When it comes to estate planning, the best advice is to plan early and often. Not only is the current gift, estate and generation-skipping transfer, or GST, tax exemption amount automatically set to be cut roughly in half after 2025, but depending on elections in November, we could see some significant changes sooner.

Past proposals have included subjecting grantor trusts to estate taxes, eliminating discounts for related party transfers, taxing sales to intentionally defective grantor trusts and even implementing a new capital gains tax at death. Accordingly, families looking to pass on intergenerational wealth in the most tax-efficient manner should consider taking action as soon as possible.

Following a 1,994 percent increase in the exemption amount over the past 25 years, each individual currently has a $13.61 million exemption amount in 2024, which means a married couple can give $27.22 million to loved ones during life or after death without owing any gift, estate or GST tax.

That exemption amount is a use-it-or-lose-it benefit, so if the exemption amount goes down in the future, any prior gifts will be protected from future estate tax inclusion. The Treasury Department issued final regulations in 2019 confirming that there will be no so-called clawback for tax purposes if an individual makes a tax-free gift under the current law and the government reduces the exemption amount in a future year.

The other change that could occur is an increase in the gift, estate and GST tax rate, which is currently at 40 percent. From a historical perspective, the

highest rates ranged from 55 percent to 77 percent for almost 70 years before 2002. Therefore, not only could the exemption amount be reduced, but the gift, estate and GST tax rate could be significantly increased in the future.

Given the potential reduction in the exemption amount and possible increase in tax rates, there is a narrow window of opportunity remaining through 2025 for families to transfer substantial wealth to future generations permanently free of gift, estate and GST tax.

Let’s look at three planning strategies that can affect this transfer, keeping in mind that any big decision should be made in the context of each family’s long-term wealth plan and in close consultation with advisors.

Dynasty Trusts

One of the most popular wealth transfer strategies is to create a Dynasty Trust in states like Delaware with strong asset protection laws for the benefit of children, grandchildren and future generations. A Dynasty Trust could not only prevent future gift, estate and GST tax, but also could help protect assets for family members from future creditors in the wake of any number of potential events, such as a car accident or divorce. For instance, a married couple could transfer $27.22 million tax-free into a Dynasty Trust. Those assets and all the future growth would be permanently set aside for family members without ever being subject to gift, estate or GST tax.

As an example of the potential future benefit provided by Dynasty Trusts, a $27.22 million Dynasty Trust growing at a 7 percent net rate per year would set aside potentially $207 million in 30 years for future generations free of gift, estate and GST tax. Moreover, many asset protection trust states like Delaware have eliminated the common-law rule against perpetuities, which means the Dynasty Trust can support multiple generations of a family for hundreds of years.

Dynasty Trusts are often set up as grantor trusts, allowing the grantor to pay all the income tax for the trust without any gift tax consequences. In other words, the Dynasty Trust’s assets grow free of income tax, and the payment of income tax by the grantor further reduces the grantor’s taxable estate. (Rev. Rul. 2008-22, 2004-64 and 85-13).

Wealthy families in high income tax states may want to consider creating a non-grantor trust—where the trust pays its own tax—in a jurisdiction in which the Dynasty Trust would not be subject to any state income tax. As a non-grantor trust in a state without a state income tax, the Dynasty Trust could continue to grow free of gift, estate and GST tax, as well as state income tax, for generations—subject to potential state sourcing rules and throwback tax, for example, in California and New York.

Spousal Lifetime Access Trusts

Not all wealthy parents are comfortable with permanently setting aside millions of dollars for children and future generations, especially if they might need or want the assets back in the future. In that case, a spousal lifetime access trust, or SLAT, could be the optimal solution to maximize the gift, estate and GST tax savings while still protecting assets for the spouses for the rest of their lifetimes.

With a SLAT, one spouse would create an $13.61 million irrevocable trust with their separate property to benefit the second spouse. After the second spouse dies, the SLAT protects future generations, free of gift, estate and GST tax. It is important to remember that SLATs are irrevocable trusts, which could be a big issue if spouses get divorced in the future.

