“Good fortune is what happens when opportunity meets with planning.” – Thomas Edison

Congratulations…To the well-guided, well-informed and well-planned families who have utilized their full lifetime estate tax exemptions, known more formally as their Gift, Estate and Generation-Skipping Transfer (GST) tax exemptions.

You have skewed the bell curve for many affluent families seeking to protect their generational wealth.

You understand that the alpha of outperforming the market, owning other appreciating assets or having a successful business can pale in comparison to the 40% haircut your wealth will suffer when it passes to your heirs.

As you certainly know, however, assets remaining in your taxable estate will continue to appreciate, as will your liability to the IRS. While there will likely be several more years of inflation increases in tax exemptions, your future wealth and tax planning must evolve and become more strategic and diligent than ever.

This article summarizes several broad techniques that are highly impactful for the well-planned family, to provide inspiration and vision that you can still fight the good fight to protect your generational wealth, even with little or no remaining lifetime tax exemptions.

ESTATE FREEZING TECHNIQUES
Estate freezing strategies are designed to guard your future appreciation from the estate and GST tax. These strategies can involve one or more of a variety of gifts, sales, annuities and lending transactions.

1. Gifts and Sales to Capitalized Spousal Lifetime Access Trusts (SLATs) and other Family Trusts
   Many families utilized their full lifetime exemptions to gift assets to a SLAT or other variations of an Irrevocable Grantor Trust. Families still have this same opportunity prior to the anticipated sunset of current laws in December 2025, upon which the exemptions are slated to be essentially cut in half.¹

   These families now have an ideal opportunity to sell additional appreciating assets to their funded trusts, in return for non-appreciating promissory notes that can carry the low Applicable Federal Rate (AFR). When properly structured, capital gains are not recognized in this type of sale.

   For further information on this and other benefits of a capitalized family trust, see “Doing Business with Your Family SLATs”, Oxford e.Insights, April 6 2022.

2. Squeezing the Value of the Remaining Taxable Estate with Valuation Discounts
   Utilization of these gift and/or sale techniques can be further enhanced by taking full advantage of valuation discounts to maximize the number of shares or units of the entity being transferred to the trust, while minimizing the corresponding “purchase price” owed back to the Grantor. The most common types of valuation discounts used in these strategies are discounts for lack of marketability and lack of control. Not only does appreciation of the entity continue outside of the Grantor’s taxable estate, but there is also an immediate net benefit to the trust, which now owns an asset worth more than its corresponding liability.
3. The Tax Burn
   These types of trusts provide another significant benefit. While most gifts utilize either lifetime exemption or annual gift tax exclusion, these trusts enable the grantor to pay taxes on behalf of the trust, thereby preserving the value of trust assets. These tax-free gifts to future generations are known as the tax burn.
4. Zeroed-out Gifts: The Grantor Retained Annuity Trust (GRAT) and Charitable Lead Annuity Trust (CLAT)
   Both GRATs and CLATs are designed to redirect future appreciation from the grantor’s taxable estate to a remainder beneficiary, typically a children’s or descendant’s trust. With a GRAT, the lead annuity beneficiary is the grantor for the term of the GRAT.² With a CLAT, it is a qualified charity.³

   With both, however, the remainder interest is considered a taxable gift, potentially subject to gift tax. This ‘gift’, however, can be reduced to zero by predetermining the lead beneficiary’s annuity payments so that the present value equals (and thereby ‘zeroes-out’) the value of the remainder gift.

STRATEGIES TO ENSURE FULL USE OF EACH EXEMPTION

1. I Love You, May I Have Your Exemption?
   Let’s talk about your options if you have utilized all of your gift and estate exemption, but your spouse has not and has significant assets in his/her taxable estate. In that scenario, there is opportunity to minimize your family’s potential estate tax liability by taking advantage of strategies for your spouse to use his/her remaining exemption. There are a number of approaches that could be implemented to achieve this goal, but a very common strategy for families in this situation is for the spouse who has not exhausted his/her exemption (“Spouse 1”) to create a SLAT for the other spouse’s (“Spouse 2”) benefit and fully fund it to the extent of his/her remaining exemption. This would remove the assets from Spouse 1’s estate (potentially at a discounted rate), while still allowing Spouse 2 to access the income or principal of the trust if needed. Remember, the gift and estate exemption, GST exemption and annual exclusion limits are applied per person, so it is important to always be sure to exhaust all of these exemptions and exclusions to the extent possible for both spouses.
2. Making Taxable Gifts to Use Remaining GST Tax Exemption – The Math Works
   Some family members may find they have remaining GST exemption, but no remaining gift exemption to pair with it. They might consider paying gift tax to fund a dynastic trust in order to fully utilize GST exemption, particularly before the December 2025 sunset.

   The math works…Gift tax is a one-time 40% tax, whereas GST exemption will provide estate tax savings for multiple generations, more than making up for the gift tax cost. Further, gift tax is ‘estate exclusive,’ because these tax dollars are removed from the taxable estate. If GST is applied at death, the tax is inclusive in the estate, resulting in a tax on the tax. Lastly, there is no portability for GST tax exemption, making it more precarious whether both spouse’s exemption will ever be fully utilized.

OUR NEXT STEPS AND YOURS
Each year we will present a series of articles on strategies for the ‘well-planned’ family, covering additional topics such as Domestic Asset Protection Trusts (DAPTs) to safeguard wealth, optimizing the annual gift tax exclusion, strategies to save state income tax and crafting an efficient plan to pay any remaining estate tax.

In the meantime, your Oxford team of advisors wish you and yours a very happy and healthy holiday season, and stand ready to consult with you on these topics and all of your wealth planning considerations.

¹The Gift and Generation-Skipping Transfer (GST) tax exemptions were $12,920,000 in 2023 and are set to increase to $13,610,000 in 2024.
²The Grantor must survive the term of the GRAT or all assets will come back into the Grantor’s taxable estate.
³With a CLAT, the Grantor is eligible for an upfront charitable deduction for the present value of the charity’s annuity interest.

Oxford Financial Group, Ltd. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Oxford Financial Group’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal or investment advice. Tax and legal counsel should be engaged before taking any action. OFG-2404-65