Cummings & Lockwood Estate Planning FAQs

Although interest rates remain low from a long-term historical perspective, interest rates are considerably higher than a few years ago. While some tax planning strategies are more effective in lower interest rate environments, others are more attractive when interest rates increase. Below are two techniques which provide better tax results, all else being equal, when interest rates are higher.

A Qualified Personal Residence Trust (“QPRT”) is a tax-efficient means of transferring a personal residence to intended beneficiaries. The concept of a QPRT is relatively simple - the owner of the personal residence transfers it to a trust but retains the right to live rentfree in the residence for a specified number of years. In order to be successful, the original owner must survive the specified number of years. If the original owner is alive at the end of that period, ownership of the residence is transferred to the beneficiaries (or to a trust for their benefit) and the value of the residence is removed from the estate of the original owner. At that time, the original owner can rent the property from the beneficiaries (or trust) if he or she wishes to continue to use the residence.

The primary tax advantage of the QPRT comes from the way in which the value of the residence transfer is calculated for gift tax purposes. The value of the gift is not the full value of the residence on the date of the gift but rather the present value of the beneficiaries’ right to receive the residence after the specified number of years and only if the original owner survives that term. This is calculated by reducing the value of the residence transferred to the QPRT by the value of the original owner’s retained right to live in the property for a period of years using the IRS assumed interest rate on the date of the transfer.

In a high interest rate environment, the value of the original owner’s retained interest increases, thereby reducing the value of the gift. For example, if a 60 year old transferred a $2,000,000 residence to a 15-year QPRT in March 2022 when the IRS assumed interest rate was 2.0%, the taxable gift would have been roughly $1,560,000 while this same gift in September 2025 when the assumed interest rate was 4.8% resulted in a taxable gift of $770,000. Assuming a federal gift and estate tax rate of 40%, the tax savings resulting from the higher IRS assumed interest rate alone is $316,000.

A Charitable Remainder Trust (“CRT”) is a trust which pays a percentage of the trust assets annually to the Grantor or to other noncharitable beneficiaries for a set period of time and, at the end of that period, pays whatever property remains in the CRT to one or more charities. Funding a CRT has a number of tax benefits for the Grantor including:

• The Grantor is entitled to an immediate income and gift tax charitable deduction equal to the present value of the charity’s right to receive the assets remaining in the trust at the end of the trust term. As interest rates increase, CRTs become a more attractive gifting option as the higher interest rate provides the Grantor with a larger charitable income tax deduction.
• The CRT itself generally is exempt from income taxes. Accordingly, appreciated property can be transferred to the CRT and then sold without the CRT paying any immediate capital gains tax. Instead, a portion of the capital gain will be deemed distributed to the Grantor or noncharitable beneficiary each year as part of the annual payment, thus spreading the tax liability over multiple years.

• Clients who are certain they will never need the gifted assets and can maintain financial independence without those assets and the income they may generate.
• Clients who are confident the gifted property will appreciate in value before death.
• Clients who believe that federal tax exemptions will be reduced below the current level for a prolonged period.
• Clients who are willing to gift the entirety of their exemption now, or at least the majority of it.  Because the exemptions may be decreased later, you must give enough now to use what might be taken away.  For example, if you have $13,610,000 in exemption now and use $4,000,000 on gifts, and the exemption is later reduced to $5,000,000, you will only have $1,000,000 of exemption left.  The $4,000,000 you use in gifts now will be applied against whatever exemption is left after the reduction.  In other words, the gift will not be taken “off the top” of the higher exemption amount; it will simply be applied to whatever exemption exists later.  That means making large gifts now is the only way to capture the difference between the historically large exemption amount, and whatever the exemption is subsequently reduced to.

When making gifting decisions, remember to consider capital gains and state tax implications: 

• Connecticut is the only state with a gift tax.  As of 2024, the Connecticut gift tax exemption mirrors the federal gift tax exemption.  The Connecticut gift tax does not apply to gifts by Connecticut residents of out-of-state real property or tangible personal property, but it does apply to gifts by non-Connecticut residents of real property and tangible personal property located in Connecticut.
• New York has no gift tax but has an estate tax with an exemption of only $6,940,000.  This means a New York resident who has not used any gift exemption in the past can gift up to $13,610,000 during 2024 and pay no federal or New York gift tax, while the same gift at death would incur a $1,644,400 New York estate tax.  (Note, however, that gifts made within three years of death are brought back into a New York resident’s estate for purposes of calculating New York estate taxes.)
• Florida has no separate state gift or estate tax.
• Gifting can result in a trade-off of capital gains tax savings for estate and gift tax savings because gifted assets retain the donor’s tax basis for capital gains tax purposes in the hands of the recipient while assets inherited at the donor’s death receive a “step-up” in tax basis to date of death value.

