Large estates may be subject to the federal estate tax, which in 2023 applies a 40% tax on all wealth exceeding $12.92 million for individuals, or $28.94 million for married couples. High-net worth individuals often seek ways of reducing their estate tax liability on their already-amassed wealth, which is frequently done by applying “discounts” to their assets through a complicated web of valuation laws. There are other ways, however, to shift future appreciation of a valuable asset out of an estate, thus avoiding further taxation on a substantial increase in the value of an existing asset, such as a business or piece of real estate.
The strategy, in general, involves transferring the asset out of one’s estate, either by gift or sale, for a certain amount of money, thereby “freezing” the asset’s value. Once the asset is out of the estate, it is free to appreciate as much as possible, without the transferring taxpayer owing any further tax liability on the extra value. Through this strategy, a taxpayer owning a business worth $50 million could potentially save millions of dollars in estate taxes if that business grows to be worth $150 million in the following years. This strategy is not aimed at reducing estate tax on wealth already accumulated; rather, it is for minimizing tax on future wealth that would otherwise accumulate, leading to higher estate tax. Two vehicles, the GRAT and the IDGT, are most commonly used in these scenarios.