Estate Planning

Ease the burden on your family immediately after your death by planning now
Ease the burden on your family immediately after your death by planning now 266 266 Lindsay Yeager

Planning for the end of life is never easy. Including your funeral and memorial wishes in your estate plan can relieve a major burden from your loved ones. When your family is grieving, decisions about burial or cremation, service preferences, or even the type of obituary you’d like can feel overwhelming. By documenting these choices in advance, you not only help to ensure your wishes are honored but also give your family clarity and comfort.

Express your wishes

First, make your wishes known to family members. This typically includes instructions about where you’re to be buried or cremated. The type of memorial service you prefer (if any), and even the clothing you’ll be buried in. If you don’t have a next of kin or would prefer someone else to be in charge of arrangements, you can appoint another representative.

Work With Your Attorney to Formalize Plans

Be aware that the methods for expressing these wishes vary from state to state. With the help of your attorney, you can include a provision in your will, language in a health care proxy or power of attorney, or a separate form specifically designed for communicating your desired arrangements.

Whichever method you use, it should, at a minimum, state 1) whether you prefer burial or cremation, 2) where you wish to be buried or have your ashes interred or scattered (and any other special instructions), and 3) the person you’d like to be responsible for making these arrangements. Some people also request a specific funeral home.

Weigh your payment options

There’s a division of opinion in the financial community as to whether you should prepay funeral expenses. If you prepay and opt for a “guaranteed plan,” you lock in the prices for the arrangements, no matter how high fees may escalate before death. With a “nonguaranteed plan,” prices aren’t locked in, but the prepayment accumulates interest that may be put toward any rising costs.

Protecting Yourself with the Right Questions

When weighing whether to use a prepaid plan, the Federal Trade Commission recommends that you ask the following questions:

  • What happens to the money you’ve prepaid?
  • What happens to the interest income on prepayments placed in a trust account?
  • Are you protected if the funeral provider goes out of business?

Before signing off on a prepaid plan, learn whether there’s a cancellation clause in the event you change your mind.

One alternative that avoids the pitfalls of prepaid plans is to let your family know your desired arrangements and set aside funds in a payable-on-death (POD) bank account. Simply name the person who’ll handle your funeral arrangements as the beneficiary. When you die, he or she will gain immediate access to the funds without the need for probate.

Incorporate your wishes into your estate plan

Thoughtful planning today can provide lasting peace of mind for the people you care about most. Don’t wait to incorporate your wishes into your estate plan — or to update your plan if needed. Contact a Smolin Representative to take the first step toward securing your family’s future.

Does your family know how to access your estate planning documents?
Does your family know how to access your estate planning documents? 266 266 Lindsay Yeager

Making sure your family will be able to locate your estate planning documents when needed is one of the most important parts of the estate planning process. Your carefully prepared will, trust or power of attorney will be useless if no one knows where to find it.

When loved ones are grieving or faced with urgent financial and medical decisions, not being able to locate key documents can create unnecessary stress, confusion and even legal complications. Here are some tips on how and where to store your estate planning documents.

Your Signed, Original Will

There’s a common misconception that a photocopy of your signed last will and testament is sufficient. In fact, when it comes time to implement your plan, your family and representatives will need your signed original will. Typically, upon a person’s death, the original document must be filed with the county clerk and, if probate is required, with the probate court as well.

What happens if your original will isn’t found? It doesn’t necessarily mean that it won’t be given effect, but it can be a major — and costly — obstacle.

The High Stakes of a Missing Will

In many states, if your original can’t be produced, there’s a presumption that you destroyed it with the intent to revoke it. Your family may be able to obtain a court order admitting a signed photocopy, especially if all interested parties agree that it reflects your wishes. But this can be a costly, time-consuming process. And if the copy isn’t accepted, the probate court will administer your estate as if you died without a will.

To avoid these issues, store your original will in a safe place and tell your family how to access it.

Storage options include:

  • Leaving your original will with your accountant or attorney, or
  • Storing your original will at home (or at the home of a family member) in a waterproof, fire-resistant safe, lockbox or file cabinet.

