Estate Planning Strategies to Save You Millions

All right, let’s get started. Welcome everyone to our webinar on estate planning strategies to save you millions. Thank you for joining us tonight. I’m joined with Christopher Mallon and Andrew Randisi, both certified financial planners here at Pennsylvania Capital Management. And we’ll go ahead and get started. We’ve compiled a list of questions that clients have asked us, friends have asked us, conversations that we’ve had around the lunch table here at PCM. So we’ve got some questions to go over, but feel free to type any question into the chat. I think the chat is enabled, hopefully that works. If you have any trouble, let me know. The first question, guys, on our list talks about the current lifetime estate and gift tax exemption. Andrew, do you want to talk about that one?

Sure, Lesley, happy to take that first question. So first thing we want to ask is what exactly is your lifetime estate and gift tax exemption? What is it? Let’s define it. So what that means is whilst a individual is alive or when they pass away, there is a dollar figure of gifts that they’re allowed to give before it would become a taxable event. Right now that exemption is fairly high. It is $13.61 million in tax year 2024 and that gets adjusted for inflation each year. So this can be quite advantageous for individuals and more so for couples because we double that with two spouses. They can gift up to $27 million of gifts can be gifted during their lifetime or if they were to pass away.

Great. Okay. Yeah, you hear a lot of chatter on the news about the gift exemption. It gets a lot of media coverage.

Yeah. It’s typically kind of a political football, we call it a lot. It gets chopped in half. One administration, next one doubles it, stays there for a few years, gets knocked down again, raised back up. It’s one of those talking points, for sure.

Yeah. Yep. What’s set to happen in 2026?

Yeah, so just in line with that, the recent bump up in the exemption, because before it was jumped up to 13.6, but I think it was around five, five and a half, if I’m not mistaken, per person. And then they effectively doubled it back a couple years ago and then rose with inflation, like Andrew said. That is set to run out at the end of 2025, so it gets cut back down to it’ll be about $7 million a person. So reverting back to what it was at before they raised it to the higher level, which is important because for us as long-term planners, we start thinking, “Okay, is this something we should be taking advantage of while we have this larger than usual exemption?”

So you could in effect do your gifting now to take advantage of the 13 or 27 figure before it drops down to five or seven or whatever it’s going to drop down to?

Right, exactly. Yeah, so that’s kind what we’ve been doing and then estate attorneys as well. And they’re going to just get even more busy over this next year, which is kind of why we’ve been pretty adamant with our clients. If they’re thinking about it, “Hey, do I need this? Should I set up different trusts?” That we’ll talk about in a little bit. When to do it would be now because we know for certain it will at least go until the end of 2025 and then beyond that it’s kind of a maybe will it stay elevated or will it come back down?

Yeah, it’ll all depend on what the next year’s makeup of Congress will look like. If both parties have their own different talking points about the estate tax, if the Republican should take all three, House, Senate, and the presidency, they will most more than likely look to with the next Congress, the next administration will look to extend it because the Tax Cuts and Jobs Act that was passed in 2017 kind doubled the exemption for us then. That was only allowed for 10 years because they had to do it as a reconciliation bill, so they couldn’t make it permanent. They would look to either, A, make it permanent at the higher levels or kick the can another 10 more years and keeping it on the high side. We’ve known from what the Democratic Party has said, they’re looking to cut it because they want to come after the ultra high net worth individuals.

And why this is so important is right now, once you’ve run out of the exemption for federal, because our conversation is just going to be talking about federal because each state, some states have an inheritance tax, some have an estate tax, some don’t have any of the above. Anything above that exemption, that $13.6 or $27 million number, gets taxed at 40%. So that’s why it’s quite opportunistic if you are a individual or a couple in these ranges or somewhere in between. Even we were having a conversation yesterday with a client couple that is in the $7 to $10 million range and they said, “Andrew, why should we really be thinking about this?”

I said, “Well, if it does get cut in half, whether you have split Congress and they just allow it to expire because Congress can’t get anything done, it seems like they don’t get anything done nowadays anyway, your $7 to $10 million, just with earning a relatively modest rate of return, 5%, 6%, a decade from now your net worth should double. If you leave it longer than that, 10, 20, 30 years into the future it could double again or even triple. So then you’ll be in that estate tax, that 40% range, and you don’t want Uncle Sam coming to give you a 40% haircut when you could have implemented some strategies now to mitigate any federal state tax.

And how does this work? How do you actually gift that much money? Because I know that you can only gift, what is it, $18,000 to a person per year. So how do you gift millions of dollars?

