King & Wood, P.A.

Top Tips for Estate Planning

“There’s a lot to keep up with when estate planning. These tips could help, from updating beneficiaries after changing your plan to understanding will-substitute options, like transfer on death.”

Social media and in-person conferences are filled with “hacks” to improve lifestyles, finances and everything you can imagine. Taking a page from the world of “life hacks,” this article from Kiplinger, “14 Rapid-Fire Estate Planning Tips,” presents short and impactful info on estate planning.

Tip 1—Consider using a professional trustee in your estate plan for a more effective estate plan and more efficient administration.

Tip 2—For business owners, make sure that your estate planning attorney, CPA and financial advisors all understand your business. Invite them to your office or factory, so they can see how production or business practices are handled and the role of key employees, especially family members.

Tip 3—Discuss Transfer on Death (TOD) and Payable on Death (POD) options to see if they might be useful or detrimental to your estate plan. Many banks are pushing these arrangements, but they are not for everyone.

Tip 4—If you own a closely held company, have your estate planning attorney review any buy-sell provisions in the shareholder and operating agreements. Were these terms coordinated with the liquidity available to your trust or estate?

Tip 5—Do your trust documents include provisions regarding substance abuse powers and protections for beneficiaries? Give the trustee the power to deal with any substance abuse issues, including the power to pay costs directly to vendors and not directly to the beneficiary, require testing and treatment programs and pay for them with trust funds, and withhold mandatory distributions until the beneficiary meets certain testing and treatment standards.

Tip 6—Use an active voice in all forms, communications and agreements. Avoid ambiguity and provide clarity by using the active voice to identify the person who is or will exercise power or duty.

Tip 7—Be careful with personal information and documents. Your estate planning attorney and all other advisors should use encryption to protect emailed documents. Multifactor authentication should be used on any remote access. Don’t open attachments from anyone you don’t know or click on a link in an email from someone you think you know. Pick up the phone and call advisors before opening the email or link.

Tip 8—Ask your estate planning attorney to review the trust’s express standards of care, so you understand the duties and liabilities of the trustee. When a trust states a trust advisor is not a fiduciary and is not liable for actions taken in good faith, then any actions must be in good faith. This is a standard of care, and they are liable for actions taken in bad faith.

Tip 9—Ask your estate planning attorney about having your trust absolve successor trustees of all prior acts of the predecessor trustee. When a trustee is named successor trustee, they will look for this language absolving them of the predecessor trustee’s prior acts of omission or commission. If there’s no such provision in the document, the successor trustee will want all qualified beneficiaries to sign a release and indemnification.

Tip 10—Don’t rely on your memory regarding gift and estate tax returns filed in the past or your past use of lifetime estate tax exemptions, annual exclusion gifts, withdrawal notices and Generation-Skipping Transfer Tax (GSTT) allocations. Locate copies of these documents in your records to ensure that they match. Document your file with any notes or communications about gifting. As a taxpayer, you and your estate are responsible for maintaining records and have the burden of proof in any tax matters.

Tip 11—Anytime you review or update your estate plan, take the time to review any beneficiary designations immediately. Existing deeds, titles, account details and beneficiary designations should all be up to date, as your new estate plan may be ineffective at best (and, at worst, worthless) if those forms are not completed and updated.

Tip 12—If you are a beneficiary, you are allowed to review trust administration and ask questions of the trust officer. You are entitled to know how often you will receive statements or annual accounting, the standards the trustee must follow for making distributions and whether or not you have any control over the use of trust benefits during your lifetime or upon your death.

Tip 13—When updating your estate, ask your estate planning attorney about drafting trust restatements and new wills rather than trust amendments and codicils. Modern word processing makes it just as easy to prepare complete restatements rather than multiple amendments.

Tip 14—If you file personal tax returns and fiduciary tax returns for trusts, it may make sense to use the same accounting firm for both.

Reference: Kiplinger (Nov. 8, 2023) “14 Rapid-Fire Estate Planning Tips”

Why You Need to File an Estate Tax Return

“The estate tax is a one-time tax due nine months after someone dies, if their assets reach a certain threshold.”