Accessing Your Will: The Hidden Risks of Safe Deposit Boxes

What about safe deposit boxes? Although this can be an option, you should check state law and bank policy to be sure that your family will be able to gain access without a court order. In many states, it can be difficult for loved ones to open your safe deposit box, even with a valid power of attorney. It may be preferable, therefore, to keep your original will at home or with a trusted advisor or family member.

If you do opt for a safe deposit box, it may be a good idea to open one jointly with your spouse or another family member. That way, the joint owner can immediately access the box in the event of your death or incapacity.

Other documents

Original trust documents should be kept in the same place as your original will. It’s also a good idea to make several copies. Unlike a will, it’s possible to use a photocopy of a trust. Plus, it’s useful to provide a copy to the person who’ll become trustee and to keep a copy to consult periodically to ensure that the trust continues to meet your needs.

For powers of attorney, living wills or health care directives, originals should be stored safely. But it’s also critical for these documents to be readily accessible in the event you become incapacitated.

Duplicate Originals: A Simple Step Toward Peace of Mind

Consider giving copies or duplicate originals to the people authorized to make decisions on your behalf. Also consider providing copies or duplicate originals of health care documents to your physicians to keep with your medical records.

Clear communication is key

Clearly communicating the location of your estate planning documents can help ensure your wishes are carried out promptly and accurately. Let your family, executor or trustee know where originals are stored and how to access them. Contact a Smolin Representative for help ensuring your estate plan will achieve your goals.

  • Noelle Merwin
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Don’t forget to include a residuary clause in your will
Don’t forget to include a residuary clause in your will 266 266 Noelle Merwin

When creating a will, most people focus on the big-ticket items — including who gets the house, the car and specific family heirlooms. But one element that’s often overlooked is the residuary clause. This clause determines what happens to the remainder of your estate — the assets not specifically mentioned in your will. Without one, even a carefully planned estate can end up in legal limbo, causing unnecessary stress, expense and conflict for your loved ones.

Defining a residuary clause

A residuary clause is the part of your will that distributes the “residue” of your estate. This residue includes any assets left after specific bequests, debts, taxes and administrative costs have been paid. It might include forgotten bank accounts, newly acquired property or investments you didn’t specifically name in your will.

For example, if your will leaves your car to your son and your jewelry to your daughter but doesn’t mention your savings account, the funds in that account would fall into your estate’s residue. The residuary clause ensures those funds are distributed according to your wishes — often to a named individual, group of heirs or charitable organization.

Omitting a residuary clause

Failing to include a residuary clause can create serious problems. When assets aren’t covered by specific instructions in a will, they’re considered “intestate property.” This means those assets will be distributed according to state intestacy laws rather than your personal wishes. In some cases, this could result in distant relatives inheriting part of your estate or assets going to individuals you never intended to benefit.

Without a residuary clause, your executor or family members may also need to seek court intervention to determine how to handle the leftover property. This adds time, legal costs and emotional strain to an already difficult process.

Moreover, the absence of a residuary clause can lead to family disputes. When the law, rather than your will, determines who gets what, heirs may disagree over how to interpret your intentions. A simple clause could prevent these misunderstandings and preserve family harmony.

Adding flexibility to your plan

A key advantage of a residuary clause is added flexibility. Life circumstances change — new assets are acquired, accounts are opened or closed, and property values fluctuate.

If your will doesn’t specifically list every asset (and most don’t), a residuary clause acts as a safety net to ensure nothing is left out. It can even account for unexpected windfalls or proceeds from insurance or lawsuits that arise after your passing.

Providing extra peace of mind

Including a residuary clause in your will is one of the simplest ways to make sure your entire estate is handled according to your wishes. It helps avoid gaps in your estate plan, minimizes legal complications and ensures your executor can distribute your assets smoothly. Contact Smolin Representative for additional details. Ask your estate planning attorney to add a residuary clause to your will.

