Hot Topics in Marital Deductions and Other Asset Protection Tools

Hot Topics in Marital Deductions and Other Asset Protection Tools

Estate planning is vital to creating a sound financial future for your clients and their loved ones. It’s also a complex area of the law, and effectively navigating the process requires attorneys to stay up to date with evolving laws and legal precedents.

One area of continuing interest to both attorneys and their clients is deductions. Deductions are powerful tools for reducing taxable estates, creating opportunities to protect assets and minimize tax liabilities. But these opportunities are dynamic; what can be deducted one year may not be an option the next. 

Let’s look at what’s new in marital deductions and other asset protection strategies. 

State laws around marital deductions are changing

One of the cornerstones of estate planning deductions is the marital deduction. The marital deduction is a provision that allows for the unlimited transfer of assets between spouses without incurring estate or gift taxes.

Marital deductions play a pivotal role in preserving wealth within a family because they help foster generational wealth transfers without unnecessary tax burdens.

However, recent legal developments—such as the recognition of same-sex marriages at the federal level—have led to complex situations for estate planning.

Delayed recognition of same-sex marriage spurs litigation in Texas

An example of this issue is the case of Kucerak v. United States in Texas. The delay in recognizing same-sex marriages at the state level has triggered litigation since federally recognized couples were not granted state deductions, but are now seeking refunds for taxes paid to the state. 

SLATs increase protection against creditors and taxes in Florida

Another noteworthy change in the estate planning arena is the recent Florida trust law amendment. This modification, designed to make Spousal Limited Access Trusts (SLATs) more appealing, permits a contributing spouse to become the beneficiary in the event of the beneficiary spouse’s demise.

This change in legislation creates potential tax advantages because the SLAT can transition into an asset protection trust for the contributing spouse, offering safeguards against creditors and federal estate tax.

Community property trusts grow in Florida

On June 29, 2021, the Florida Community Property Trust Act was enacted. This Act gives married couples in Florida the option to create a “community property trust” (CPT), essentially converting it to community property status even though Florida is a marital property state. 

CPTs are trusts created jointly by spouses to obtain the rights and benefits of community property. Florida’s new law requires specific language that expresses the desire to treat trust property as community property. Once established, property transfer to the CPT grants community property status and tax benefits to the trust property.

Couples who own high-value property, stocks, or real estate (whether owned by one or both spouses) may benefit from this, as these trusts provide a full step-up in basis for the assets upon the death of the first spouse. 

This benefit is particularly useful if a surviving spouse decides to sell the property. CPTs can also make estate and tax planning easier by reducing the need for spouses to equalize the value of their assets.  

Gift and generation-skipping transfer tax exemptions are increasing (for now)

From 2023, taxpayers had a $12,920,000 lifetime gift, estate, and GST tax exemption—but it’s increasing by $690,000 per taxpayer in 2024 to $13,610,000. If you’re married, you and your spouse could benefit from up to $27,220,000 in exemptions. 

Note that this amount was set by the Tax Cuts and Jobs Act (TCJA) of 2017 and is due to expire in 2025. (Read more below)

By leveraging the annual gift tax exclusion, you can enable your clients to give a certain amount of money each year to individual recipients without incurring a gift tax. You can also explore the generation-skipping transfer tax exemption to facilitate wealth transfers to grandchildren or later generations, bypassing potential taxation at each level.

Sunsetting tax cuts create challenges and opportunities for estate planning strategies

As noted above, the TCJA sunsets in 2025. This legislation initially lowered individual federal tax rates and raised the lifetime estate and gift tax exemption, but will expire at the end of 2025. 

This means that unless new legislation is passed, there will be some notable changes. Namely, individual income tax rates will increase, and standard deductions and exemptions and lifetime estate and gift tax exemptions will revert to pre-TCJA levels. 

While estate planning clients will need to factor in these changes, there are ways to offset the impacts: 

• Roth conversions
• Annual exclusion gifts 
• 529 savings plans 
• Charitable gifts

Note that estate and gift tax exemptions made between 2018 and 2025 can’t be clawed back. 

High interest rates increase interest in Qualified Personal Residence Trusts (QPRTs)

With interest rates still high, homeowners who are in estate planning mode (and they should be!) may be concerned about how to transfer property to their loved ones without the exorbitant wealth transfer tax burden. 

A qualified personal residence trust (QPRT) may be a potential workaround. A QPRT enables clients to transfer ownership of their primary residence or vacation home out of their taxable estate without the burden of a high gift tax. 

Qualified Personal Residence Trusts (QPRTs) are unique in their ability to handle an increase in interest rates. This is due to the way federal tax laws calculate the value of the grantor’s retained use of transferred real estate, which relies on the Internal Revenue Code Section 7520 rate (120% of the applicable federal mid-term rate).

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