Estate Tax Reduction Success — ILIT, GRAT, Annual Exclusion Planning for a NJ/NY Retired Couple

TAX · ESTATE PLANNING · SONG LAW FIRM SUCCESS STORY

Client Profile

A retired couple with real estate, business interests, and investment portfolios spanning New Jersey and New York came to Song Law Firm concerned about the estate tax burden their children and grandchildren would face. The clients wanted to pass on the maximum possible to the next generation while the federal estate tax exemption remained at historically high levels. Their combined net worth was substantial, and without proactive planning the projected tax exposure would grow significantly once the scheduled sunset of enhanced exemptions arrived.

Case Background

Federal estate tax exemptions were nearly doubled by the 2018 Tax Cuts and Jobs Act, but the enhanced levels are scheduled to sunset at the end of 2025. Beginning 2026, the exemption is projected to be roughly cut in half. Assets not transferred during the window of higher exemptions will be exposed to significantly greater tax when the sunset takes effect. New Jersey has eliminated its estate tax but still imposes an inheritance tax that varies by beneficiary class, with Class C and D relatives facing meaningful rates. New York retains its estate tax and has a well-known "cliff" that subjects an entire estate to full tax once assets exceed a threshold by more than a small margin.

Legal Issues

Reviewing the couple's holdings, several strategic issues surfaced:

• Urgency of transferring assets before federal exemption sunset
• New Jersey inheritance tax variability by beneficiary class
• Avoiding the New York estate tax "cliff"
• Life insurance death benefits currently includable in the gross estate
• Moving future appreciation out of the taxable estate before growth occurs

Song Law Firm Strategy

Working closely with the clients' CPA and financial advisor, Song Law Firm designed a four-pronged integrated plan.

First, an Irrevocable Life Insurance Trust (ILIT). Existing whole life policies were assigned to a new ILIT so that the death benefit would fall outside the gross estate. Timing and mechanics were carefully calibrated to address the IRC §2035 three-year lookback rule.

Second, Grantor Retained Annuity Trusts (GRATs). Business interests and growth-oriented investments with high appreciation potential were placed into rolling short-term GRATs, allowing appreciation to pass to children without consuming lifetime exemption. Execution was timed to take advantage of favorable IRS §7520 rates.

Third, annual exclusion gifting. A ten-year rolling plan was built around per-donee annual exclusion limits (approximately $18,000 per donee in 2024, or $36,000 combined for a married couple), covering children, grandchildren, and children's spouses. The five-year front-loading option for 529 education plan contributions was also incorporated.

Fourth, portability and trust structuring. The plan preserved the ability to elect portability of the deceased spouse's unused exclusion (DSUE) on a timely Form 706, and layered credit shelter and QTIP trust structures to align income needs, control, and generation-skipping planning.

Process

The first three months focused on asset diligence and valuation. Each LLC interest, real estate parcel, and portfolio position was appraised by qualified professionals to produce IRS-defensible valuation reports. Months four through six were devoted to trust drafting, execution, and phased asset transfers. Life insurance ownership assignment was prioritized to start the §2035 clock. GRAT funding was timed with favorable §7520 rates. Months seven through nine were spent completing gift tax returns (Form 709) and coordinating income tax reporting with the CPA team.

Result

• Meaningful reduction in projected federal estate tax exposure through pre-sunset transfers
• New Jersey inheritance tax burden reduced by adjusting allocations toward Class A beneficiaries
• New York estate tax "cliff" avoided through disciplined portfolio and gift design
• Family alignment achieved via shared roadmap and scheduled reviews

Specific dollar figures are not disclosed to protect client confidentiality, but the delta between planned and unplanned outcomes was substantial.

Takeaways

The window before federal exemption sunset is the single most important estate-planning inflection point of the decade for high-net-worth couples. ILIT, GRAT, annual gifting, and portability each work independently, but integrated design produces meaningful multiplication of benefits. New Jersey and New York dual-jurisdiction estates require additional attention to state-specific rules (NJ inheritance tax classes and NY estate cliff) to fully optimize.

FAQ

Q1. Is the exemption sunset certain?

Current law fixes the sunset at the end of 2025, though legislative changes remain possible. The uncertainty itself is a reason to plan proactively rather than wait.

Q2. What happens if the grantor passes away shortly after establishing an ILIT?

Under IRC §2035 the death benefit may be pulled back into the gross estate if the grantor dies within three years of transferring an existing policy. Design choices mitigate this exposure.

Q3. What are GRAT risks?

If the grantor dies during the GRAT term the trust assets may be included in the estate. Short-term rolling GRATs spread this risk across multiple vehicles.

Q4. How is New Jersey inheritance tax calculated?

Rates depend on the beneficiary's class (A through E). Class A (direct descendants, spouses, parents) is exempt, while Class C and D face notable rates.

Q5. Is portability automatic?

No. A timely Form 706 must be filed at the first spouse's death to preserve the DSUE for later use by the surviving spouse. Missing this election is generally not curable.