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Estate Planning for Modest Estates: Practical Tools Every Planner Should Know

Jan 11, 2024

Legislative changes have dramatically increased the federal estate and gift tax exclusions (currently $13.61 million in 2024) in the past few years, changing the landscape of estate planning for all but the wealthiest taxpayers.  For many individuals, paying estate tax is no longer their main concern; income tax planning is their top priority. Mickey R. Davis and Melissa J. Willms of Davis & Willms, PLLC offered some considerations on several existing estate planning tools at the 58th Annual Heckerling Institute on Estate Planning. 

  1. Outright Gifting. Lifetime gifting is a way for a taxpayer to reduce their estate as well as share their wealth now with their family, rather than after their death. It is important to identify the best assets to gift. Making lifetime gifts can be extremely impactful when the value of the assets given is depressed (stock during a market dip or real estate in a down cycle) so that all post-gift appreciation ends up in the hands of the recipient without the imposition of gift or estate tax.  Although the basis of assets gifted have a carryover basis in the hands of the recipient and inherited assets that have appreciated as of a decedent’s date of death receive a step-up to fair market value, gifting is still more beneficial in light of the fact that the top capital gains rate is 23.8% while the estate tax rate is 40%. There is even a formula that can be used to determine how much an asset must appreciate for the estate tax savings to exceed the income tax cost of the loss of basis step-up:

    1 + [unrealized appreciation x ((income tax rate/(estate tax rate - income tax rate))/total gift]
    Using this formula at current rates, a gift of $5 million with unrealized appreciation of $1 million must appreciate by a factor of 1.29 up to $6.7 million for the estate tax savings to offset the income tax cost.

  2. Spousal Lifetime Access Trusts (SLATS). Even taxpayers with significant wealth are sometimes hesitant to part with certain assets. A SLAT allows one spouse to create an irrevocable trust of which the other spouse is a beneficiary.  Therefore, assuming the beneficiary spouse is living and willing to spend trust assets for the couple’s lifestyle, the donor spouse will indirectly benefit from the trust.  A SLAT is intended to use the lifetime exclusion of one spouse only.  If both spouses create identical SLATS, the IRS could assert the reciprocal trust doctrine which would mean that each spouse would be deemed to have created a trust themself, causing the trusts to be includible in that spouse’s respective estates.  To avoid exposure to the reciprocal trust doctrine, the presenters suggested that one spouse create a trust for the other spouse and their descendants, and the other spouse create a trust for their descendants only.  An independent party could be given the power to add the first spouse as a beneficiary to the second trust.

  3. Qualified Personal Residence Trust (QPRT). QPRTs become even more attractive in high interest rate environments. The purpose of a QPRT is to keep a family vacation home or the parents’ primary residence in the family for generations. Using a QPRT, a taxpayer can give away his home while retaining the right to reside in the home for a term of years.  The value of the gift to the QPRT is computed by subtracting the value of the taxpayer’s retained right to use the home from for a term of years from  the current value of the home. It is also important to note that once a home is transferred to a QPRT, the cost of improvements to the home and mortgage payments are considered additional taxable gifts to the QPRT, which are not eligible for the annual gift tax exclusion.

    For estate tax purposes, the term of the QPRT and life expectancy of the grantor are important.  If the grantor survives the QPRT term, the home will not be includible in the grantor’s estate.  Furthermore, if the grantor wants to remain in the home after the QPRT term, they must pay fair market rent. Failure to pay rent will cause the home to be includible in the grantor’s estate.

    Some income tax considerations include remembering that a QPRT is a grantor trust and therefore the grantor can deduct mortgage interest and real estate taxes.  The IRC Sec. 121 exclusion on the gain from the sale of a residence is also available if the home is sold by QPRT. If the residence passes in trust for  the grantor’s children or other beneficiaries after the QPRT term, the trust should continue to be a grantor trust so that any rent paid by the grantor for the use of the home after the QPRT term won’t be taxable.

  4. Charitable Planning. Charitable planning is a huge component of many people’s estate planning. While this is a discussion on its own, I will focus on direct gifts to charity from an IRA.  These benefits are sometimes overlooked. The Protecting American from Tax Hikes Act of 2015 made permanent the rule that distributions directly to charity (as opposed to taking the RMD and giving it to charity) will provide a double benefit to taxpayers.  First, the distribution is not treated as an itemized deduction and second, the distribution is not includible in the taxpayer’s adjusted gross income (AGI), thereby potentially increasing deductions tied to AGI such as medical expenses and Medicare premium calculations.  In addition, the distribution to charity is not subject to AGI imitations. Clients who are at least age 70½  can make these direct contributions; if they have attained age 73, the distributions to charity will count as part of their required minimum distribution (RMD).  However, the  following requirements must be met:
    1. Funds must be transferred by the IRA trustee directly to the charity.
    2. The recipient must be made to a public charity. Distributions to donor-advised funds, private foundations, supporting organizations, split interest trusts, charitable reminder, and/or charitable lead trusts do not qualify.
    3. The qualifying distribution cannot be more than $105,000 in 2024. This amount is indexed for inflation.
    4. Only distributions from regular and rollover IRAs qualify.
    5. The exclusion is only available for distributions that are includible in income. Distributions from Roth IRAs or otherwise non-taxable distributions do not qualify.

These are a few of the topics that we can discuss with our clients as they navigate the complex tax considerations of gift, estate and income tax planning.


The Heckerling Institute offers practical guidance on today’s most important tax and non-tax planning issues, including planning challenges and opportunities. We’ve aggregated blog posts from highlight sessions here, to share our insights with you.

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Barbara Taibi

Barbara Taibi is a Partner in the Private Client Services Group with years of public accounting and income tax planning and tax return preparation experience. Barbara focuses on helping clients plan for and meet their financial and tax goals.

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