Right, so how that ends up working, so the per year per person gifting is the $18,000. That’s before a gift tax return would have to be filed. Just because that is filed doesn’t necessarily mean a tax is owed at that point in time. Essentially, it starts the tally against your lifetime exemptions and the IRS is aware, okay, Chris gave his daughter $25,000 this year. He was $7,000 over the limit for the year, so that goes against the lifetime gifting exemption. So that just keeps kind of a separate tally of it so you’re not necessarily paying taxes on that. It’s actually a common one. We get a lot of clients come in and be like, “I can’t give them more than this because people have to pay taxes.” It’s not really how it works. It just kind of starts the meter running on that side of it.

Okay. So if you gift over the $18,000, that starts to tap into your lifetime technically?

If you give $18,001, that extra dollar counts towards that $13.6 million exemption per person. So what we’ll see, oftentimes we’ll go work our client couples. We’ll say, “Okay, rather than just Dad gave 25, Mom and Dad gave 25 because technically mom and dad combined can do 36.” And that’s one way you can kind of start reducing in your estate. Grandparents, we have another client couple, grandmom dishes out $18,000 a stock to every single person, children, and then it goes down to the grandchildren. So there’s like 25 people in this family tree that they just get checks for $18,000. She makes it rain money. It’s wonderful. I wish I was part of the family.

Right. It’s kind of like advanced inheritances because it’s almost you either do that or you’re looking at the 40% tax rate. And if the money’s intended to go down those lines anyway, then kind of better to get in front of it before Uncle Sam comes for that big chunk.

You can’t take it with you, so you might as well use it to benefit your children, grandchildren now and have some experiences with them. Other areas where you can kind of do gifting without having it count towards that $13 million exemption would be paying for education. If you pay the education directly to the institution, it’s an unlimited gift. So if little Bobby, cousin Susie, 18, they’re going off to college. It could be pick your college, Yale, Harvard, Princeton. $80,000, $90,000, $100,000 a year, you can unlimited gift for education so long as you pay the institution directly. That’s the caveat there. Healthcare is also another one. You could pay for healthcare.

Someone has a medical bill, needs an operation, anything like that, you can gift for healthcare expenses. Pay the healthcare organization directly, though, unlimited amount. You can pay for someone’s open heart transplant for all you want to do, if you’re that generous, but the other ways you can kind of use that exemption is there are different types of trusts that we’re going to get into. A little bit we’re into right now. One of the first ones is called, which we see a lot with our clients, is a spousal lifetime access trust. Chris, why don’t you give us a little bit of follow up detail.

Yeah, so this has been one we’ve been doing a lot the last few years and working with clients and our state attorneys to set up for them. Effectively what it does, it allows one spouse to use up their lifetime gift exemption to set up a trust, gift assets into the trust, and then the beneficiary of that trust would be their spouse. So what that does is it lets one of the spouses, and a lot of times it’s both depending on the size of the assets in the family, to use up their lifetime exemption. Spouse will still be able to have access to the funds, so effectively not a lot changes in terms of family spousal access to the money, but it gets the money out of your estate really to take advantage of the larger exemption we’re seeing right now.

So then there’s not an estate tax issue down the line as well as maintaining some sense of control and access to it. Whereas different trusts that are out there, if you’re giving it into the trust, you’re really not going to be able to receive any benefit of it. So this is kind of a good one we’ve been seeing a lot of lately that has been pretty powerful.

Yes, and then …

What would you say, what’s the asset size to make it worth your while to do one of these trusts? How big should your estate be?

I would say you want to probably, if you are having a estate upwards of $10 million, really might want to think about it.

Yeah, $10 million and then depending on your age, too, I think comes into a factor. Say you’re in your 50s and you have $10-ish million dollars of assets, then it makes a lot of sense because, like I said before, you can have 10, 15, 20, maybe 30 or 40 years of appreciation of those dollars. And it really makes sense to get some of that out of your state versus where if you have right at $10 million, you’re 105, then maybe it’s like, “Okay, might not necessarily see a lot of benefit there.” So yeah, like Andrew said, $10 million plus. So we’re talking about ultra high net worth individuals or if there’s estate, if the exemption we talked about gets knocked back down, that’ll bring a whole nother slew of people into the mix that will fall into this category.

Especially Andrew and I are on the younger side, Millennials. You hear about the great wealth transfer. Not to totally digress here, there will be people in their 30s and 40s that will be receiving a lot in inheritances that might raise them up into these levels. And they’ll be thinking, ‘Geez, I need to start planning for this because all of a sudden I have a large nest egg that I didn’t have a couple years ago.”

