Metz Lewis Brodman Must O'Keefe

Metz Lewis Brodman Must O'Keefe

Posted on March 1, 2019

The Irrevocable Spousal Trust (“IST”) is an irrevocable trust created for the lifetime benefit of the grantor’s spouse, and then typically for the benefit of children or grandchildren.

The IST is usually funded with cash, securities, or closely held business interests.  What makes the IST so attractive is that the financial benefit of the trust assets remains within the marital unit, while still constituting a completed gift for federal estate and gift tax purposes.

Why Consider an IST?

The Tax Cuts and Jobs Act (the “TCJA”) raised federal estate tax and generation-skipping transfer tax (“GSTT”)[1] exemptions.  The TCJA raised the threshold for federal estate and gift tax and GSTT from $5,490,000 to $11,400,000.  Because this increase will expire on December 31, 2025, and the thresholds will revert to their pre-TCJA amounts, taxpayers face a “use-it-or-lose-it” situation.  The IST gives a married couple an attractive way to use these increased exemptions.

The IST Moves Appreciation Out of Your Estate

Two spouses, each using their $11,400,000 GSTT exemptions, can each create one or more trusts that would, in the aggregate, shelter up to $22,800,000 of family assets for several generations.

If you do no further gift planning, then future appreciation on assets that you do not spend (i.e., literally consume) will be taxed in your estate.  This means that the federal government will confiscate 40% of at least some of that growth in value.

If you own assets of $20,000,000, an increase of 100% in overall value would generate additional federal estate tax of $4,000,000 at today’s 40% rate.  An increase of 200% in overall value would generate additional federal estate tax of $8,000,000.

The sole goal of the IST is to shift appreciation out of your estate, thereby avoiding paying 40% federal estate tax.

The IST Works Even if You Don’t Want to Gift

Even for couples who have no desire to do more gifting, the IST uses gifting purely to reduce the amount payable to the federal government at your deaths.  The IST is not intended to provide any current benefit your children before your deaths.

The IST is a novel approach because it is basically a no-lose proposition for any person who would otherwise not be considering additional gifting.

[1] The federal government imposes a second tax in some situations, called the Generation-Skipping Transfer Tax, or the “GSTT.”  In basic terms, the GSTT was enacted to ensure that as assets pass from one generation, the assets will be subject to either a federal estate tax or a generation-skipping tax at each generational level.  In other words, Congress wanted to give people a disincentive to make lifetime or death-time transfers that skipped their children but instead went straight to grandchildren (thereby avoiding federal estate tax when the children died).

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