Even if your spouse has died and left all their assets to you and no estate tax is due, you still need to file an estate tax return. Doing so may save your family significant sums in estate taxes after your death, according to a recent article from Forbes, “5 Reasons You Must File An Estate Tax Return (Even When No Tax Is Due).”

The estate tax is a one-time tax due nine months after the date of death. The federal threshold in 2023 is $12,920,000 for an individual. Many states have their own estate taxes, with thresholds ranging from $1 million in Oregon and Massachusetts to $12,920,000 in Connecticut. Your estate planning attorney can advise which assets are included in calculating this amount. For example, many people are surprised to learn that proceeds from their life insurance policies are taxable on their death, unless the policy is owned in an irrevocable trust.

No estate tax is due if your assets are left to your surviving spouse because of the unlimited marital deduction. You get an unlimited deduction for the assets left to your spouse. Spouses can leave any amount to their surviving spouse tax-free, whether $2 or $2 million. However, there are reasons to file an estate tax return. The law requires it, even if the value of your estate assets is below the filing threshold.

If you’ve done estate planning, your spouse most likely has a trust that will break into various sub-trusts upon her death. As the surviving spouse, you’ll need to fund those trusts and apportion assets to them, which is done through the estate tax return. The estate tax return establishes the value of what those trusts are funded with.

Critical tax elections. When you file an estate tax return for your spouse, you’ll make certain elections to determine what assets are included in your estate when you die.

Tax savings for heirs. If your spouse has not used up all their $12,920,000 exemption, you can lock in their unused portion and port it to your estate tax return when you die. The portability of the deceased spouse’s unused exemption could potentially save your children millions of dollars in estate taxes in the future.

The combined exemption for two spouses is currently $25,840,000. The federal estate tax rate can be as high as 40%. By locking in the unused exemption, you could save more than $5 million in estate taxes that would otherwise be due on your death. Even if your assets are not in the $12 million to $25 million range, this is still smart because your assets could increase in value, and the estate tax thresholds are scheduled to drop to $5 million in 2026 (adjusted for inflation).

More tax savings for grandchildren. If your spouse has yet to use all of their general-skipping transfer tax (GST Tax) exemption, you can lock in their remaining GST Tax exemption. The GST Tax is a 40% tax on assets, if you “skip” your children and leave them directly to your grandchildren or in a trust that will eventually be distributed to them. The amount of GST Tax exemption is the same as the estate tax exemption, $12,920,000 per person in 2023. Therefore, the amount is the same, but they are different taxes.

Reference: Forbes (May 10, 2023) “5 Reasons You Must File An Estate Tax Return (Even When No Tax Is Due)”

Get These Estate and Tax Items Done Before It’s too Late

“What estate planners need to accomplish for their clients before Tax Day, as well as the regulatory changes they need to be aware of while preparing for the big day.”

This year, tax day falls on April 18 because of the weekend and because the District of Columbia’s Emancipation Day holiday takes place on April 17. Don’t let these extra days go to waste, says a recent article from Investment News, “Top things for estate planners to do before Tax Day 2023.”

Now that the SECURE 2.0 Act has taken effect, there’s much to do before the April 18 deadline. Taxpayers should review their wills and trusts to confirm that their wishes are effectively stated. However, there’s more this year. Asset valuations, family circumstances and changed laws are all reasons to review these documents. While you’re preparing taxes and reviewing net worth statements is also an excellent time to review IRA Required Minimum Distributions (RMDs), and beneficiary designations and make an appointment to review your estate plan in light of current estate planning laws.

Current federal estate, gift and generation-skipping transfer tax exemptions are currently $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. This changes dramatically on January 1, 2026, when both numbers will be cut in half. Therefore, planning needs to be done well before the dates when these exemptions shrink.

Wealthy married couples may consider using the Spousal Lifetime Access Trust. This allows the couple to gift their increased exemptions before the reduction in 2026. If the trust is drafted properly, spouses will remain in a similar economic position as long as both spouses are alive and married to each other. The SLAT benefits the donor’s spouse, while also taking advantage of these high exemptions. For example, Betty creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her husband Barney will receive income and possibly principal. While Barney is still alive and married to Betty, their lifestyle remains intact.

