What Strategies Address the Federal Estate Tax?

Federal estate tax
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Your planning may need to adjust to a new federal estate tax.

Most people cringe at the mention of taxes.

The exceptions would be those whose livelihoods depend on taxes like accountants, IRS agents, and other government officials.

If your employment does not find you within one of these exceptions, incomes taxes, property taxes, inheritances taxes, and estate taxes may trigger feelings of dread.

According to a recent Financial Advisor article titled “How Trusts Can Be Used To Counter Tougher Estate Taxes,” more people will likely be impacted by the federal estate tax in the near future.

The federal estate tax may apply to more people.
Owning a home and having retirement accounts could mean you will owe a federal estate tax when you die.

How so?

The current administration is likely to lower the federal estate tax exemption significantly.

In fact, it could be as low as $3 million.

Although this may not seem significant, it can prove costly for Americans with robust retirement accounts who own a home.

If the threshold is significantly lowered, then you should meet with an experienced estate planning attorney to create or revise your estate plan to account for this adjustment.

Your estate planning attorney may suggest Grantor Retained Annuity Trusts (GRATs) and Spousal Limited Access Trusts (SLATs) to account for the new federal estate tax.

What are these?

A GRAT is also an irrevocable trust.

In exchange for property transferred into the trust, the donor receives a annual fixed payment.

One could also make a sale of property to an Intentionally Defective Trust (IDGT) and receive a balloon note in exchange.

These can be helpful if interest rates are low.

A SLAT is an irrevocable trust.

One spouse funds a trust with a gift to be used for the benefit of the spouse.

A SLAT removes assets from the combined estate of the married couple while allowing for a retention of limited access.

The donor spouse is allowed to benefit indirectly from the trust as long as the couple remains married and the beneficiary spouse does not die first.

Can a SLAT be created for both spouses?


The IRS is particularly suspicious of the creation of these trusts on the same day and for the same amounts.

This triggers something known in estate planning circles as the “reciprocal trust doctrine,” which you want to avoid.

After all, they would rather collect on the federal estate tax.

Another strategy to address the federal estate tax is gifting.

In 2020 and 2021, the annual gift-tax exclusion allows for gifts of $15,000 per recipient from a single donor.

If you gift money each year with the exclusion, you can remove money from your taxable estate.

Review your estate plan regularly and updated it according to changes in life and legislation.

Doing so will ensure your plan accounts for the federal estate tax and state tax law changes.

ReferenceFinancial Advisor (April 19, 2021) “How Trusts Can Be Used To Counter Tougher Estate Taxes”

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