  • Noelle Merwin
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Stop procrastinating and get to work on your estate plan
Stop procrastinating and get to work on your estate plan 1200 1200 Noelle Merwin

For many people, creating an estate plan falls into the category of important but not urgent. As a result, it can get postponed indefinitely. If you find yourself in this situation, understanding the reasons behind this procrastination can help you recognize and overcome the barriers that are preventing you from taking the first steps toward creating an estate plan.

Multiple reasons for procrastination

A primary reason people delay estate planning is emotional discomfort. Thinking about your death or a disability or becoming incapacitated is unpleasant. Simply put, it can be difficult to confront your mortality or make difficult decisions about who should inherit your assets or serve as guardian of your minor children.

Another reason for delay is that estate planning can seem daunting, especially when people assume it involves complicated legal jargon, multiple professionals and a mountain of paperwork. For those with blended families, business interests or complex financial situations, the process may feel even more overwhelming. Without clear guidance, many people don’t know where to start, so they don’t start at all.

There’s also the mistaken belief that estate planning is only necessary for the wealthy or elderly. Younger individuals or those with modest assets may think they don’t need a plan yet. Additionally, procrastination bias — the tendency to prioritize immediate concerns over future needs — often pushes estate planning to the bottom of the to-do list.

Reasons to motivate yourself

Not having an estate plan in place, especially the basics of a will and health care directives, can have dire tax consequences in the event of an unexpected death or incapacitation. Without a will, your assets will be divided according to state law, regardless of your wishes. This can cause family disputes and lead to legal actions. It can also result in tax liabilities that could have been easily avoided.

There are a few relatively simple documents that can comprise an estate plan. For example, a living will can spell out instructions for end-of-life decisions. A power of attorney can appoint someone to handle your affairs if you’re incapacitated. And a living trust can be used to transfer assets without going through probate.

The bottom line

Procrastinating on estate planning carries real risks — not just for you, but also for your loved ones. Without a proper plan, state laws will determine how your assets will be distributed, often in ways that may not align with your wishes. Contact your Smolin representative for help taking the first steps toward forming your estate plan.

 

Your Need-to-Know Tax Guide for Inherited IRAs
Your Need-to-Know Tax Guide for Inherited IRAs 850 500 smolinlupinco

A 2019 change to tax law ended the “stretch IRAs” strategy for most inherited IRAs. This means that beneficiaries now have 10 years to withdraw all of the funds. Since then, there’s been a lot of confusion about required minimum distributions (RMDs).

Thankfully, the IRS has now issued final regulations clarifying the “10-year rule” for inherited IRAs and defined contribution plans, like 401(k)s. In a nutshell, the final regulations largely align with proposed rules released in 2022.

The SECURE Act and 10-Year Rule

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, most heirs except surviving spouses must withdraw the entire balance within 10 years of the original account owner’s death. In 2022, the IRS proposed regulations to clarify the rule. It outlines that beneficiaries must take their taxable RMDs over the course of the 10-year period after the account owner dies. 

They are not permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement significantly limits beneficiaries’ tax planning flexibility and, depending on their situations, could push them into higher tax brackets during those years.

Confused beneficiaries reached out to the IRS trying to determine when they needed to start taking RMDs on recently inherited accounts. The uncertainty posed risks for both beneficiaries and the defined contribution plans. 

This is because beneficiaries could have been assessed a tax penalty on amounts that should have been distributed but weren’t. And the plans could have been disqualified for non-compliance.

In response, the IRS waived penalties for taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs due to the death of the account owner in 2020 or 2021, respectively. 

The waiver guidance also stated that the IRS would issue final regulations no earlier than 2023. When 2023 rolled around, the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022.

As of April 2024, the IRS again extended the relief, this time for RMDs in 2024. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs for these years, and plans will be safe from disqualification based solely on the missed RMDs.

2024 final regulations

The final regulations require certain beneficiaries to take annual RMDs from inherited IRAs or defined contribution plans within ten years following the account owner’s death. These regulations will take effect in 2025.