It also may be possible for the second spouse to create a similar $13.61 million SLAT for the first spouse. However, the two SLATs would need to be independent and different enough to avoid what is known as the “reciprocal trust doctrine” and “step transaction doctrine.” Accordingly, the first spouse is taking a risk that the second spouse might not necessarily fund a second SLAT for the first spouse. Suppose there is concern about the reciprocal trust or step transaction doctrine. In that case, instead of the second spouse creating a similar SLAT for the first spouse, another option could be for the second spouse to utilize their individual $13.61 million exemption by creating an entirely different type of trust, such as a Dynasty Trust, for future generations.

Typically, SLATs are grantor trusts, similar to Dynasty Trusts. As an alternative, careful drafting may make it possible to create a spousal lifetime access nongrantor trust, or SLANT. As a non-grantor trust, the SLANT would grow free of state income tax in a jurisdiction such as Delaware, subject to potential state sourcing rules and throwback tax, for example, in California and New York.

Sale to Intentionally Defective Grantor Trusts

Families looking to maximize the amount they can leave to future generations free of gift, estate and GST tax can consider several strategies that maximize use of the current high exemption amounts. A sale to an intentionally defective grantor trust, or IDGT, which could be a Dynasty Trust or SLAT, is one of the most powerful strategies to set aside substantial amounts of assets for future generations.

Typically, the first step is to fund the IDGT with an amount equal to 10 percent of the assets that the IDGT will be acquiring. The initial gift is often referred to as seeding the trust, although some practitioners are comfortable eliminating this step if there are adequate beneficiary guarantees.

For example, a married couple who are parents could gift $27.22 million to an IDGT, and the IDGT would then buy $272 million worth of assets from the parents for a promissory note. The IRS publishes applicable federal rates monthly; the minimum interest-only payment that the parents would need to charge on a promissory note for 30 years would be 4.79 percent as of June 2024. (Rev. Rul. 2024-12).

To make the sale to IDGT strategy even more effective, wealthy families often sell assets, such as closely held business interests, to the IDGT at a discount due to their lack of marketability and control. For instance, families could create a family limited partnership, or FLP, or a family LLC to manage the family’s investments. It is essential that the entity has a legitimate business purpose and that the family respects both the form and substance of the structure.

Of course, the government could eliminate discounts for family-controlled entities in the future—which has been proposed by the House Ways and Means Committee and the Treasury Department—so there might be limited time to transfer discounted interests in a family-controlled entity before the rules change.

The Treasury Department issued proposed regulations under section 2704(b) in 2016, which would have limited the ability of families to claim valuation discounts for gifts and bequests of interests in family-controlled entities to family members. However, in response to President Trump’s Executive Order 13789 in 2017, the Treasury Department withdrew those proposed regulations. Depending on elections in November 2024, intrafamily discounts once again could be a target for change.

As an example of the substantial amount of assets that parents can transfer to future generations with a sale to IDGT strategy, let’s assume two wealthy parents create an FLP. They could seed an IDGT with $27.22 million and sell a $272 million discounted limited partnership interest to the IDGT. Assuming a 32 percent aggregate discount for lack of marketability and control, that $272 million could have an undiscounted value of $400 million.

The IDGT could purchase the interests from the parents with a $272 million interest-only promissory note using, for example, the June 2024 IRS Sect. 7520 interest rate of 4.79 percent for 30 years.

The IDGT is a grantor trust, so the parents would not owe any income tax on the sale, as the tax rules do not treat it as a sale for income tax purposes pursuant to Rev. Rul. 85-13. If the assets grow at an illustrative 7 percent net rate for the next 30 years, the partnership liquidates, and then the note is paid off, there would be approximately $1.75 billion in the IDGT for future generations that could be permanently free of gift, estate and GST tax. If future estate tax rates eventually go back to the historical norm of 55%, planning in 2024 could save the family almost $1 billion in future tax.

Where Do I Go from Here?

Every family has unique characteristics and dynamics, and again, any plan should reflect the collaborative counsel of advisers, including a wealth manager, attorney and accountant. A professional appraiser also should be included to value assets other than cash or publicly traded securities. And don’t forget to file Form 709, United States Gift (and Generation- Skipping Transfer) Tax Return, to report any gifts that take advantage of the exemption amount.