When Barney dies, all amounts payable to Barney end and the trust assets pass to the following or remainder beneficiaries named in the document. They may receive the trust assets outright or in further trusts. For example, the assets are held in trust for Betty’s children for their lives, and Betty’s GST is allocated to the SLAT. If the trust is created in this way, the children receive income and principal during their lives, and the trust may continue for Betty’s grandchildren without being taxed in their respective estates.

The IRS has issued guidance stating that, with certain exceptions, most completed gifts made now will not be subject to a clawback if the taxpayer dies after exemptions are reduced.

Various states have their own additional estate, gift and/or inheritance taxes and exemptions.  Your estate planning attorney will be able to explain what state-specific laws apply to your situation.

For families whose wealth is tied up in real estate property, assets can be titled differently to lower taxable estates. For example, transferring a home to a Qualified Personal Residence Trust can remove the asset from the taxpayer’s estate, while only a fraction of the home is counted as a gift. However, after the QPRT term, the grantor must pay rent to keep the home outside their estate.

For commercial property, contributing the property to an entity and then making gifts of partial interests in the entity may be helpful. However, the gifts of a portion of the entity may qualify for discounts for lack of control and marketability.

These are just a few steps to be taken before tax day 2023 and before the high exemption levels revert to pre-JCTA levels. Your estate planning attorney will know which steps are more effective for your family.

Reference: Investment News (Feb. 27, 2023) “Top things for estate planners to do before Tax Day 2023”

Will Estate Tax Exemption Change In 2022?

“Which tax-free transactions will trigger an estate tax, if the taxpayer dies after the higher exemption amount sunsets?”

It is possible the proposed clawback regulations from the Treasury may undermine the estate planning you’ve done to address the reduction in estate tax exemptions coming on January 1, 2026. These proposed regulations are not as severe as initially feared, but they do pose a threat to some estate planning, according to a recent article titled “Proposed Clawback Regs May Undermine Some Estate Planning” from Wealth Management.com.

On a positive note, if your estate plan includes a SLAT (Spousal Lifetime Access Trust) or a Self-Settled Domestic Asset Protection Trust (DAPT), the proposed regs shouldn’t prevent you from securing those exemptions, as long as they work with the other aspects of the planning. The proposed regulations are complex and may change the anticipated results of several other estate planning strategies.

When the Tax Cuts and Jobs Act of 2017 was passed, the federal estate tax exemption doubled from $5 million to $10 million, adjusted for inflation until January 1, 2026, when it ends. Some taxpayers made transfers, usually to irrevocable trusts, to secure the temporarily higher gift, estate, and generation-skipping (GST) exemptions. However, what’s not clear is what happens if the taxpayer who made these gifts dies after the higher exemption ends and the new exemption is considerably lower.

In most, but not all, cases, such gifts won’t be subject to a clawback. However, there are exceptions in the proposed new regulations.

The Treasury is concerned about gifts made where the taxpayer continues to retain control over assets. One example is funding a Grantor Retained Interest Trust (GRIT) so the gift would be deemed made of the entire amount transferred with no reduction for the interest retained because the value of the retained remainder would be zero.

A Preferred Partnership could also be structured that intentionally violated requirements under IRC regulations, so the equity the donor received in the entity would be valued at zero. The taxpayer would have retained a preferred interest and the trust would be set up so the entire value would be treated like a gift when family members acquired the common interests. The gift exemption would be secured and the Preferred Partnership interest would be included in the taxpayer’s estate, but the exemption would be preserved.

These types of transactions are the targets of the proposed regulations. Several types of transfers won’t benefit from the anti-clawback rule, so the lower exclusion at death and not the higher exclusion that was thought to have been secured will still be available.

Your estate planning attorney has been following the efforts of the Treasury to provide anti-abuse regulations. A review of your estate plan is always a good idea, but with these changes coming, it would be wise to evaluate your estate plan to see if any planning needs to be revised. There may be newer, better options.

Reference: Wealth Management.com (May 3, 2022) “Proposed Clawback Regs May Undermine Some Estate Planning”

What are the Advantages of Putting an Estate in a Modern Directed Trust?

“Modern trusts can be drafted, and existing trusts can be modified, to provide flexibility allowing a family the ability to navigate an unknown future and preserve family legacies intergenerationally.”

Many families use their estate, gift and generation-skipping transfer tax exemptions to fund a flexible modern trust for non-tax reasons, explains an article “Trust Planning in Unprecedented Times” from Wealth Management. Future uncertainty is one of the reasons, which seems keenly appropriate today.

Passing family values as well as wealth to future generations is an important part of estate planning for many families. A directed trust can accomplish both goals, through the participation of family members and advisors in the directed trust’s distribution committee (DC). The DC decides how trust income and principal will be distributed and directs the administrative trustee accordingly.

Any distribution over and above the health, education, maintenance and support of beneficiaries needs to be considered from a tax-sensitive perspective, but the DC has the flexibility to make these decisions.

These modern directed trusts can also be created to allow for charitable purposes. Donations to charity from a non-charitable modern directed trusts lets the family express its social responsibility, while obtaining unlimited income tax deductions to the trust.

There are instances where knowledge of a trust is kept from beneficiaries or other family members, if they lack the financial maturity or don’t understand or comply with family values. Other reasons to keep a trust quiet are asset protection, divorce, ID theft and similar issues. In many modern trust states, the trust can remain quiet, even after the grantor has died or becomes incapacitated.

Modern directed trusts provide protection against divorce. Often the trust’s main protection is the use of a spendthrift provision, which prevents the assignment of a beneficiaries’ interests in an irrevocable trust before the interest is distributed. There are exceptions to the spendthrift clause, and alimony is one of them. In recent cases, courts have disregarded the spendthrift clause when exceptions are involved, especially in cases of divorce.

Litigation can be a problem for trusts. Modern trusts provide excellent asset protection when trust discretionary interests are not defined as property or an enforcement right. Many trusts have clauses providing a court to award legal fees and costs to the winning party. The trustee may be reimbursed for attorney’s fees if the plaintiff loses, a significant discouragement for embarking on litigation against a modern trust.

COVID-19 has reframed how often people think about their mortality, which has fueled interest in creating trusts to protect family assets and heirlooms. A “purpose trust” doesn’t have beneficiaries, but is created to care, protect and preserve an asset, either for an extended period of time or even perpetuity. Assets typically placed in a purpose trust include gravesites, antiques, art, jewelry, royalties, digital assets, land, property, buildings and vacation homes.

The uncertain times in which we live call for unprecedented estate planning. Modern directed trusts are a way to preserve wealth across generations with flexibility. Regardless of what changes to federal estate, gift or generation skipping trusts may come in the future, trusts make sense.

Reference: Wealth Management (Jan. 10, 2022) “Trust Planning in Unprecedented Times”

What Is a Dynasty Trust?

“If you want to protect your family’s legacy from unnecessary taxes, divorce and creditors over the course of many generations, a dynasty trust could be your best friend.”

Don’t be put off by the term “dynasty.” Just as every person has an estate, even if they don’t live in a million-dollar home, every person who owns assets could potentially have a dynasty trust, even if they don’t rule a continent. If you have assets that you wish to pass to others, you need an estate plan and you may also benefit from a dynasty trust, says this recent article from Kiplinger, “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust.”

When parents die, assets are typically transferred to their descendants. In most cases, the assets are transferred directly to the heirs, unless a trust has been created. Estate taxes must be paid, usually from the assets in the estate. Inheritances are divided according to the will, after the taxes have been paid, and go directly to the beneficiary, who does what they want with the assets.

If you leave assets outright to heirs, when the beneficiary dies, the assets are subject to estate taxes again. If assets are left to grandchildren, they are likely to incur another type of taxes, called Generation Skipping Transfer Taxes (GSTT). If you want your children to have an inheritance, you’ll need to do estate planning to minimize estate tax liability.

If you own a Family Limited Partnership (FLP) or a Limited Liability Company (LLC), own real estate or have a large equity portfolio, you may have the ability to use gifting and wealth transfer plans to provide for your family in the future. You may be able to do this without losing control of the assets.