If the deceased hadn’t begun taking their RMDs before their death, beneficiaries have more flexibility. They can take annual RMDS or wait until the end of the 10-year period and take a lump-sum distribution. Ultimately, the IRS eliminated the requirement to take annual distribution, allowing beneficiaries greater tax planning flexibility. 

For instance, if Ken inherited an IRA in 2021 from his father, who had already begun taking RMDs, under the IRS-issued waivers, Ken doesn’t need to take RMDs for 2022 through 2024. Under the final regulations, he must take annual RMDs for 2025 to 2030, with the account fully distributed by the end of 2031.

If Ken’s father had not started taking RMDs, Ken could have waited until the end of 2031 to take a lump-sum distribution. As long as the account is fully liquidated by the end of 2031, Ken remains in compliance with the rules.

Contact us with questions

If you’ve inherited an IRA or defined contribution plan in 2020 or later, it’s understandable to feel confused about the RMD rules. Reach out to your Smolin advisor for help understanding these regulations and developing a personalized tax-saving strategy.

Does a FAST Fit into Your Estate Plan?
Does a FAST Fit into Your Estate Plan? 850 500 smolinlupinco

Traditional estate planning often focuses on minimizing gift and estate taxes while protecting your assets from creditors or lawsuits. While these are important considerations, many people also hope to create a lasting legacy for their family.

Dovetailing with the “technical” goals of your estate plan, such “aspirational” goals might include preparing your children or grandchildren to manage wealth responsibly, promoting shared family values and encouraging charitable giving. A Family Advancement Sustainability Trust (FAST) is one way to ensure your estate plan meets your objectives while informing your advisors and family of your intentions. 

FAST funding options

A well-structured estate plan can protect your assets while aligning with your family values and goals. Establishing a FAST can bridge the gap between those objectives.

A FAST typically requires minimal up-front funding, instead being primarily funded with life insurance or a properly structured irrevocable life insurance trust (ILIT) upon the grantor’s death. This lets you maximize the impact of your trust without depleting your current assets. 

4 decision-making entities

FASTs are typically created in states that 1) allow perpetual, or “dynasty,” trusts to benefit future generations, and 2) have directed trust statutes, making it possible to appoint an advisor or committee, making it possible for family members and trusted advisors to participate in the governance and management of the trust.

To ensure effective management and decision-making, a FAST often includes four key roles:

  1. An administrative trustee oversees day-to-day operations and administrative tasks but doesn’t handle investment or distribution decisions.
  2. An investment committee typically consists of family members and an independent, professional investment advisor who collaboratively manage the trust’s investment portfolio.
  3. A distribution committee which determines how trust funds are used to support the family and helps ensure that funds are spent in a way that achieves the trust’s goals.
  4. A trust protector committee essentially takes over the role of the grantor after death and makes decisions on matters such as the appointment or removal of trustees or committee members and amendments to the trust document for tax planning or other purposes.

Bridging the leadership gap

In many families, the death of the older generation creates a leadership vacuum and leads to succession challenges. A FAST can be particularly beneficial for families looking to help avoid a gap in leadership and establish a leadership structure that can provide resources and support for younger generations.

Consult with a Smolin advisor to discuss if including a FAST in your estate plan is the right choice for your family.

Maximize Your Estate Planning with the Roth 401(k) Contributions
Maximize Your Estate Planning with the Roth 401(k) Contributions 850 500 smolinlupinco

When deciding on contributions to your 401(k) plan, you might wonder whether it’s better to choose pre-tax (traditional) contributions or after-tax (Roth) contributions.  The best choice depends on your current and anticipated future tax circumstances, as well as estate planning goals.

Traditional vs. Roth 401(k)s

The main difference between a traditional and a Roth 401(k) plan is how they are taxed. With a traditional 401(k), contributions are made with pre-tax dollars, which means you get a tax deduction when you contribute. Your money grows tax-deferred, but you’ll pay taxes on both your contributions and earnings when you withdraw them. 

