King & Wood, P.A.

Can Estate Planning Reduce Inheritance Taxes?

“Contrary to common belief, estate planning benefits aren’t exclusive to the ultra-wealthy. The mid-affluent—individuals and married couples poised for significant asset growth—should also consider their future tax exposure.”

If not renewed, the expiration of changes in estate and gift taxes from the Tax Cuts and Jobs Act of 2017 (TCJA) on Dec. 31, 2025, will reduce federal estate tax exemptions to $7 million for individuals and $14 million for married couples. A recent article from CPA Practice Advisor, “A Crucial Window for Estate Planning: Preparing for 2026 Changes,” reminds us the IRS has said any benefits used under the current exemption are not subject to any “claw-backs.” In other words, use this tax advantage while you can.

It’s important to note the many benefits of estate planning are not just for wealthy people. The cohort referred to as “mid-affluent”—individuals and couples with or who will have significant assets and growth—should carefully plan for future tax exposure. Someone with $5 million in assets today could see their wealth grow to exceed the future exemption thresholds, making estate planning a vital means of protecting their wealth.

There are several techniques to minimize estate tax consequences, and your estate planning attorney will be able to identify the most appropriate for your unique situation.

Lifetime and Annual Gifting. Making gifts while living transfers wealth to the next generation while minimizing your estate’s tax exposure. Right now, you may gift $18,000 per person, or $36,000 per married couple, to as many people as you wish. Making these gifts annually allows you to reduce your taxable estate and enjoy seeing the recipients benefit from your gifts.

If you’d like to help someone with tuition or medical costs, you may pay any amount you wish without generating gift taxes as long as the payments are made directly to the educational institution or healthcare provider.

Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust designed to benefit the spouse. Other family members can also be named as beneficiaries. The spouse has access to the income from the trust during their lifetime, and upon the spouse's death, the remainder can be distributed as per the grantor’s wishes.

Grantor Retained Annuity Trusts (GRATs). These trusts are best in a low-interest rate environment. Assets are transferred to the trust, with the right to receive annuity payments for a set period, usually two to ten years. When the grantor dies, assets pass to designated beneficiaries.

Intentionally Defective Grantor Trusts (IDGTs). No, they’re not broken. By creating an “intentionally defective” trust, the grantor splits the income tax responsibility from the estate and gift tax implications. The grantor pays the income taxes, allowing assets in the trust to grow tax-free.

There are more, including Qualified Personal Residence Trusts, Charitable Remainder Trusts, Charitable Lead Trusts, Dynasty Trusts and Irrevocable Life Insurance Trusts.

If you expect the value of your taxable estate to come close to or exceed the future estate tax threshold, now is the time to discuss the various options with your estate planning attorney.

Reference: CPA Practice Advisor (June 13, 2024) “A Crucial Window for Estate Planning: Preparing for 2026 Changes”

How Do Gifting Strategies Minimize Estate Taxes?

“Beyond being an act of generosity, gifting ensures that a significant portion of your wealth is preserved rather than diminished by taxes.”

Understanding the role of strategic gifting provides an opportunity to significantly reduce estate tax liabilities, according to a recent article from Forbes, “6 Effective Gifting Strategies To Minimize Your Estate Taxes.” If your goal is to facilitate wealth transition across generations and preserve wealth, these will be useful to know and use.

The annual gift tax exclusion allows you to give generous gifts to as many people as you want without taxes. In 2023, the maximum amount is $17,000 per person and up to $34,000 for married couples filing jointly. In 2024, this increases to $18,000 per person and $36,000 for married. This provision is a foundation for reducing taxable estates. Your estate planning attorney may recommend setting up an annual gifting schedule or using special occasions like a wedding or the birth of a child to make gifts. You can reduce the eventual estate tax burden by systematically gifting within the exclusion limits each year.

A second strategy is maximizing the lifetime gift tax exemption. Unlike an annual gift, the lifetime gift tax exemption is a cumulative amount you may give away throughout your lifetime without incurring gift taxes. This IRS provision is especially useful for those who wish to transfer substantial wealth. In 2023, the limit is $12.92 million; in 2024, adjusted for inflation, the limit will be $13.61 million.

Using the lifetime exemption includes gifting assets expected to appreciate, like stocks or real property. By gifting these assets earlier, any future appreciations occur outside of your own estate, maximizing the impact of the exemption.

You can enhance this strategy by combining the lifetime exemption with the annual gift tax exclusion. For example, parents might gift their children a portion of their estate annually, staying within the annual exclusion limit, and then use their lifetime exemption for larger gifts.

Medical and educational exclusions allow you to pay for another person’s tuition or medical expenses. The payments must be made directly to the institution and not the individual. Following this important rule allows you to avoid incurring any gift tax or having the amount impact the annual exclusion limit of lifetime exemptions. These payments can only cover tuition and direct medical expenses, not related costs like books or room and board.

