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On this week’s episode of THE FINANCIALCOMMUTE, host Chris Galeski welcomes Wealth Planner & Estate Attorney Brian Standing to discuss advanced estate tax planning strategies.

Here are some key takeaways from their conversation:

- Estate tax laws are set to sunset in the next year and a half, potentially reducing the exemption amount from over $13 million to $7 million per person.

- High net worth individuals with estates over $26 million (married) or $13 million(single) should consider advanced estate tax planning to avoid higher taxes.

- Irrevocable Life Insurance Trusts (ILIT) help create liquidity to pay estate taxes without forcing the sale of assets. This trust owns the insurance policy to avoid taxation on the proceeds.

- Spousal Lifetime Access Trusts (SLAT) allow assets to be given to a spouse, maintaining indirect access to income while reducing estate taxes. This strategy has risks, such as the potential for divorce.

- Charitable Remainder Trusts allow individuals to donate assets to a charity in the future while retaining income from those assets during their lifetime.

- Family Limited Partnerships (FLP) help reduce estate tax liability by discounting the value of restricted or non-controlling ownership interests in assets like real estate or businesses.

- Brian advises listeners to organize their assets, income, and future needs to facilitate effective estate tax planning before the law changes in 2026.

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Watch previous episodes here:

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Ep. 90 What's Next for Interest Rates & Monetary Policy

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Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Wealth Planner Brian Standing. Brian, thank you for joining us as always. I should also say you are a practicing estate planning attorney as well outside of Morton.

Yeah, we try not to talk about that.

But that's what we're here to talk about today. I mean, we're trying to talk about estate taxes, estate laws. So I mean, I felt like it was relevant.

Okay. It's relevant. Attorneys just don't have the reputation, I guess.

All joking aside, it's an election year, in case you didn't know, but there are some estate tax laws that are set to sunset in the next year and a half. And so that's why we're here to talk about estate taxes or estate rules, estate strategies. This is sort of a follow-up from our previous episode.

Yeah, it's getting busy. Although maybe from a topical standpoint after the recent debate, we don't have to get political here. I think people are maybe a little less worried about the estate tax laws. I think it's still relevant because as we talked about in the last episode, we've got a current exemption amount, right? Which is an amount you can give away or pass away, owning without estate taxes, it's above 13 million.

That's pretty nice per person. The law is scheduled, as we talked about, to sort of revert back. Call it 7,000,000 in 2026 and it's possible, obviously, that that could be extended with some kind of the default law. The way it's built in is that it will revert unless a new law is passed or a new budget is passed with estate tax laws in it.

So after what happened recently, there's some sense of like, maybe we can wait it out till November, see if, you know, parties change, see if they're going to extend the law. I would advise that people still be prepared for this, because as we'll get into today, estate tax planning, there's a lot of steps.

You don't want to be scrambling. at the end of the year.

And look, this is a follow up from our last conversation in terms of who needs who needs an estate plan. And the answer was pretty much everybody. If you don't have one, there's already one design for you. And you may or may not like those rules. But now we're talking about who should do some additional estate tax planning.

Right? And so right now, if your estate is north, if you're married, your state's north of $26 million, you should potentially raise your hand and say, maybe I should look into it, potentially, if you're not married and it's just the south of your estates, north of $13 million. You might want to raise your hand and engage in the conversation.

What are some other sort of key indicators that somebody should engage in having discussions right now around potentially some estate tax planning, knowing that these rules are set to sunset or get cut in half?

Yeah. So this would be a nice review to lead us into today because we went into detail. So I would encourage people to go back if they haven't heard that one. but it's not just about net worth. because whether someone needs to estate tax planning is actually a more personal question even than just a sort of objective, like, what am I worth?

You sort of have to meet certain requirements of I have a lot of net worth. I'm leaving that net worth to individuals, right? Not to charities. Right. In that case, you don't need estate tax planning. You obviously have to care about paying estate tax. And certainly some people say, you know what it is, what it is.

My kids will be fine. Some people, as you know, will say, I don't want to pay any estate tax. I'd rather not do that.

Right. And then there's trade-offs. Even when you get to the bottom line of I think I'm taxable. I'd like to reduce the tax burden upon my passing. Well, there's no such thing as a free lunch right now. We've got to talk about the trade-offs of doing some strategies. You know what are you willing to give up as far as control, maybe income, or other factors? Before we even begin to determine, like, okay, here's a good plan for you.

Yeah. Now, I know you're not making recommendations, blanket recommendations to the audience here, but typically, if they're sitting there raising their hand, saying, I'm worried that my estate is over this limit, I would like to reduce or, you know, avoid paying estate tax and have more money go to my kids. There are typically a few different terms or phrases that those clients might come across, and we would like to educate them on what those are and who might potentially be appropriate for them.

Let's start with the easiest one or most common one typically used. I'm not saying it's a lazy way of doing estate tax planning, but it's an irrevocable life insurance trust or alternatively, an ILIT. Let's talk a little bit about what that is and why someone would use that. Yeah.