Yeah, I’d say let’s take an example of a couple right now. They have a net worth, we’ll bogey it at $27 million on the nose, so pretty much the entire exemption for a married couple. They both could set up with and they each have a couple children. They both could each set up a his and hers, I like to call it spousal, lifetime access trust benefiting each spouse. You could move all of your assets and you could move all of your … And it’s also, to clarify, it would be for taxable assets. So joint account, taxable brokerage account, a business, real estate. It wouldn’t be qualified retirement plans. Qualified retirement plans, it’s best to leave out of this because that way there could be some income tax complications with that, leaving it to a trust.

So you would have a client, the client couple, they would do this technique, move the $27 million in. When they would pass away, there would be essentially no federal estate tax because you’ve completely gifted it away, in theory. Let’s say that example, that client couple, they choose to not do this, the exemption cuts in half from $27 million. Now it’s about 14. Those clients pass away a few years from now or they pass away suddenly a couple years after it’s signed.

Keep the math simple.

Yeah, we have to keep the math simple. So you’re able to cover 14 with each spouse. You still have about another, we’ll call it, 10 or 15. Say they have $15 million left, that $15 million is taxed at 40%. You’re writing a $6 million check to Uncle Sam.

Yeah.

That’s how this technique can save you millions.

Yeah, and then some things here. During your lifetime wouldn’t necessarily you’re not all of a sudden going to be richer and richer. It’s really for your spouses, your kids, grandkids, great grandkids down the line because you’re talking $27 million in net worth. That should ideally be generational wealth that can be passed down, so this is a way to preserve that, to be able to pay for education, starting businesses and things like that, philanthropic endeavors down the line for future generations. So that’s kind of why this planning is important.

As well as provide the asset and credit protection that trusts for your children, grandchildren, future great grandchildren, and going all the way down the family tree. Now with the SLAT trust, there’s some other wrinkles that can kind of be built into it, one of them where you can actually inferior, say even more on estate taxes, would be an intentionally defective grantor trust. Oftentimes we see a SLAT trust be a intentionally defective grantor trust. Now, with this type of trust, you separate the estate tax from the income tax. So we’ll go back to that example, the client couple put $27 million away in their SLAT trusts. They set them up, so they’ve removed $27 million of their estate. Now, with the intentionally defective grantor trust, they’re actually still keeping the income tax portion of the bill, so the income tax bill.

Say it’s a brokerage account, it’s $27 million of stocks and bonds. You’re going to have interest dividends and such and such. Mom and Dad are going to pay the income tax on their personal income tax returns. Personal [inaudible 00:16:49].

Versus the trust angle, right?

Exactly, versus having the trust, because trusts have more truncated income tax brackets. That income, that 37% kicks in once the income gets over $13,000. But for married filing couple jointly, it’s several hundred thousand dollars before you hit the 37% marginal bracket. That’s another way Mom and Dad paying the tax, or in this will be Grandma and Grandpa paying the tax, if they did this technique, they’re paying the tax on would be your future inheritance right now, an additional tax-free gift.

Right. Yeah, because then if it’s in the trust, too, which we talk about this with some clients if we are selling trust assets, a lot of times, again, it’s going to be low basis, so there’s a lot of unrealized gains in there. So you’re effectively sometimes creating a tax snowball, we’ll call it. So you’re using unrealized gains. You have to realize gains to pay the last tax bill, realizing more gains, then pay the next tax bill, and you’re kind of creating this feedback loop that isn’t necessarily ideal for the trust to keep growing. Whereas again, if there’s earned income outside that, it’s like, “Okay, we’ll pay the tax bill that’s due over here.” Again, especially because of the tax rates because that’s a significant difference between individuals and what a trust pays.

Makes sense.

Yeah, one other thing that happens with the defective grantor trust and SLATs is the ability to swap things, so this happens sometimes where you’re able to swap nonappreciated assets to the trust for appreciated assets. So in an example, so with the downside of giving things into a trust is the basis goes with it. So say you paid $1,000 or $10,000 for Apple stock when it IPOed, now it’s millions and millions of dollars. That $10,000 is your basis, so it’s pretty much all game you’ve gifted into the trust. That basis doesn’t step up upon your passing. It stays in there. So then you sell any Apple, you owe a lot of taxes. But let’s say there’s another windfall of cash outside of there, you’d be able to swap those into the trust, take the Apple stock back out. It steps up in basis upon your passing. Therefore, you’re not going to have to pay unrealized capital gains or realized capital gains taxes when you were to sell the assets inside the trust. So that’s an effective way to, again, just save money on taxes for you and the family.

