How to Ride the Gift and Estate Tax Wave (2017 Tax Cuts and Jobs Act)

Riding Gift and Estate Tax Wave

Surfers know how to get above a wave and ride it to the shore.  The 2017 Tax Cuts and Jobs Act (TCJA) created a gnarly wave for wealth preservation; estate tax exemptions have crested at double the previous limit – for a limited time only.  People can give or inherit more than ever – without incurring gift taxes or federal estate taxes. The only way to fully ride this wave, however, is if you die before 2026 or if you give before 2026 (I think most people would pick option 2). And if your gift is used to fund a life insurance policy, you can make it really epic; your heirs will receive way more than you gave – tax free.   

Crash Course

We discuss estate tax planning in detail here, but here are some key facts:

  • Estate taxes are due within 9 months of a person’s death.
  • The IRS will skim 40% off any estate value over $11 million per individual, and $22 million per couple (the current estate tax exemption limit).
  • When the estate tax exemption limit reverts in 2026 (according to the Tax Cuts and Jobs Act), the tax exemption will be reduced to the range of $6 million.
  • Note that some states charge an inheritance tax on much smaller estates.

Let’s say your estate is expected to be $20 million at the time of your death.  Assuming you die after 2026, and you are married, your children will likely see a tax on $8 million of the total (excluding state inheritance taxes). The result is a total of over $3 million going to a distant relative (Uncle Sam).

To find how you can cover the estate tax payment for your children, avoid gift taxes, reduce your taxable estate, and avoid estate taxes legally, read on.

How to Ride the Wave

Set up an irrevocable life insurance trust (ILIT) that takes out a life insurance policy on your life.

  • When set up properly, a trust separates assets from your estate, thereby ensuring that those assets will not be taxed when you die (or when anyone else dies for that matter).
  • Because of the current tax laws, you can now fund the life insurance premium payments by giving to the money to your ILIT without hitting your lifetime gift tax limit.  Your policy could be fully funded within 8 years, but then remain in force (without any additional payments from you) to provide a sizeable death benefit for your children.
  • By funding the life insurance policy in the first 8 years, you will not risk incurring gift taxes when the exemption limit has gone back down.                                                                       

Don’t Wipe Out

Be sure to set up your ILIT carefully, so that you do not get taxed inadvertently. You will need to work with an experienced professional. A few thing to look out for:                                    

  • The trust must be irrevocable, meaning that once you fund the trust, there is no way for you to get the assets back (and they won’t become part of your estate again).
  • To ensure that the IRS will not deem you to have any ownership rights (and tax your estate), you should not be the trustee (or the beneficiary) or have any control over the funds.  (However, your spouse can!)
  • To be safe, its best to have the trust purchase a life insurance policy on your life after the trust is formed. If you purchase a policy and then give it to the trust, you run the risk of the IRS deeming some or all of the insurance proceeds part of your estate.
  • If you overfund the policy, it could be considered a Modified Endowment Contract (MEC) and become taxable; an issue only if loans or withdrawals are made.

Two Ways to Ride

There are many scenarios that you could choose from for setting up your ILIT, but here are two examples:

  1. Hang Five: You can put a policy in force that strictly covers estate taxes. In the scenario above, the estate tax was estimated at $3 million for a $20 million estate. You could pay $140,000 per year for 8 years, make no further payments, and not incur any gift taxes. Your children will have the full death benefit of $3 million, tax free. Instead of $17 million, you leave a $20 million legacy.
  2. Hang Ten:  You can put a policy in force that makes the most of the tax free giving opportunity. For example, if you give $1 million per year for 8 years (no gift taxes!), you could have a $21 million death benefit for your children and grandchildren. And if your estate was $20 million, your giving has reduced the estate to $12 million, and you have eliminated estate taxes altogether. Instead of $17 million, you leave a $41 million legacy!     

If you would like help in determining whether an ILIT is right for you or your affluent clients, or could use some support in getting it set up properly, please contact us. We would love to help you ride the estate tax wave, and make a measurable difference in your financial life.

Note: the statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with your trusted financial advisors and lawyers. For current tax or legal advice, please consult with an accountant or an attorney.


About Axia Global

J. Michael Roney, Founder of Axia Global, has worked alongside the best financial and legal professionals in the field to craft profitable solutions for even the most complex wealth preservation and estate planning cases. Together, the team at Axia Global has nearly a century of combined experience in the financial services sector.