Christopher H. Suh, Esq. The Wagner Law Group Private Client Group One Financial Center, Suite 3610 Boston, MA 02111 (617) 271-5282 csuh@wagnerlawgroup.com https://linktr.ee/suhchris 2025 1 Federal Estate Tax • In 2025, a decedent is subject to a 40% tax to the extent his or her taxable estate exceeds the $13.99 M lifetime exemption upon death. • So if you die unmarried in 2024 with $14.99 M (1M over the exemption), you could pay $400K in federal estate tax. • The amount of the lifetime exemption is scheduled to decreased to $6.995 M starting in 2026. • So if you die unmarried in 2026 with $7.995 M (1M over the exemption), you could pay $400K in federal estate tax. • After death, one’s taxable estate gets a step up in basis. • Your heirs won’t have to pay income tax when they sell your property if it stays at the same value it was when you died. 2 Massachusetts Estate Tax Massachusetts also has its own separate estate tax, based upon an exemption of $2M. Taxable Estate MA Estate Tax $2 M $0 $2.5M $39,200 $3 M $82,400 $4 M $180,800 $5 M $292,000 $10M $968,000 $15M $1,767,200 3 Federal Gift Tax • Annual exclusion: One can gift away up to $19K per person (gift split to $38 K) to a beneficiary per year provided that the gift is a present interest. • To the extent one exceeds the annual exclusion, gifts will use up your $13.99 M lifetime exemption. • Once the entire lifetime exemption is used up, one will be subject to federal gift or estate tax. • The federal gift tax is taxed at the same rate as the federal estate tax. • There is no Massachusetts gift tax. 4 Unified Taxes • Federal estate and gift taxes are unified: • Any assets which remain in the taxable estate of a person are potentially subject to federal estate tax when the individual passes away to the extent it exceeds their lifetime exemption. • If the person gives away property during their lifetime, it uses up their lifetime exemption. • MA is not unified: • Since MA does not have a gift tax, this does mean that one can give away property prior to death and have it escape MA estate tax. 5 Deductions from Estate and Gift Taxes • Marital Deduction • You can give an unlimited amount of property to your spouse if your spouse is a U.S. citizen free of federal or state estate or gift taxes. However, that property will still be subject to estate tax when the spouse passes away, because it will be included in the spouse’s taxable estate as their property. • Charitable Deduction • You can give an unlimited amount of property to U.S. charities free of federal or state estate or gift taxes. 6 There are a number of benefits to gifting away assets: • Annual exclusion (19 K per year per donee, gift split to 38 K) • No Massachusetts gift tax • Value of assets can be much larger upon death due to appreciation than it was at the time that it was gifted away. 7 Negatives to gifting away assets • The person making the gift does not have control of the property anymore. • The person receiving the property might lose the property through spending, creditors, divorcing spouses, etc. • No step up in basis upon death 8 What assets are best to gift away? • Assets that will appreciate greatly after the transfer are the best to gift away. • Life Insurance • Stock options • Assets that are artificially reduced in value for purposes of valuation at the time of gift are very good as well • Minority interests in businesses • Fractional shares in real estate 9 Gifting to Irrevocable Trust • By gifting to a trust, one can still indirectly control how the property is used through the Trustee of the trust and the trust provisions. • A trust can protect the trust assets from a beneficiary’s misuse, creditors and/or divorcing spouse. • The trust must be irrevocable to be considered a gift. • The person making the gift generally cannot continue to benefit from the property after it has been gifted or have the ability to change who will benefit from the gift. 10 Who directly controls an Irrevocable Trust? • No one at this time. The purpose of an irrevocable trust is to make sure that no one directly controls the property of the trust right now. It should be “no man’s land.” • We do not want you to directly control the trust anymore because if you did the trust will be subject to estate tax when you die. • You should not be Trustee of the Trust. • You should not be able to amend or revoke the trust. • You should not be able to receive distributions from the trust. • You should not be able to remove the Trustee of the trust. • You should not be able to change the beneficiaries of the trust. • You should only be able to name a Disinterested Trustee as a successor Trustee of the Trust. • We do not want your spouse to directly control the trust while your spouse is living because if the spouse did the trust would be subject to estate tax when your spouse died. • Spouse should not be able to make distributions to themselves as Trustee beyond an ascertainable standard. • We do not want your children or descendants to directly control the trust before they are ready, because they may be too young to handle the money yet or may have creditors or divorcing spouses. • The Trustee may control the trust, but we want them to be subject to the terms of the trust that you dictated, the rules of the law, and their fiduciary duties to the beneficiaries 11 Three Common Types of Irrevocable Trusts • Crummey Trusts • Minor Trusts • SLATs Crummey Trusts are the most common form of irrevocable trust, and so when people refer to an ILIT they are most often referring to a Crummey Trust. ILIT stands for irrevocable life insurance trust, an irrevocable trust that holds life insurance. Trusts can also be grantor trusts, if one wants the grantor of the trust to pay the income tax for the trust. 12 Crummey Trusts • Ordinarily a gift to an irrevocable trust will not qualify for the annual exclusion because the beneficiary is not receiving a present interest in the gift. • Crummey Trusts get around this by providing each beneficiary with a limited 30 day right to withdraw a share of the property gifted to each trust. • They must be notified of their right of withdrawal with a “Crummey letter”. • Crummey Trusts are named after a court case (Crummey v. Commissioner) which said that one could do this to qualify for the annual exclusion. • To prevent a gift from the beneficiary to the trust upon the lapse of the withdrawal right, it should only lapse at the rate of the greater of $5,000 or 5% of the trust’s assets. • Once the withdrawal right has lapsed, the Trust may hold the gifted property as long as wanted, subject to the rule against perpetuities. 13 Minor’s Trusts (aka 2503(c) trust) • A minor’s trust is established to hold gifts for one child until he or she attains age 21. • There is no need to give the child a limited right to withdraw assets gifted to the trust in order for the gifts to qualify for the annual exclusion. • However when the child turns age 21 the trust must terminate. 14 SLAT • Irrevocable Trusts can be established for the benefit of one’s spouse in addition to one’s descendants. • While a person who establishes an irrevocable trust cannot benefit from the trust, one’s spouse can which is a way that a couple can still benefit from assets gifted to an irrevocable trust. • The spouse can be the Trustee of the SLAT, but if so the spouse should only make distributions to themselves under an ascertainable standard such as health, education, support or maintenance. • However, a Disinterested Trustee can distribute any part or all of trust to the spouse. This can be a backdoor route to undoing the trust in the event the spouse then gifts the property back to the original owner. • A SLAT can also be a Crummey Trust. 15 SLAT • The great power of a SLAT is that it allows a potential backdoor for your family to get back money gifted to the trust: • In 2025 the federal gift tax exemption is $13.99 M. • In 2026 the federal gift tax exemption is scheduled to drop to $6.995 M. • The IRS has indicated that it will not tax people in 2026 who have gifted away over $6.995 M. So one could fund a SLAT with over $6.995 M prior to 2026 and the excess amount would escape one’s taxable estate tax free. • If one had an emergency and really needed the money, a Disinterested Trustee could distribute trust money to one’s spouse undoing the transaction. • One would want to be secure in the health and stability of one’s marriage prior to undertaking a SLAT. 16 Diagram of SLAT with Crummey Provisions 17 Grantor Trust • A grantor trust is a trust which is drafted in a way that allows the person who establishes the trust to still pay income taxes for the trust. • The most common way to do this is to allow the grantor to exchange property in the trust with their own property of equivalent value. • A SLAT will generally be a Grantor Trust 18