By swapping the assets in and out of the trust?

Right. Essentially, yeah, because if it stays in the trust, the tax basis doesn’t again rise up after you pass away. I pass away, the assets are in my name, basis steps up, my kids sell the next day, then there’s going to be effectively no taxes due on that. However, if it’s inside the trust, it doesn’t matter when I pass away. That basis is staying the same and doesn’t step up inside the trust. It just stays in there. So then if assets need to be sold in there to pay for things, then you’re always going to be paying those big capital gains taxes.

Got it. Okay, that makes sense. How about another kind of trust here that you guys were talking about for real estate?

The next one, this is also another one we see, especially for our clients that like to live in the more, we’ll call it, glamorous areas with all the muckety mucks, so the Hamptons, West Palm beach, you have a house down on one of the shore points, or you’re in California with all the Hollywood celebs. The qualified personal resident trust, or a QPRT as we like to call it, with this type of trust, what you do, you take the property, you put it in trust, and you freeze it at its value, especially if you feel you’re in an area where you think it’s going to continue to highly, rapidly appreciate, like those couple areas I mentioned before. Mom and Dad, Grandma and Grandpa, they’ll still get to live in the property for usually a period of time. Typically, it’s 10 to 20 years.

And then once that period of time expires, it’s been removed from their estate and all the appreciation for the beneficiaries, whether that be kids, grandkids and such. Now, you might ask the question, what happens if I don’t die inside that 10 or 20 year period? Rats, you think I’m foiled.

No.

What can you can do, you can pay your kids rent. They own the house now. You pay them rent, you are reducing your estate by paying them rent. Another way you’re reducing your taxable estate.

What happens if you pass away during the term?

Then it becomes a mess and it has to get unwound. So what happens is after a portion of the appreciation while you were alive, a portion goes back into your estate. That’s why with that timeline, you have to be pretty on target with the timeline to make sure you’re going to still not pass away inside that timeline. So if you have a terminal illness, anything like that, or don’t get hit by a bus the day after you do this and it all goes to hell in a hand basket.

There’s pros and cons to all these things.

Exactly. Yeah.

And again, just to reiterate what you said at the beginning, this is all probably for clients with $10 million plus, all these strategies.

Yeah, I’d say the QPRT could be a little bit lower, but if you’re … Yeah, that’s more so that would be helpful. Say it’s $10 million, it could be an $8 million property and there’s not a lot of liquid things that would kind of push you in that realm. Yeah, I think it’s still kind of the same range.

Same ballpark, okay.

Yeah, which is one thing I think that a lot of people we talk to sometimes can almost overthink estate planning. If they’re not necessarily in that $8 million plus range, I think there’s a lot of tricks and techniques to be done. Outside of those levels, there’s things that can be done that can make things easier, like avoiding probate and fees associated with that. But in terms of necessarily saving a lot of money in estate tax dollars, that would be more so at the state level when you get to lower net worths because the federal level interest just right now is just at such a significant level. Again, if you’re in those ranges, then it’s very important to have the planning done correctly because 40% on millions and millions of dollars is going to be millions and millions of dollars that could pass down to future generations.

Why write a check? Why write a check when you don’t have to?

Right. Yeah. Now, that stuff is expensive upfront and we’ve seen state attorney bills for these be not insignificant by any means, but …

Five to six vendors if you do it the right way.

Right. So it’ll cost you a lot, but then long-term save you. Can save you tons.

You have to weigh the pros and the cons. Do I pay a $50,000 to $100,000 estate tax bill now to save, in that example I mentioned before, a $6 plus million of federal estate tax?

Right. And one other important consideration where we’ve seen this sometimes is before a lot of this stuff is done, especially if the money is new, make sure you have an idea of what your spending is going to be, in the next few years at the very least, because this does limit some access. Even in the spousal limited, the spousal trust where you have quite a bit of access to them via loans and all these intricate things you can do, it’s not set up to be a perfect piggy bank where you can go and just write checks out of 24/7. It’s little bit more of it becomes a little bit cumbersome. So say it’s like, okay, I’ve inherited all these assets, now I can do my own estate planning. You can kind of get yourself in a mess if all of a sudden I need $5 million, I’m buying a house here.

