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Can we reduce our estate tax bill without losing access to our assets?

Reducing estate taxes is a fundamental aspect of estate and legacy planning. But first, what does “taxable estate” mean?

In Washington, when you pass away, your first $2.193 million passes estate tax free, but you’ll pay the state between 10—20% of the value above that. On top of that, you’ll pay the federal government up to 40% of any assets over $11.7 million (scheduled to drop to $5 million in 2026). Fortunately, there are strategies to reduce these taxes. Unfortunately, many of them require you to give up access to these assets.

Now you’re faced with a tough choice – give up access and control of your resources to avoid the taxes or risk an ever-growing tax bill. But what if there were ways to get assets outside of your taxable estate, but not entirely out of reach? This article will explore some of the tools to do exactly that. These fall into two categories:

  1. Maintain “control” or decision making capacity over the funds, give up some access.
  2. Maintain “access” or ability to use funds during your life, give up some control.

 

Strategies to maintain control
  • Donor Advised Funds (DAF) are charitable investment accounts. Contributions can be tax deductible, invested tax-free at your direction, and given to qualified charities all at once or over a period of years – it’s up to you. If a portion of your estate is earmarked for charity but you aren’t ready to commit to a specific cause yet, a DAF might be for you. Children and grandchildren can also be named as “advisors” on your DAF, so they can be part of your giving now or in the future!

 

  • Irrevocable Life Insurance Trusts (ILIT) are created to own a life insurance policy and pay proceeds to your beneficiaries when you pass away. Rather than moving significant assets out of your estate and giving up control all at once, you make smaller annual gifts to the trust to fund the life insurance premiums. These contributions reduce your estate, the premiums turn into a tax-free benefit for your family, and you keep control of these assets for a longer period of time. ILITs are often used to pay estate taxes on sizeable, illiquid assets, like commercial real estate or a family business, so the property or business can pass to the next generation.

 

  • Family Limited Partnerships (FLP) allow General Partners to maintain controlling shares of partnership-owned assets while giving non-controlling shares to Limited Partners, typically children or grandchildren. Using a FLP, you could transition 99% of the family business over time in non-controlling shares to your kids and grandkids, while maintaining a 1% controlling interest. This can be a powerful way to transition a business because, as General Partner, you keep 100% control until you’re ready to hand over the reins and the Limited Partners’ shares grow outside your estate.

 

Strategies to maintain access
  • Charitable Remainder Trusts (CRT) provide a lifetime benefit to you with the remainder going to a qualified charity at death. Because contributions are irrevocable and ultimately intended to go to charity, you receive an up-front tax deduction and are also entitled to annual income for your lifetime. This can be a great way to move highly appreciated stock, real estate, or business ownership out of your estate but maintain income to support your living expenses.

 

  • Intrafamily Loans allow you to loan an asset to a trust for the benefit of your children or grandchildren with the option of forgiving that loan in the future. You might loan a $10 million asset to this trust in exchange for a note. Income would now come from note payments rather than directly from the asset. If the Applicable Federal Rate were 1%, the trust would pay you $100,000 per year and all other growth would now be outside your estate. You can also forgive the note down the road if you decided that you no longer needed the income.

 

  • Spousal Limited Access Trusts (SLAT) are irrevocable trusts set up by one spouse for the benefit of the other spouse and their children. Assets from your estate move into a trust, your spouse maintains access to the funds during his lifetime, and remaining assets are divided up into trusts for the benefit of your children at your death. During your life, if you share expenses, your spouse’s access to income from the trust benefits you, as well. When you pass, growth on remaining assets passes to your kids estate tax-free.

 

  • Reversible SLATs take the strategy above and gives you, the Grantor, the ability to take loans from the trust and pay back those loans at death from your taxable estate. If you owed $3 million to the SLAT at your death, the first $3 million of your estate would repay the loan, further reducing your taxable estate.

 

  • Loan Regime Split Dollar is a variation on the ILIT mentioned earlier that creates some access during your life. You’ll establish the same trust-owned life insurance on your life for the benefit of your children. In this strategy, rather than gifting premiums to the trust, your contributions are treated as a loan to the trust under a “split-dollar agreement”. You can access income from the trust through loan payments, which the trustee can provide from the policy cash value. At death, the trust will use insurance proceeds to repay the loan, which will be included in your estate, but keeps remaining proceeds outside of your estate.

 

This is not an exhaustive list, but it should demonstrate that efforts to reduce estate taxes don’t always result in full loss of control or access. Complex strategies like these should be carefully considered. But when properly coordinated by an expert financial team, you may find that moving assets out of your estate doesn’t necessarily mean putting them out of reach!

Alterra Advisors - Josh Whelan

Zach Hamilton

Financial Advisor

About the Author

Zach graduated from Gonzaga University with degrees in Marketing and Finance. While growing up, Zach heard stories from his grandfather about his work as an insurance agent, and other stories from his dad who was an investment manager. They both spoke financial “languages” but had completely different dialects. Recognizing the breadth of the financial vocabulary ultimately led to Zach’s passion for financial planning. He credits his family for this enthusiasm. Zach sees his time with clients as an opportunity to translate all of the different – and often confusing – information they’ve heard and provide clear guidance for each unique situation.

Zach enjoys working with people – his clients – who also appreciate that their financial decisions have an impact not just on themselves, but also on their families, charities and their own life legacy. Many of Zach’s clients have a strong desire to “make a difference”, and they rely on his financial expertise to magnify their philanthropic goals.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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