Jacqueline Yu has extensive experience helping clients create an array of comprehensive, personalized wealth and legacy plans, no matter the circumstance.

    Practice Area Highlight:

    • International estate planning, including planning for foreign persons who have U.S. situs assets and planning for families with mixed citizenship and residency status and/or ownership of assets in multiple jurisdictions.
    • Planning for LGBTQ couples, blended families, and other non-traditional families.

    Jacqueline Yu will help you and your partners craft a plan that effectively protects your business now and ensures an orderly transition in the future.

    Practice Area Highlight:

    • Implemented transfer of minority interests in a family-owned limited liability company valued at $40 million using strategies to minimize tax consequences.
    • Designed a trust to help a business executive transfer $10 million in shares of his company to children, without incurring estate or gift taxes.

    Administering an estate is a complicated, time-intensive process. There are many pitfalls to avoid. Jacqueline helps clients navigate estate administration—with a focus on efficiency, clarity, and legal protection.

    Practice Area Highlight:

    • Ms. Yu has unique experience advising trustees and personal representatives with complex international estates.
    • Ms. Yu emphasizes the minimization of risk and conflict between trustees, beneficiaries, and grantors.

    Jacqueline D. Yu provides Southern California-based estate planning services with an international focus.

    Some regions in which we have worked:

    • Singapore
    • Philippines
    • United Kingdom
    • Canada
Close Menu x

Use It or Lose It: It’s Time to Maximize on Your Estate and Gift Tax Exemption

May 16, 2021 - Legacy Planning

SLAT and IDGT approaches to estate tax exemption

With potential risks of retroactive application of any changes in the tax laws, including a reduction of the currently $11.7 million unified gift and estate tax exemption, affluent individuals who have not already fully used their exemption may wish to implement lifetime gifting strategies, such as SLAT and IDGT, sooner than later. 

While nothing definitive has yet emerged from Washington, the Biden Administration’s tax plan would cut the federal estate, gift and generation-skipping transfer (GST) tax exemptions from $11.7 million per individual ($23.4 million per married couple) to $3.5 million per individual ($7 million per married couple). Additionally, the tax plan would potentially drop the federal gift tax exemption to as low as $1 million per individual ($2 million per married couple), without inflation adjustments; increase the federal estate and gift tax rate from 40% to 45%; and eliminate the step-up in basis for inherited assets. 

Another cause for concern is whether these changes to the federal estate, gift and GST tax regime would be retroactively applied. Given that that there are several public policy initiatives prioritized by the Biden Administration on its agenda ahead of tax law changes, it is more likely that these changes would be retroactively applied to January 1, 2022, instead of January 1, 2021. 

How to Protect Your Estate from New and Potentially Significant Taxes

Fortunately, the following are some of the strategies that can be implemented now before tax law changes go into effect that can protect your estate against incurring significant estate, gift and GST taxes by maximizing on the currently available $11.7 million exemption. 

About Spousal Lifetime Access Trusts (SLAT)

A Spousal Lifetime Access Trust (“SLAT”) is a lifetime gift from one spouse (“donor”) to an irrevocable trust for the benefit of the donor’s spouse. Because assets transferred to a SLAT (as well as any appreciation on them) will be removed from the donor’s estate, they will not be subject to estate tax when the donor dies. The donor maximizes his or her gift tax exemption by making a lifetime gift to the SLAT, and the donor’s spouse is named as the current beneficiary of the trust. Children, grandchildren, and more remote descendants also may be named as either current or remainder beneficiaries. To prevent the value of the assets transferred to the SLAT from being included in the estate of the donor’s spouse, provisions are drafted into the trust so as not to qualify the gift from the donor for the marital deduction and instead the donor’s gift tax exemption is applied to shelter the transferred assets from gift tax. Optimal candidates for the SLAT are assets that are likely to appreciate in the future.  The donor’s spouse may serve as trustee; provided, however, that the power to make distributions to the donor’s spouse is restricted by an “ascertainable standard,” which includes a beneficiary’s need for health, education, maintenance and support. Either spouse or both, and the current or future beneficiaries, may be given the power to remove and replace a trustee. For married persons, SLATs offer the opportunity to maximize the donor’s gift and estate tax exemption for shifting assets out of the donor’s estate as well as the estate of the donor’s spouse, while allowing the donor’s spouse to continue benefiting from those transferred assets. On the death of the donor’s spouse, the trust may continue for the benefit of descendants, and the donor can allocate the exemption from generation-skipping transfer tax to the SLAT, making the trust exempt from future estate tax for multiple generations. 

Learn more about SLAT estate planning

Using Intentionally Defective Grantor Trusts (IDGT) to Benefit your Descendants

Another strategy to maximize on the current high gift and estate tax exemption is making gifts and/or sales to an Intentionally Defective Grantor Trust (“IDGT”), which applies your exemption to lifetime gifts made to the trust for the benefit of your children, grandchildren and more remote descendants. An IDGT is a complete transfer of assets to a trust for estate and gift tax purposes but an incomplete or “defective” transfer for income tax purposes such that the donor (“grantor”), and not the beneficiary, is taxed on all the trust’s income, even though it is the beneficiary who is receiving the distributions from the trust.  By allocating the generation-skipping transfer tax exemption to the gifts made to the IDGT, the trust can be exempt from future estate tax for multiple generations. In the case of a sale to an IDGT of a minority interest in an entity or a fractional interest in real property, valuation discounts can be leveraged to shift more of your assets (and any future appreciation) out of your future estate without applying more of your gift tax exemption. So long as the grantor is alive and has capacity, this “grantor trust” status for income tax purposes causes the nonrecognition of capital gain on the sale. The “grantor trust” status of the trust may be “turned off” in the future by a release of certain powers held by the grantor so that the trust becomes a “nongrantor trust,” thereby shifting the income tax liability from the grantor to the beneficiaries who receive income distributions from the trust. Thanks to the grantor trust status, individuals who already have previously exhausted their gift and estate tax exemption through prior gifting may implement sales to IDGTs to remove additional assets from the estate without incurring gift tax and income tax. 

There are additional tax planning strategies that can be used before new higher taxes go into effect. It is therefore especially important to consider your options now.  To discuss these opportunities, please contact Jacqueline Yu at info@jacquelineyulaw.com or 310-313-1195.