Preparing for changes to the US Estate Exemption Limits

Current exemption limit and pending changes

As of 2024, the federal estate tax exemption limit is $13.61 million per individual or $27.22 million for married couples, meaning that estates and lifetime gifts valued below this amount are not subject to federal estate and gift taxes.

If the incoming US Congress does not re-authorise the law, the threshold will be reduced to approximately $7 million per individual (or $15 million for married couples) on January 1, 2026 ($5 million, indexed inflation).

With the potential for the amount individuals can put into a trust estate or gift tax free to essentially halve, this lower exemption limit would result in more estates becoming subject to federal taxes, potentially increasing the tax liability for heirs.

Dynasty Trusts – a potential solution

A dynasty trust is a long-term trust designed to pass wealth from generation to generation while reducing or eliminating exposure to estate, gift, or generation-skipping transfer (GST) taxes.

Key features of Dynasty Trusts include:

• Long duration: These trusts can last for many generations, potentially indefinitely, depending on state laws. South Dakota was the first US state to abolish the Rule Against Perpetuities in 1983, allowing a trust to endure indefinitely.
• Tax efficiency: By funding a dynasty trust with assets up to the current exemption limit, you can take advantage of the current exemption amounts before they potentially decrease. This strategy may provide significant estate and GST tax savings on the assets in the trust.
• Asset protection: Assets in a properly drafted dynasty trust are protected from creditors, lawsuits, and divorce settlements, providing long-term financial security for beneficiaries.

To maximise benefits, individuals can fund the trust with assets up to the current exemption limit ($13.61 million per individual). By doing so before the exemption limit potentially decreases in 2026, they can utilise the higher existing exemption amounts and avoid higher tax liabilities in the future.

The trust can be designed to allow for distributions to beneficiaries according to specific terms set by the grantor. This can include provisions for education, health, maintenance, and support, or more specific guidelines.

Some states have rules against perpetuities that limit the duration of trusts. However, several states have abolished or extended these rules making dynasty trusts a more viable option.

Strategic planning and next steps

• Consult with an Estate Planning Attorney:

Due to the complexity of tax laws and trust structures, it is crucial to work with a professional to ensure the trust is set up correctly and complies with all legal requirements.

• Review Current Estate Plan:

Analyse the current estate plan and consider how the upcoming changes will impact it. Determine if establishing a dynasty trust is beneficial based on individual financial situations and goals.

• Consider State Laws:

Evaluate the state laws regarding dynasty trusts and consider setting up the trust in a state with favourable laws if your state has restrictive rules.

By proactively planning and utilising dynasty trusts, individuals can mitigate the impact of the upcoming reduction in the estate exemption limit, protect their wealth, and provide for future generations effectively.

How ZEDRA can help

Since our beginning, we have been helping high net worth individuals, families, entrepreneurs and investors to secure their futures. Contact Chris Bouwman to find out more about how we can help you set up a South Dakota Trust.