Under current law, each individual has an $11.58 million gift tax exemption and an $11.58 million generation-skipping transfer (GST) tax exemption. These amounts are scheduled to decrease to $5.49 million, adjusted for inflation, on January 1, 2026. Currently, there is no clawback provision in the increased exemption, so the approximate $6.5 million excess during this time-period will evaporate if not used.

Additionally, any gift tax exemption used during your lifetime reduces the estate tax exemption available at death. This is a very tax-efficient method to consider, especially if your estate exceeds $5.49 million (twice the amount if married).

In order to take advantage of the temporarily increased estate and GST tax exemptions and currently depressed asset values, one spouse (the “Donor Spouse”) may enter into a gifting strategy whereby he or she will gift the full $11.58 million to a family trust for the benefit of the other spouse (the “Beneficiary Spouse”) and his or her children.

The Beneficiary Spouse would serve as trustee and would oversee investment decisions and distribution decisions. 

Under this strategy, the Donor Spouse is making all taxable gifts so that if the estate and GST tax exemptions are reduced as scheduled to $5.49 million, adjusted for inflation, on January 1, 2026, the Beneficiary Spouse will still retain the difference between the adjusted amounts and her exemptions already utilized. 

For example, if after the gifting transaction is completed, the estate and GST tax exemptions are reduced to $5.49 million, the Donor Spouse will not have any remaining exemptions, but the Beneficiary Spouse will have the full $5.49 million. 

One downside to this strategy is that if the Beneficiary Spouse passes, the Donor Spouse will lose all indirect control of the investments and indirect beneficial enjoyment of the assets gifted. 

To correct this issue, the Beneficiary Spouse can establish an irrevocable life insurance trust (ILIT) for the benefit of the Donor Spouse to hold an insurance policy on his or her life. If the Beneficiary Spouse passes, the Donor Spouse will receive the death benefit in trust for his or her benefit.

The ILIT should be set up by a qualified estate planning attorney and the life insurance policy should be designed by a case design team familiar the objective of the trust. Contact my office for more information or for an estate planning attorney near you.