A Spousal Estate Reduction Trust, sometimes referred to as a Spousal Lifetime Access Trust (“SLAT), is an irrevocable trust created by one spouse (the “Grantor Spouse”) for the benefit of the other spouse (the “Beneficiary Spouse”) and/or other family members to remove assets and their appreciation from the Grantor Spouse’s taxable estate.  For married couples, a gift to such a trust can be particularly attractive because the Beneficiary Spouse can be the primary beneficiary of the trust, allowing the assets to remain available to the Beneficiary Spouse.  In addition, if you choose to allocate GST exemption to the gifts to a SLAT, the trust assets and their appreciation can also be removed from the GST tax system for as long as the trust exists, meaning that eventual distributions from the trust to grandchildren and more remote descendants can be made without any transfer tax.

One of the primary drawbacks of a traditional Spousal Estate Reduction Trust or SLAT is that in most states the Grantor Spouse cannot directly benefit from the SLAT.  This traditional design requirement can present a problem for the Grantor Spouse if the Grantor Spouse survives the Beneficiary Spouse.  Fortunately, the Florida Statutes were modified as of July 1, 2022 to permit the inclusion of the Grantor Spouse as a beneficiary of the SLAT after the death of the Beneficiary Spouse (referred to as a “Back-End SLAT”). 

While the Back-End SLAT is an interesting option for clients who wish to retain access to the trust property after the death of the Beneficiary Spouse, it is not without risks.  The primary issue is whether the IRS would treat the Grantor Spouse as having retained an indirect interest in the trust, thereby causing federal estate tax inclusion.  The IRS has issued several rulings addressing this issue that essentially boil down to whether there is a preexisting arrangement with the Grantor Spouse on how trust assets will be distributed after the death of the Beneficiary Spouse.  Therefore, it is imperative that no such prearrangement exist between the Grantor Spouse and the Beneficiary Spouse and/or a third party that the Beneficiary Spouse or such third party will add the Grantor Spouse as a beneficiary or that a Trustee will make distributions to the Grantor Spouse should the Grantor Spouse become a beneficiary. 

In addition to possible estate tax inclusion, because the Back-End SLAT lacks specific support under the Treasury Regulations, the IRS could decide to subject these trusts to the IRS’s anti-abuse regulations which would have severe adverse tax consequences.  Despite these issues, for some it may be worth the risk to permit the Grantor Spouse to be a future, potential beneficiary of the SLAT.

A Dynasty Trust is a trust that is designed to benefit multiple generations by continuing to hold property in trust for each generation with the assets in the trust exempt from estate tax and GST tax.  The current increased gift and GST tax exemptions present an excellent opportunity to benefit grandchildren, great-grandchildren and more remote descendants by using those increased exemptions to fund a Dynasty Trust.  Estate Reduction Trusts (discussed above) can be designed as Dynasty Trusts.  Trusts in Florida can be designed to exist for as long as 1,000 years and, with Connecticut’s recent trust law changes, trusts in Connecticut can be designed to exist for up to 800 years.  Because of these extended time periods, Florida and Connecticut residents no longer have to establish Dynasty Trusts in states like Delaware in order to take advantage of longer trust terms.  New York, however, still requires that trusts terminate within approximately 90 years so New York residents may want to consider establishing trusts in jurisdictions such as Connecticut, Florida or Delaware for this reason.

A Qualified Personal Residence Trust is a tax-efficient means of transferring a personal residence to your intended beneficiaries.  The concept of a QPRT is relatively simple:  the owner of the personal residence transfers it to a trust but retains the right to live rent-free in the residence for a specified number of years.  In order to be successful, the original owner must survive the specified number of years.  If the original owner is alive at the end of that period, ownership of the residence is transferred to the beneficiaries (or a trust for their benefit) and the value of the residence is removed from the estate of the original owner.  At that time, the original owner can rent the property from the beneficiaries (or trust) if he or she wishes to continue to use the residence. 

The primary tax advantage of the QPRT comes from the way in which the value of the residence is calculated for gift tax purposes.  The value of the gift is not the full value of the residence on the date of the gift, but rather the present value of the beneficiaries’ right to receive the residence only after the specified number of years.  Generally, no matter how a QPRT is structured to reduce the value of the gift, the gift will still be substantial.  With the impending sunset of the 2017 Tax Act, QPRTs may be an appropriate vehicle for people who are looking to use their available exemption before it disappears but do not wish to give away other income-producing assets.

A Qualified Terminable Interest Property (“QTIP”) Trust can be established by you during your lifetime for the benefit of your spouse.  No gift tax is imposed on the transfer of assets to a QTIP Trust because the trust qualifies for the marital deduction.  While Lifetime QTIP trusts do not use gift tax exemption and therefore are not an effective vehicle for locking in the temporarily increased gift exemption, these trusts allow you to take advantage of your increased GST exemption in a manner that allows your spouse to continue to have access to the assets during the spouse’s life.

Gifts of fractional interests in assets such as real estate, limited liability companies and closely owned corporations can be an effective way to leverage the use of your available gift and GST exemptions because the fair market value of a fractional interest in property is often less than its corresponding proportion of the fair market value of a 100% interest in the property.  This is because there is no ready market for the sale of those fractional interests and those who own fractional interests have little or no control over the property.  Therefore, an appraiser will take into account this lack of marketability and lack of control when valuing the fractional interest.  Any of the trusts discussed above can be funded with fractional interests in property that take advantage of this valuation method in assessing fair market value.