The “dynasty trust,” named because it was once used by families like the DuPont’s and Fords, is created to transfer wealth from generation to generation without being subject to various gift, estate and/or GSTT taxes for as long as the assets remain in the trust, depending upon appliable state laws. A dynasty trust can also be used to protect assets from creditors, divorcing spouses and others seeking to make a claim against the assets.

Many people use an Irrevocable Life Insurance Trust (ILIT) and transfer the assets free of the trust upon death. Most living trusts are transferred without benefit of being held within trusts.

A dynasty trust is usually created by the parents and can include any kind of asset—life insurance, securities, limited partnership interests, etc.—other than qualified retirement plans. The assets are held within the trust and when the grantor dies, the trust automatically subdivides into as many new trusts as the number of beneficiaries named in the trust. It’s also known as a “bloodline” trust.

Let’s say you have three children. The trust divides into three new trusts, dividing assets among the three. When those children die, the trust subdivides again for their children (grandchildren) in their own respective trusts and again, assets are divided into equal shares.

The trust offers broad powers for health, welfare, maintenance and support. The children can use the money as they wish, investing or taking it out. When created properly, the assets and growth are both protected from estate taxes. You’ll need a trustee and a co-trustee and an experienced estate planning attorney to draft and execute this plan.

Reference: Kiplinger (Oct. 2, 2021) “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust”

Will Inheritance and Gift Taxes Change in 2021?

“Facing down an uncertain election outcome and the possibility of tax reform in 2021, many families started transferring substantial amounts of wealth last year, making large gifts to take advantage of the historically high gift and generation-skipping transfer tax exemptions.”

Uncertainty is driving many wealth transfers, with gifting taking the lead for many wealthy families, reports the article “No More Gift Tax Exemption?” from Financial Advisor. For families who have already used up a large amount or even all of their exemptions, there are other strategies to consider.

Making gifts outright or through a trust is still possible, even if an individual or couple used all of their gift and generation skipping transfer tax exemptions. Gifts and generation skipping transfer tax exemption amounts are indexed for inflation, increasing to $11.7 million in 2021 from $11.58 million in 2020. Individuals have $120,000 additional gift and generation-skipping transfer tax exemptions that can be used this year.

Annual exclusion gifts—individuals can make certain gifts up to $15,000 per recipient, and couples can give up to $30,000 per person. This does not count towards gift and estate tax exemptions.

Don’t forget about Grantor Retained Annuity Trust (GRAT) options. The GRAT is an irrevocable trust, where the grantor makes a gift of property to it, while retaining a right to an annual payment from the trust for a specific number of years. GRATS can also be used for concentrated positions and assets expected to appreciate that significantly reap a number of advantages.

A Sale to a Grantor Trust takes advantage of the differences between the income and transfer tax treatment of irrevocable trusts. The goal is to transfer anticipated appreciation of assets at a reduced gift tax cost. This may be timely for those who have funded a trust using their gift tax exemption, as this strategy usually requires funding of a trust before a sale.

Intra-family loans permit individuals to make loans to family members at lower rates than commercial lenders, without the loan being considered a gift. A family member can help another family member financially, without incurring additional gift tax. A bona fide creditor relationship, including interest payments, must be established.

It’s extremely important to work with a qualified estate planning attorney when implementing tax planning strategies, especially this year. Tax reform is on the horizon, but knowing exactly what the final changes will be, and whether they will be retroactive, is impossible to know. There are many additional techniques, from disclaimers, QTIPs and formula gifts, that an experienced estate planning attorney may consider when planning to protect a family legacy.

Reference: Financial Advisor (April 1, 2021) “No More Gift Tax Exemption?”

Tax Planning Strategies for 2021

“Although uncertainty surrounding the likelihood of tax reform continues for the moment, there are still several wealth transfer strategies that can be considered by those wanting to make gifts.”

The uncertainty surrounding the election and possibility of changes to the tax law led many families to make substantial wealth transfers in 2020, especially as the historically high gift and generation-skipping transfer (GST) tax exemptions were so advantageous. This recent article from Financial Advisor, “No More Gift Tax Exemption? Additional Planning Strategies To Consider for 2021,” discusses the options that are still available for 2021.

