Can Estate Taxes Be Avoided with a Trust?

Can Estate Taxes Be Avoided with a Trust?

If the federal estate tax exemption is lowered, as is expected, it could go as low as $3 million, reports the article “How Trusts Can Be Used To Counter Tougher Estate Taxes” from Financial Advisor. For Americans who own a home and robust retirement accounts, this change presents an estate planning challenge—but one with several solutions. Trusts, giving and updating estate plans or creating wholly new estate plans should be addressed in the near future.

Not that these topics aren’t challenging for most people. Confronting the future, including death and incapacity, is difficult. Adult children and their parents may find it hard to talk about these matters; emotions, death and money are tough to talk about on their own, but estate planning includes conversations around all three.

Once those hurdles are overcome, an unemotional approach to the business of estate planning can accomplish a great deal, especially when guided by an experienced estate planning attorney. Here are a few suggestions for families to consider.

Estate and gift planning techniques include Grantor Retained Annuity Trusts (GRATs) and Spousal Limited Access Trusts (SLATs). A SLAT is an irrevocable trust created when one spouse (the donor spouse) makes a gift into a trust to benefit their spouse (the beneficiary spouse), while retaining limited access to the assets at the same time they remove the asset from their combined estate. One spouse is permitted to indirectly benefit, as long as the couple remains married.

The indirect access disappears, if the spouses divorce or if the beneficiary spouse dies before the donor spouse. Be careful about creating SLATs for both spouses; the IRS does not like to see SLATs with the same date of origin and the same amount for both spouses.

The GRAT and sales to an Intentionally Defective Trust (IDGT) are useful tools in a low-interest rate environment. For a GRAT, property is transferred to a trust in exchange for an annual fixed payment. A sale to an IDGT is where property is sold to a trust in exchange for a balloon note.

Gifting is an important part of estate planning at any asset level. For 2020 and 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. The simple strategy of aggressive lifetime gifting using that $15,000 exclusion is a good way to get money out of a taxable estate.

Protect the estate plan by reviewing it every four or five years, and sooner if there are large changes to the tax law—which is coming soon—and changes in the family’s circumstances.

Thoughtful use of trusts and gifting strategies can avoid the probate of the will and ensure that assets go directly to heirs. Reviewing the estate plan regularly with an eye to changes in tax law will protect the legacy.

Reference: Financial Advisor (April 19, 2021) “How Trusts Can Be Used To Counter Tougher Estate Taxes”

Estate Planning Options to Consider in Uncertain Times

Estate Planning Options to Consider in Uncertain Times

Now is a good time to reach out to an estate planning attorney to review and update beneficiaries, named executors, financial and healthcare powers of attorney, wills and trusts, advises the article “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage” from Traders Magazine. There are also some strategic estate planning tools to consider in the current environment.

Intentionally Defective Grantor Trusts (IDGTs): These are irrevocable trusts that are structured to be “intentionally defective.” They are gifts to grantor trusts for non-grantor beneficiaries that allow contributed assets to appreciate outside of the grantor’s estate, while the income produced by the trust is taxed to the grantor, and not the trust. The external appreciation requires the grantor to use non-trust assets to pay the trust’s income taxes, which equals a tax-free gift to the beneficiaries of the trust, while reducing the grantor’s estate. Trust assets can grow tax-free, which creates additional appreciation opportunities for trust beneficiaries. IDGTs are especially useful to owners of real estate, closely held businesses or highly-appreciating assets that are or will likely be exposed to estate tax.

Grantor Retained Annuity Trusts (GRATs): GRATs allow asset owners to put assets irrevocably into trusts to benefit others, while receiving fixed annuity payments for a period of time. GRATs are especially effective in situations where low asset values and/or interest rates are present, because the “hurdle rate” of the annuity payment will be lower, while the price appreciation is potentially greater. GRATs are often used by asset owners with estate tax exposure who want to transfer assets out of their estate and retain access to cash flow from those assets, while they are living.

Debt strategies: Debt repayment represents an absolute and/or risk-adjusted rate of return that is often the same or better than savings rates or bond yields. Some debt strategies that are now useful include:

Mortgage refinancing: Interest rates are likely to be low for the foreseeable future. People with long-term debt may find refinancing right now an advantageous option.

Opportunistic lines of credit: The low interest rates may make tapping available lines of credit or opening new lines of credit attractive for investment opportunities, wealth transfer, or additional liquidity.

Low-rate intra-family loans: When structured properly, loans between family members can be made at below-interest, IRS-sanctioned interest rates. An estate planning attorney will be able to help structure the intra-family loan, so that it will be considered an arms-length transaction that does not impose gift tax consequences for the lender.

High-rate intra-family or -entity loans: This sounds counter-intuitive, but if structured properly, a high-rate intra-family or -entity loan can charge a higher but tax-appropriate rate that increases a fixed income cash flow for the borrower, while avoiding gift and income tax.

All of these techniques should be examined with the help of an experienced estate planning attorney to ensure that they align with the overall estate plan for the individual and the family.

Reference: Traders Magazine (May 6, 2020) “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage”