At the recently concluded 53rd Annual Heckerling Institute on Estate Planning in Orlando, Fla., discussions, unsurprisingly, once again centered around the high exemptions outlined in the 2017 Tax Cuts and Jobs Act.
In light of the significant increase to the federal estate, gift and generation-skipping transfer (GST) tax exemptions under the act, individuals who wish to reduce or eliminate future estate taxes may consider maximizing their use of the increased gift tax exemption before the exemptions revert to pre-2018 levels on Jan. 1, 2026. Strategies that remain viable and attractive include dynasty (GST) trusts, spousal lifetime access trusts (SLATs), grantor retained annuity trusts (GRATs), intra-family loans and sales to intentionally defective grantor trusts (IDGT).
Dynasty (GST) Trusts
Through coordinated use of their federal gift and GST tax exemptions, individuals can create trusts with an aggregate value of up to $11.4 million ($22.8 million per married couple), which may benefit several generations of descendants while insulating the assets from gift, estate and GST taxes. These are sometimes referred to as “dynasty trusts.”
Dynasty trusts are generally structured as intentionally defective grantor trusts (IDGTs). An IDGT provides two independent planning opportunities. First, the grantor will pay the income tax on the income generated by the trust, including capital gains tax, thereby allowing the trust to grow for the grantor’s children and their issue unencumbered by the income tax, while reducing the grantor’s estate. Second, the grantor may engage in transactions with an IDGT without any income tax consequences. (See Revenue Ruling 85-13.)
Dynasty trusts may be structured to give the grantor’s spouse access to the trust as a discretionary beneficiary of trust income and principal. Such trusts can provide comfort that transferred wealth would still be available for a married couple if needed down the road and can essentially serve as a “rainy day fund” while allowing one to take maximum advantage of the new tax laws. SLATs will generally be grantor trusts for income tax purposes during the grantor’s lifetime.
My other observations about Heckerling can be found here.