I need $3 million, we’re doing this. We’re going on these vacations and then college is coming up and, okay, we want another real estate venture over here. And you can kind of bury yourself in like, “Geez, why do we set all these up?” Because I actually want to spend this money that we’ve accumulated or our family’s accumulated over time. So that’s another really important consideration. You don’t want to lock yourself up in things that are kind of a pain to get out of. And then that five figure sum to an estate attorney might be wasted, so it’s important to consider that as well.

Makes sense. Well, let me ask our participants if they have any questions. Feel free to type them in the chat or the Q&A. I had one question that I wanted to throw to you guys. What changes if you have a business, if you’re a business owner, do the trusts still apply? Do you have to rethink this?

Most definitely. We’ve seen clients put their entire business in a spousal limited access trust. We’ve also seen clients put them in, they would be, family limited partnerships. That’s another technique where if you want to do a succession planning, push the business on down the kids now and grandkids, that allows you to put in this illiquid asset, your business, and the IRS allows different discount rates. Some examples would be marketability. It’s an illiquid family business. I can’t go sell it at nine o’clock on the New York Stock Exchange. Others would be there’s lack of control. So long as I’m the GP, I make all the decisions, whether I have 1% or 100% of all the limited partnership holders. They can yell, hammer, or cry as much as they want. I’m in charge. That’s also a discount. When you apply all these discounts, you could take a several million dollar asset and shrink it its value for estate tax purposes and make it worth less to pass down the future errors.

So you’re just using up less of your gift tax, your lifetime exemptions. Say the business on paper, if you were to sell it to somebody, they would pay 10 for it, but if you want to keep it in the family you can, say, gift it to the family limited partnership and then would be $7 million, $8,000,005. Can use those different discount rates with the attorney to determine how much would actually get taken against your lifetime exemption.

Yeah, we’ll often see that a lot with clients that have a family owned business or there is a lot of, I’ll call it, investment real estate, whether that be multifamily homes, commercial real estate. That would be another way of passing it down. It might be you might’ve burned up all the exemption because in the case if you burn up your 13.6 or a couple, 27, that’s the next kind of technique to go to. Or you can also there’s some advantages with life insurance that you can do, such as an ILIT, which is an irrevocable life insurance trust. That’s one way where, say you’ve used your entire exemption, you can purchase a policy. Usually it’s, if it’s a couple, it’ll be a second to die policy, so the death benefit will pop when the surviving spouse passes away.

It will be put in its own separate trust outside of your estate. The trust owns the policy. The trust is the beneficiary of the policy and you, the grantors, are gifting each year the annual premium to fund it. So when that second spouse passes away, say, example, it’s a $5 million ILIT, this trust will have $5 million with no estate tax consequences. And what that will do is that will kind reimburse your beneficiaries in the event if you had the right as a $6 million check because your estate was well over. You’re getting reimbursed five million bucks back from the life insurance. That’s one way you can kind of mitigate. If you have to write a check to Uncle Sam long, long into the future, an irrevocable life insurance trust can be a potential solution for you.

Then there’s one last trust that we’re also often forgetting about, which would be the dynasty trust. That actually can be incorporated into a lot of the other trusts we mentioned, the SLAT, the defective grantor, because there actually is a second tax for the government. There is what’s the generation skipping tax. There’s actually two different exemptions running right now at the same time that are $13.6 million. One’s the federal state tax, the other is the generation skipping tax. If grandpa wants to gift money, if he wants to skip a generation, he doesn’t like his son for whatever reason, that he gets up that day, I want to give to my grandson, he wants to give his grandson money. We’ve skipped a generation. That goes against the federal estate tax and the generation skipping tax if I want to gift him $13.6 million in a trust.

So oftentimes what we’ll see is these SLAT trusts will use both. You’ll be gifting both, so it essentially becomes a dynasty trust. So it stays outside of the estate and just goes from generation to generation to generation to generation. Never comes back in your future child, grandchild, great grandchild’s estate. It’s the type of planning that you’ll see from the billionaires like think Rockefellers, Jeff Bezos. Those are the type of trusts you’ll want to do. That way you don’t have to worry about it. It can just grow for perpetuity.

Well said.

That was good. I think we’ll wrap up there. Thank you both for this informative discussion on trusts and estate planning and saving millions on estate taxes. Very helpful. To our participants, thank you for joining us. If you have any questions, we’re happy to help about estate planning or any really financial planning or investment topic. Feel free to reach out. We are here to help and thanks again.

And I think there’ll be a recording, too, right? We’ll send out [inaudible 00:32:11]

Yep. There’s a recording of this that we will send out. Absolutely. Yep. We’ll see you next time. Thanks, everybody.

Thanks.

Bye-bye now.

Good night.