In contrast, Roth 401(k) contributions are made with after-tax dollars, so you don’t get a tax break upfront but qualified withdrawals, including contributions and earnings, are tax-free. Plus you can contribute to a Roth 401(k) plan no matter how hight your income is.

For 2024, the salary deferral limits for both traditional and Roth 401(k) plans are the same: $23,000,  plus an additional $7,500 if you’re 50 or older by the end of the year. Combined employee and employer contributions can go up to $69,000, or $76,500 if you’re 50 or older.

The rules for taking distributions from traditional and Roth 401(k)s are similar. You may take penalty-free withdrawals when you reach age 59½, or if you die or become disabled (with some exceptions). For Roth 401(k)s, the account must be open for at least five years to take withdrawals.

One key difference is that traditional 401(k) accounts require a minimum distribution (RMD) at age 73 (or age 75 starting in 2032). Roth 401(k) accounts do not have RMDs starting in 2024.

From a tax perspective, with a Roth 401(k) means you pay taxes now, while a traditional 401(k) defers taxes until you withdraw the funds. Mathematically speaking, that means the best choice depends on whether you expect to be in a higher or lower tax bracket in retirement.

If you’re a high earner and expect a lower bracket when you retire, a traditional 401(k) might be more beneficial. On the other hand, if you expect to be in a higher tax bracket later (perhaps due to higher income or potential tax increases), a Roth 401(k) might be a better choice. 

Estate planning factors

Tax implications during your lifetime aren’t the only thing to think about. Estate planning factors are important too. Roth 401(k)s, with their elimination of RMDs, can be a powerful estate planning tool. If you don’t need the funds for living expenses, you can let the grow tax-free for as long as you want. And if the account is at least five years old, your heirs can withdraw the money tax-free.

On the other hand, a traditional 401(k) requires you to withdraw funds according to RMD rules, which might reduce the amount left for you heirs. Plus, their withdrawals will be taxable.

If you need help deciding which 401(k) account is best for your situation, reach out to a Smolin advisor to discuss your options. 

Planning For Foreign Assets in Your Estate
Planning For Foreign Assets in Your Estate 850 500 smolinlupinco

If you own foreign assets but haven’t included them in your estate plan, it’s time to revisit your plan. It’s possible to structure the ownership of your foreign assets according to the laws of the U.S. and the country where they’re located. But you probably should engage the help of an experienced estate planning advisor so you avoid these common issues.

The Burden of Double Taxation

U.S. citizens are subject to federal gift and estate taxes on all worldwide assets, regardless of where they live or the location of the assets. This means that If you own assets in other countries, you run the risk of double taxation if the assets are also subject to inheritance, estate, and other death taxes in those countries. 

A foreign death tax credit can help offset the US gift or estate tax; however, those aren’t necessarily available in all situations.  It’s possible that you might be able to get a foreign death tax credit which can lower your US estate and gift tax. But that is often dependent on tax treaties the other country has with the United States, and in some cases those credits aren’t available.

You are a U.S. citizen if:

  • You were born in the U.S., whether or not your parents were ever U.S. citizens and regardless of where you currently reside, unless you’ve renounced your citizenship, or
  • You were born outside the U.S. but at least one of your parents was a U.S. citizen at the time.

Even if you’re not a U.S. citizen, living inside the U.S. can make your worldwide assets subject to US gifts and estate taxes. This depends on the concept of “domicile”, meaning you have made the U.S. your home and plan to return there when you leave. When the U.S. is your domicile, their gift and estate taxes apply to your assets outside that country, even if you leave the country. Unless you take action to change your domicile, these taxes apply.

This may not be cause for concern. The U.S. gift and estate tax exemption amount is $13.61 million for the 2024 tax year. But remember, the exemption amount is scheduled to revert to its pre-2018 level of $5 million (indexed for inflation) as of 2026 unless an act of Congress extends it. 

Regardless, it’s best to plan for potential estate tax in the future. Additionally, married couples have different and potentially more complex rules. This is specifically true if one spouse is not a U.S. citizen nor considered a resident for estate tax purposes.