So the the context of that is estate tax. It's not like there's one perfect strategy, right? There's different things that you do to both potentially reduce the tax burden, but also be prepared to pay any tax. And so sometimes what people will do is have life insurance or even purchase new life insurance. And the purpose is to have liquidity so that if estate taxes due if the law doesn't change, money comes in at your death.

There's money to pay state taxes, do other things in the estate, which is nice.

So if I own a bunch of real estate, and I really want my kids and family members to continue to maintain and own that real estate, I might buy an insurance policy that would create some liquidity in order to pay estate taxes that might be owed. So that way, they don't have to sell or liquidate a property because you never know if it's a good time to, you know, sell a particular.

You don't want to be forced. You don't want to sell it because estate tax... There are some exceptions as far as businesses. And the time you can pay estate taxes, but in general you have nine months to write a big check. And so you don't want to be sort of fire selling properties to pay tax. So that kind of brings us to the ILIT, which is if I want 10 million of insurance available to pay tax.

Well, I don't want to end up with 6 million because the insurance itself is subject to a 40% estate tax. You wouldn't pay premiums to get 10 million of insurance to net six, right? And so there's a strategy where you wouldn't own that policy, because if you own it, that's what brings it. Even though you never had the 10 million... The fact that you own it, you have the right to decide who gets it.

You're taxed on the ten. So there's different options. But for the purpose of this conversation, you would want this life insurance trust to be the one buying this policy. For example, you don't own it, what happens is in order to purchase that policy and maybe to make premiums going forward, you're actually gifting to this trust.

And it's a silly game we play where you're not the trustee of the trust. You gift money, that's about the amount of the premium. And the trustee takes it and goes, you know, thanks. Let me see what I want to do with this. And then after 30 days, I go, you know what, I think I'm going to pay this premium.

We all know what we're doing, but as long as we play the game, there's notices that go out. We don't have to get into that detail. Then now the trust is paying for the premium. And so that separates you enough so that there's not sort of taxation on the 10 million. In my example.

Yeah. Thank you for that. So it is a game that you sort of have to play in terms of making sure that you don't have control or access in order for it to be shown that it's outside of your estate. Let's say someone's like, okay, yes or no to the Irrevocable Life Insurance Trust.

What are some other types of terms or phrases that they might hear when they're engaging in a conversation with you or another estate planning attorney around saving estate taxes?

There's something called a SLAT.

Yeah. So that's becoming more common, sort of out of necessity. and the reason for that is that typically, conceptually speaking, when you give something away, you give away its income, its benefits. Right. And so if you've got a sort of an estate tax cliff where you feel like, well, it's use it or lose it, right.

If the exemption goes from 14 million to 7, I'm going to lose 7 million of, available money to give to my heirs. Well, I'm going to give it away.

Well, estate tax free given.

Right. And so you say, okay, well, let's throw 14 million in a trust for your kids. Well, you don't get the income anymore, right? So you might be living off of that. You may want to live off of that in the future. You certainly are not going to want to ask your kids to help you out financially.

I mean, when you're when you're engaging them, this conversation, you've got to do the financial planning to know that you can give away this asset and still have enough assets and income to maintain the rest of your life, because once you make this gift, it's no longer yours, right? You lose not only access to the assets, but also the income that that may generate.

So, for example, a multifamily property, I own the asset I'm living off of the rents. If I gave that asset away to somebody else, I no longer get to keep the rent.

Yes. Exactly right. And there's some things that can be done. There's fees that can be paid for management. There's partial sales where you get... these are all things that you can chip away at some of that, but it's easier just initially to consider, okay, I give away the asset, I give away all the economic benefits. And so, it's you coming back to the SLAT, you think, well, wait a minute, that's a big commitment.

And so what the SLAT allows you to do if you have a spouse is to give assets to your spouse, right. And so you still are following the law such that you're giving away the income. It's not yours, it's your spouse's. So you might want to stay on good terms with him or her at that point. Right. Because they're getting the money.

And if they decide you guys get to go on a vacation that year. Great. I joke, but it's serious because that is one of the risks of the strategy, right?

Because if they were to get, you know, divorced or if something were to happen to them, those assets don't come back.

Correct? Right. Those are gifted assets that are in a trust for them. And then you split the rest, let's say. So there's some risk there. But the goal of this is to say I'm giving things away. I'm maintaining indirect access to my monies right, because if we need them, my spouse can take them out. We can use them for something to benefit us.

Obviously, we want to be careful and follow the rules. but this is why you end up doing these SLATs, which is we have to do something. We need to use the exemption. Right. We're taking 10 million. 14 million, whatever it is, we're putting it in this bucket and we've removed it from our estate. You file a gift tax return, and you use that number before the law changes.

And now it's in this bucket. And you want to live off of your other assets and hopefully leave that one alone because it can grow outside of your estate. So that's why people are talking about it. Just to add a final point, maybe on SLATs is that the IRS is really going to scrutinize sort of double SLATs.