Gifting is Still a Good Strategy. Even if you used your gift and GST tax exemptions, you may still make additional gifts outright or in trust using the 2021 inflation adjusted amount. The gift and GST tax exemptions are indexed for inflation, so this year the exemptions went from $11.58 million in 2020 to $11.7 million for 2021. Annual exclusion gifts allow individuals to make gifts up to $15,000 per person, and $30,000 for married couples, which do not count towards the gift and estate tax exemptions.

Direct payments for medical and tuition payment are still good options that won’t deplete the annual exclusion or gift and GST tax exemption. Just be sure to make the payment directly to the qualified educational institution or medical provider.

Grantor Retained Annuity Trusts (GRATS) still work. A GRAT is a special type of irrevocable trust. The grantor makes a gift of property in trust, retaining the right to an annual payment (annuity) from the trust for a specified amount of time. They can be used for a number of different assets, including assets expected to appreciate significantly. Check with your estate planning attorney to be sure this is a good option for you. If the grantor dies within the annuity term, the entire value of the trust generally will be included in the estate, as if it had never been created.

Sale to Grantor Trust. This strategy takes advantage of the differences between the income and transfer tax treatment of irrevocable trusts. The goal is to transfer anticipated appreciated assets at a reduced gift tax cost. In return for the transfer of property, the trust gives the grantor a note, which carries a market rate of interest and usually requires a balloon payment of principal at the end of the note’s term. In most cases, when the trust is a grantor trust, the grantor and the trust are treated as the same taxpayer for income tax purposes, but as two separate entities for transfer tax purposes. Because of this, neither the sale nor the note payments trigger income taxation.

Intra-Family Loans. These loans can be made at lower rates than by commercial lenders without the loan being deemed a gift. This lets an individual help their family members financially, without triggering additional gift tax. Wealth may be shifted, if the loan assets are invested by the borrower and earn a higher return than the required interest rate. Interest is to be paid within the family, and not to a third-party lender.

The intra-family loan establishes both a bona fide creditor relationship and the payment of interest. Family loans can be financially advantageous and emotionally tricky, so navigate with care. Your estate planning attorney will create the proper documents and all parties need to be clear on the details.

These strategies will work best when integrated into your estate plan. Discuss with your estate planning attorney to ensure that they will align with your long-term goals, as well as your tax planning.

Reference: Financial Advisor (Feb. 24, 2021) “No More Gift Tax Exemption? Additional Planning Strategies To Consider for 2021”

Your Estate Planning Checklist for 2021

“Early in 2021, you should communicate with your advisers and review several items about your 2020 planning, if that planning is to have any likelihood of succeeding.”

If you reviewed or created your estate plan in 2020, you are ahead of most Americans, but you’re not done yet. If you created a trust, gave gifts of real estate, business interest or other assets, you need to address the loose ends and do the follow up work to ensure that your planning goals will be met. That’s the advice from a recent article “Checklist 2020 Planning Follow Through: You Have More Work To Do” from Forbes.

Here are few to consider:

Did you loan money to heirs? If you made any loans to heirs or had any other loan transactions, you’ll need to calendar the interest payment dates and amounts and be sure that interest is paid promptly as described in the promissory notes. Correct interest payments are necessary for the IRS or creditors to treat the transaction as a real loan, otherwise you risk having the loan recharacterized or worse, being disregarded completely.

Did you create an irrevocable trust? If so, you need to be sure that gifts are made to the trust each year to fund insurance premiums. If the trust includes annual demand powers (known as “Crummey powers”) to allow gifts to qualify for the gift tax annual exclusion, written notices for 2020 gifts will need to be issued. This can be way more complicated than you expect: if you have transfers made to multiple trusts and outright gifts made directly to heirs, those gifts may need to be prioritized, based on the terms of the trusts and the dates of the gifts to determine which gifts qualify for the annual exclusion and which do not.