Plan to make two wills

If you want your foreign assets distributed exactly as you’d prefer, your will must be valid in both the U.S. and the other countries where assets are located. While it can be possible to prepare a single will that meets the requirements of each jurisdiction, it is still preferable to have separate wills for your foreign assets. If you opt to have a separate will, written in the foreign country’s language (if not English), it can help smooth the probate process.

Should you opt to prepare two or more wills, you should definitely work with local counsel in each foreign jurisdiction so you can be certain your wills meet each country’s requirements. If possible, it’s preferred that your U.S. and foreign advisors are able to coordinate to avoid any nullifying conflicts between the two wills. 

The bottom line is that if you own foreign assets, the wisest decision is to work with a Smolin advisor to ensure your wishes are executed in the most tax-efficient way possible. Reach out to a Smolin Advisor for support in all your estate planning needs. 

21 Estate Planning Terms You Need to Know

21 Estate Planning Terms You Need to Know
21 Estate Planning Terms You Need to Know 850 500 smolinlupinco

Whether you’re making your first estate plan or need to update an existing one, it helps to speak the language. While most people are familiar with common terms like “trust” or “will,” the meanings of other estate planning terms may feel less clear. 

Keep this glossary of key terms handy to help you navigate the estate process with more confidence

  1. Administrator 

An individual or fiduciary appointed by a court to manage an estate if no executor or personal representative has been appointed or the appointee is unable or unwilling to serve.

  1. Ascertainable standard

This legal standard, typically relating to an individual’s health, education, maintenance, and support, is used to determine what distributions are permitted from a trust.

  1. Attorney-in-fact

The individual named under a power of attorney as the agent to handle the financial and/or health affairs of another person.

  1. Codicil 

A legally binding document that makes minor modifications to an existing will without requiring a complete rewrite of the document.

  1. Community property

A form of ownership in certain states in which property acquired during a marriage is presumed to be jointly owned regardless of who paid for it.

  1. Credit shelter trust

A type of trust established to bypass the surviving spouse’s estate to take full advantage of each spouse’s federal estate tax exemption. It’s also known as a bypass trust or A-B trust.

  1. Fiduciary

An individual or entity, such as an executor or trustee, who is designated to manage assets or funds for beneficiaries and is legally required to exercise an established standard of care.

  1. Grantor trust

A trust in which the grantor retains certain control so that it’s disregarded for income tax purposes and the trust’s assets are included in the grantor’s taxable estate.

  1. Inter vivos 

This is the legal phrase used to describe various actions (such as transfers to a trust) made by an individual during his or her lifetime.

  1. Intestacy

When a person dies without a legally valid will, a situation called “intestate,” the deceased’s estate is distributed in accordance with the applicable state’s intestacy laws.

  1. Joint tenancy

An ownership right in which two or more individuals (such as a married couple) own assets, often with rights of survivorship.

  1. No-contest clause

A provision in a will or trust that ensures that an individual who pursues a legal challenge to assets will forfeit his or her inheritance or interest.

  1. Pour-over will

A type of will that is used upon death to pass ownership of assets that weren’t transferred to a revocable trust.

  1. Power of appointment

The power granted to an individual under a trust that authorizes him or her to distribute assets on the termination of his or her interest in the trust or on certain other circumstances.

  1. Power of attorney (POA)

A legal document authorizing someone to act as attorney-in-fact for another person, relating to financial and/or health matters. A “durable” POA continues if the person is incapacitated.

  1. Probate

The legal process of settling an estate in which the validity of the will is proven, the deceased’s assets are identified and distributed, and debts and taxes are paid.

  1. Qualified disclaimer

The formal refusal by a beneficiary to accept an inheritance or gift or to allow the inheritance or gift to pass to the successor beneficiary.

  1. Qualified terminable interest property (QTIP)

Property in a trust or life estate that qualifies for the marital deduction because the surviving spouse is the sole beneficiary during his or her lifetime. The assets of the QTIP trust are therefore included in the estate of the surviving spouse, that is, the spouse who is the beneficiary of the trust, not the estate of the spouse who created the trust.

