3 ways to maximize your estate tax exemptions before the sunset

Author: Casey Haggerty, Senior Manager, Wipfli LLP

The potential sunset of the lifetime estate and gift tax exemption has added new urgency to estate planning.

In 2017, the Tax Cut and Jobs Act doubled gifting exemptions from $5 million to $10 million, with indexing for inflation. Under the act, the eligible lifetime exemption has grown to $13.61 million, with $14 million expected in 2025.

But that number could be halved on January 1, 2026, resulting in an exemption of about $7 million per individual.

If you want to take full advantage of the increased exemptions as they exist today, the time to start planning is now. With the right strategies, you can move growth out of your estate, reduce your estate’s overall tax liability and better prepare for your beneficiaries’ futures.

Here are three strategies you can use to prepare for the estate tax exemption sunset:

Spousal lifetime access trust

A spousal lifetime access trust (SLAT) is an irrevocable trust that allows indirect access to assets while excluding them from your taxable estate. Proper planning for a SLAT can help you make the most of the current exemption before the sunset, allowing you to transfer a large amount of future growth out of your estate tax-free, while still providing your spouse access to those funds. 

There are three important considerations you may face when establishing a SLAT:

  • If both spouses want to create a SLAT, the trusts must be nonreciprocal. Each trust would need to be distinguished, either by different assets or by different rights.
  • Indirect access to the trust will be lost when the beneficiary spouse passes away. To effectively plan for a SLAT, you’ll need to be sure there will be sufficient assets left for the surviving spouse without it.
  • Divorce can create significant complications for a SLAT, so be sure to address a possible separation when creating the trust document.

Intentionally defective grantor trust

An intentionally defective grantor trust (IDGT) allows a transfer of assets to be effective for estate tax purposes without affecting income tax treatment.

With an IDGT, you can transfer wealth out of your estate through gift or sale. A sale effectively freezes the value of the transferred assets without impacting your exemption.

Using an IDGT also gives you double benefits for your planning: 

  • Growth of value in the IDGT is higher since the assets don’t have to be decreased by income tax every year from the trust side. And to the extent that those assets grow in value, that growth remains outside of your estate.
  • An IDGT also allows you to reduce your remaining estate via an income tax “burn.” As the grantor, you would be responsible for paying income tax on the trust itself out of assets includable in your taxable estate.

To maximize this strategy, it’s crucial to watch your cash flow.

Don’t underestimate the potential tax liability you’ll face when paying tax on income earned by the trust. During planning, make sure you’ll have the liquidity you need available.

Irrevocable life insurance trust

An irrevocable life insurance trust (ILIT) can help you manage your life insurance policies and allocate benefits.

While it’s not an effective vehicle for moving growth out of your estate, it can help you avoid the potential estate tax consequences of owning life insurance policies directly. The ILIT is separate from your estate and, therefore, not subject to estate tax when it pays out.

An ILIT also gives you more control over your policy’s proceeds, as the terms of the trust allow you to dictate how the benefits will be distributed.

The primary consideration for these trusts is that they require a long-term funding plan for how you’ll pay the premiums. Typically, these trusts are paired with an annual gifting strategy, allowing you to take advantage of the annual gift exemptions while draining your taxable estate. However, you’ll need to make sure that the annual gift tax exemption per beneficiary is sufficient to cover the premium or else you could potentially be making annual taxable gifts that reduce your remaining exemption.

How Wipfli can help

Wipfli’s estate planning team is ready to help you establish a lasting financial legacy. Our experienced professionals don’t just provide strategies — we take the time to understand the unique needs of your estate, applying proven tools and the latest knowledge of regulations to help you achieve your vision of the future.

Contact us to learn more about how we can help you secure your legacy.

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