If you made gifts to a trust that is exempt from the generation skipping transfer tax (GST), you may have to file a gift tax return to allocate the GST exemption, so the trust remains GST exempt. Talk to your estate planning attorney to avoid any expensive mistakes.

Do you own life insurance? Or does a trust own life insurance for you? Either way, do not ignore your coverage after you’ve purchased a policy or policies. Your broker should review policy performance, the appropriateness of coverage for your plan, etc., every few years. If you didn’t do this in 2020, make it a priority for 2021. Many people create SLATS—Spousal Lifetime Access Trusts—so that their spouse benefits from the trusts. However, if your spouse dies prematurely, the SLAT no longer works.

Paying trustee fees. If you have institutional trustees, their fees need to be paid annually. If you pay the fees directly, the fee becomes an additional gift to the trust, requiring the filing of a gift tax for that year. If the trust pays the fee directly, there might not be a tax implication. Again, check with your estate planning attorney.

Did you make transfers to a trust with a disclaimer mechanism? If you made transfers to a trust that has a disclaimer mechanism and you want to reconsider the planning, it may be possible for beneficiaries or a trustee to disclaim gifts made to the trust within nine months of the transfer, thereby unwinding the planning.

Did you create any GRATs in 2020? If you created a Grantor Retained Annuity Trust, be certain that the trustee calendars the required annuity payments and that they are paid on a timely basis. Missing payments could put the GRAT status in jeopardy. You should also confirm also how the payment is calculated, which should be in the GRAT itself.

The best estate plan is one that is reviewed on a regular basis to ensure that it works, throughout changes that occur in law and life.

Reference: Forbes (Dec. 27, 2020) “Checklist 2020 Planning Follow Through: You Have More Work To Do”

Should a GRAT Be Part of My Estate Plan?

“Low interest rates and looming potential tax changes make this a good time for high-net-worth clients to use a special tool to transfer wealth: the grantor-retained annuity trust (GRAT), a strategy to reduce future estate taxes, by transferring assets to beneficiaries without using the lifetime gift tax exclusion.”

A Grantor-Retained Annuity Trust, or GRAT, is funded by the grantor, the person who creates the trust, in exchange for a stream of annuity payments at a predetermined interest rate—the IRS Section 7520 rate. The interest rate in December 2020 is 0.6%, as reported in the article “Transferring Wealth With This Trust Can Yield Big Tax Advantages” from Financial Advisor.

GRAT assets need only appreciate greater than the Section 7520 rate over the term of the trust, and any excess earnings will pass to beneficiaries, or to an ongoing trust for beneficiaries with no gift or estate tax.

Because the grantor takes back the amount equal to that which was transferred to the trust (often two or three years), which is set by the IRS when the trust is funded, future appreciation over and above the interest rate passes gift-tax free.

There’s little upkeep. Once the trust agreement is in place, a gift tax return needs to be filed once a year. If the trust is set up without a tax ID number, there’s no need to file an income tax return.

The grantor is responsible for the income generated by the asset in the GRAT, but that’s it. If the value of the property is increased following an audit, the gift won’t be increased but the annuity will. If the GRAT property decreases in value, the only out of pocket is the set-up costs.

Assets in a GRAT may be anything from an investment portfolio to shares in a closely held business.

Most GRATs are designed to have the value of the retained annuity be equal to the value of the property that is transferred to the GRAT. If the values are equal, then the amount of the gift for tax purposes is zero, since the value of the transfer less the annuity value is zero.

GRATs are not for everyone. The success of the GRAT depends upon the success of the underlying assets. If they don’t appreciate as expected, then there might not be a significant amount transferred out of the estate after paying for the legal, accounting and appraisal fees. If the grantor dies during the term of the GRAT before payments back to the grantor have ended, the GRAT will be unsuccessful.

Generation skipping transfers cannot utilize GRATS, since the generation skipping tax exemption may not be applied to a GRAT, until the grantor’s death.

Ask your estate planning attorney about whether a GRAT could benefit your family. If a GRAT is not a good fit, they will know about many other tools available.

Reference: Financial Advisor (Nov. 30, 2020) “Transferring Wealth With This Trust Can Yield Big Tax Advantages”