  1. Spendthrift clause

A clause in a will or trust restricting the ability of a beneficiary (such as a child under a specified age) to transfer or distribute assets.

  1. Tenancy by the entirety

An ownership right between two spouses in which property automatically passes to the surviving spouse on the death of the first spouse.

  1. Tenancy in common

An ownership right in which each person possesses rights and ownership of an undivided interest in the property.

Questions? Smolin can help. 

This brief roundup isn’t an extensive list of estate planning terms. If you have questions about these terms or others that aren’t listed here, reach out to us! We’re happy to provide additional context for any estate planning concepts you need more clarity on.

Estate Planning Don’t Forget the Generation-Skipping Transfer (GST) Tax

Estate Planning? Don’t Forget the Generation-Skipping Transfer (GST) Tax
Estate Planning? Don’t Forget the Generation-Skipping Transfer (GST) Tax 850 500 smolinlupinco

Would you like to include grandchildren, great grandchildren, or nonrelatives who are significantly younger than you in your estate plan? If so, you’ve got more to consider than gift and estate taxes. The generation-skipping transfer (GST) tax may also apply.

GST Tax Basics

One of the harshest taxes in the Internal Revenue Code, the GST tax is a flat 40% tax on asset transfers that “skip persons”. For example, the tax may apply if you plan to leave assets to grandchildren or other family members who are more than one generation below you. (For non-family members, the tax applies when the heir in question is more than 37 ½ years younger than you.)   

Because this tax is calculated in addition to estate and gift taxes, it can significantly impact the amount of wealth you’re able to leave to future generations. 

GST Tax Exemption Under the Tax Cuts and Jobs Act

A generous GST tax exemption may fortunately offer some relief. For persons dying after December 31, 2017 and before January 1, 2026, the Tax Cuts and Jobs act adjusts the GST tax exemption amount to an inflation-adjusted $10 million. That totals $13.61 million for 2024.

Unless congress takes action before this time frame ends, the exemption will shrink back to an inflation-adjusted $5 million starting on January 1, 2026.

Of course, taking advantage of this exemption requires careful planning.

For an exemption to apply in some cases, it’s necessary to allocate the exemption to particular assets on a timely filed gift tax return. This is called an affirmative election.

In some cases, the exemption may be allocated automatically unless you opt out. If you prefer to allocate your exemption elsewhere, this can lead to unwanted results.

Reviewing each transfer for potential GST tax liability is a great way to avoid costly mistakes and ensure your exemption is allocated as advantageously as possible.

What transfers are taxable under the GST?

In addition to direct gifts that skip persons, GST tax applies to two types of trust-related transfers: 

  1. Taxable terminations

Trust assets pass to your grandchildren when your child dies and the trust terminates.

  1. Taxable distributions

Trust income or principal is distributed to a skip person.

Note: Gifts covered by the annual gift tax exclusion aren’t currently subject to the GST tax. 

Protections offered by automatic allocation rules

While the automatic allocation rules can be unfavorable if you prefer to allocate your exemption elsewhere, they’re ultimately intended to protect you against unintentional loss of GST tax exemptions.

For instance, your unused GST tax exemption may be automatically applied to a gift to a grandchild or other “skip person” that exceeds the annual gift tax exclusion ﹘without the need to make an allocation on a gift tax return. 

The rules’ impact on “GST trusts” are complex. In general, a trust is considered a GST trust if it will likely benefit skip persons or your grandchildren in the future.

In most cases, these automatic allocation rules work favorably and ensure your GST tax exemption is applied where it’s most needed. However, they can also lead to unintended﹘and potentially expensive﹘results in other cases.   

Questions? Smolin can help

For many people, the GST tax might not be top of mind right now. After all, the exemption amount is currently high enough that it doesn’t impact most families’ estate plans. 

However, the GST tax exemption rate is expected to decrease significantly after 2025 without action from congress. 

By choosing to contact your accountant to plan for this tax now, you can avoid unexpected costs and protect the wealth you want to leave to your younger relatives in the future. 

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