusts, liquidity planning
• Appraiser: Business and asset valuations
• Insurance professional: Life insurance analysis

Costs vary widely based on complexity—$5,000-$50,000+ for sophisticated planning. But the tax savings often dwarf the costs.

The Bottom Line

Advanced estate planning goes far beyond wills and basic trusts. Tools like ILITs remove life insurance from estates, FLPs enable discounted transfers, GRATs freeze asset values, and charitable trusts provide income with tax benefits. Dynasty trusts protect wealth for generations, and state planning optimizes both domicile and trust location. With federal exemptions potentially decreasing after 2025 and state taxes starting much lower, proactive planning matters at wealth levels that might surprise you. Work with qualified professionals to design strategies appropriate for your situation—the complexity requires expertise, but the wealth preservation can be substantial.