Right. Let's say we're married. I give 14 million to you. You give 40 million to me. We just keep living our lives the same way, right? It's like, what's going on here? You guys are playing games. And so I would encourage people who are truly high net worth and are going to take advantage of both exemptions to separate those transactions as much as possible.

Right. This year, I want to give money to you, right. No strings attached. I'm going to set up a trust. I want you to have a trust. Next year, you say, you know I want to give money to you. Different assets, different provisions, different trustee, and they're totally different transactions. This is the way you want to do it. If you're really trying to like hit a home run with this strategy.

Thank you for bringing up those nuances. One other thing that people like to kind of bring up in terms of reducing, eliminating or avoiding tax but still wanting to maintain income, we don't need to get into the details of it, but they set up charitable remainder trusts- things where they put assets in there. They're giving it away to a charity, you know, in the future, but they can maintain access to income during their lives.

That's another strategy that somebody might engage in with you. So we don't need to go down that in detail. But family-limited partnership comes up a lot as well. Why would somebody engage in a family-limited partnership structure?

Sort of the foundation of this, and then there's sort of things you can build on top of it is the concept of discounting. And so when we've been talking about the exemption, we're talking about, you know, call 14, 13.61 million. And so we've been saying if your estate is above, you know, 27.2 million, well, it's more complicated than that because if you own assets that have some restriction on them, right, the ability to sell without a partner's consent, maybe you don't control it at all.

It's just an income interest right. You're not a sort of controlling partner. Then the value of that asset is discounted for estate tax or gift tax purposes. So a family limited partnership, an LLC, sometimes with voting and nonvoting shares. What this allows you to do is separate out types of ownership of an entity. So you've got sort of, let's say a limited partner that doesn't have voting rights.

So basically I have an income interest and they can't control sort of what that partnership does. Well, if you owned 40% of that, no one's going to pay you 40% of the fair market value of the assets because they can't control it. It's not liquid. It's hard to sell that to a third party. And so ultimately you can reduce the value.

And so this would be the purpose behind these LLCs or these FLPs is to create interest in estate that can be discounted and not, and not sort of taxed at full fair market value. Once you do that, now you're in the situation where you can do other transactions, you can do gifting, you can do sales transactions.

But that's sort of the kind of the baseline to do more, more powerful planning.

So if you're invested in a property with, you know, several different members and your limited partner, let's say that property, your values were $20 million because you don't have voting, because you don't have control, because you can't make a decision on, you know, when and how much that gets sold for somebody else making that decision for estate tax gifting purposes, the value of that property might not be worth $20 million.

It might be worth 14 or 15. Yeah. And so that's an example of a family limited partnership in terms of being able to reduce the value.

Exactly right. And just so people know, it's from an administrative standpoint on on this kind of a transaction, you are sort of appraising the value of the business itself, sort of full fair market value. It might be real estate, it might be a business, who knows. And then you're getting sort of a discount valuation, an actual professional evaluation of what would someone purchase this partial interest for or this limited interest.

What's nice about the gift- doing it as a gift is you put that on a gift tax return, and the IRS has three years to challenge your valuation. Right. And it's not that they won't, but it's less likely because there's nothing at stake for them. There's no tax to pay necessarily. And so it's... you sort of get to lock in that lower valuation.

Whereas in an estate, if you, you have the limited interest, so you still get a discount when you pass away. The dollars are on the table. And so I'd like to think it's always like fair. But in my experience, when there's dollars on the table and you throw a 30%, 35% discount down, the IRS says, well, no, this is a negotiating start.

How about 25? And then for every dollar they get $0.40. And so you know I would encourage people to to consider doing it. If they feel comfortable through gifting. Do it now. Lock it in. You've got future appreciation you know. So there's some benefits.

And by gifting you're referring to using part of your estate exemption today or your annual gift limit as well to kind of take advantage of those opportunities.

Yeah. Yeah yeah. Sort of accelerate that now.

Quick summary. Right. In about a year and a half these rules are subject to be reduced in terms of the estate the estate tax rules. What would you advise somebody to do?

Well I mean, get organized first, right? If you're going to go into a meeting, you're really going to want to know, you know, what's the value of what I own? What are some limitations? So do things have debt on them? Right. Because that's going to be a roadblock on certain kinds of plans. Where's my cash flow coming from?

How much do I need? Maybe project out future needs to the extent possible. Obviously it's uncertain, but without this information, it's going to be hard to know which assets make sense? Does planning make sense? I mean, are there things that are important in the family that we're going to keep? Are there things that we probably don't want to keep?

All of this comes up because of the trade offs involved with giving something away versus keeping it, getting a step up in basis and selling it. And there's... so I would say get yourself organized, get your assets together, get your income, your financial planning, cash flow planning, which, by the way, high net worth clients sometimes don't do- they don't need cash flow planning.

The cash flow is fine. But we're not talking about can you retire? We're talking about can you give this away and still be okay? Yeah. So I would get all that organized and then sort of get in soon and, and think about starting this year on just kind of getting organized on, on the potential plan so that we have a whole year.

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