Trusts can be used for gifting, allowing you to manage and distribute assets according to your own terms. Your estate planning attorney will be able to guide you to what best suits your situation. For instance, an Irrevocable Life Insurance Trust shelters life insurance proceeds from estate taxes, effectively reducing the taxable estate size. A Grantor Retained Annuity Trust can transfer appreciating assets to beneficiaries, while providing the grantor a fixed annuity, potentially reducing gift taxes.

There is also the Charitable Remainder Trust, which provides income to the donor and later benefits a charity, resulting in income and estate tax advantages.

Charitable giving has long been a favored way to do good while obtaining valuable tax benefits. One approach is to use donor-advised funds, which allow for a charitable contribution, getting an immediate tax deduction, and then recommending grants from the fund over time. Making pledges or binding promises to give to charities can also create current tax deductions while committing to the future of your charity of choice.

Timing gifts and their frequency can have implications for the donor and recipient. Strategic timing needs to address asset value fluctuations and tax law changes. Timing involves market conditions, life events, or anticipated changes in legislation.

The frequency of gifting can also be critical in estate planning. Regular, systematic gifting can steadily reduce the size of the estate, potentially leading to significant tax reductions over time. Be mindful about balancing gifting with personal financial needs to not overextend yourself.

Reference: Forbes (Nov. 25, 2023) “6 Effective Gifting Strategies To Minimize Your Estate Taxes”

How Wealthy People Save on Taxes—Can Regular People Do the Same?

“The wealthiest taxpayers have many tools at their disposal to pay less to Uncle Sam. Some tactics, like donating to charity via trusts, might seem far-fetched but are perfectly legal.”

As a direct result of tax cuts made in recent years, Americans can give nearly $13 million in assets without paying any federal estate taxes. Only 0.2% of all tax payers worry about federal estate taxes these days, explains the article “Here are six ways the rich save big on taxes, from putting houses in trusts to guaranteeing inheritance for future generations” from Business Insider. Could some of their tactics work for “regular” people too?

Among these tax avoidance techniques include putting homes and vacation homes in trusts lasting decades and any appreciation in the property’s value doesn’t count towards their taxable estate. Qualified Personal Residence Trusts, or QPRTs, basically freeze the value of real estate properties for tax purposes. The home is placed in the trust, which retains ownership for however many years desired. When the trust ends, the property is transferred out of the taxable estate. The estate only pays the gift tax on the property’s value when the trust was formed—regardless of the appreciation of the home.

Dynasty trusts allow taxpayers to pass wealth to generations who haven’t been born yet and are only subject to the 40% generation-skipping tax once. Florida and Wyoming allow these trusts to last up to 1,000 years, which spans about 40 generations. Heirs don’t own the trust assets but have lifetime rights to the trust’s income and real estate.

Charitable Remainder Trusts (CRTs) can be funded with various assets, from yachts to closely held businesses. Taxpayers put assets in the trust, collect annual payments for as long as they live and get a partial tax break. Only 10% of what remains in the CRT must be donated to a charity to qualify with the IRS.

Taking loans to pay estate taxes is scrutinized by the IRS and has many hoops to jump through. Asset-rich people use this method but are cash-poor and facing a big estate tax bill. The estate can make an upfront deduction on the interest of “Graegin” loans, named after a 1988 Tax Court case. Suppose illiquid assets comprise at least 35% of the estate’s value. In that case, families can defer estate tax for as long as 14 years, paying in installments with interest and effectively taking a loan from the government. However, Graegin loans are prime targets for IRS auditors and can lead to legal battles.

Private-placement life insurance, or PPLI, can pass on assets without incurring any estate tax. A trust is created to own the life insurance policy, which has been created offshore. This strategy is only for the very wealthy, as it usually requires $5 million in upfront premiums and a small army of professionals to set up and administer.

A down market has one silver lining for high-net-worth individuals: it’s an excellent time to create new trusts, as people can transfer depressed assets at a lower tax basis. The Grantor-Retained Annuity Trust (GRAT) pays a fixed annuity during the trust term; any appreciation of the asset’s value is not subject to estate tax.

An experienced estate planning attorney will know which of these strategies might work for your family, along with many others used by “regular” people.

Reference: Business Insider (June 12, 2023) “Here are six ways the rich save big on taxes, from putting houses in trusts to guaranteeing inheritance for future generations”

How Estate Planning Works with Exit Planning

“Estate planning alone isn’t enough protection for business owners, who need to also consider succession plans, as well as financial, legal and operational issues.”

A professionally created and well-executed estate plan is a must for protecting families and assets, minimizing tax liabilities and addressing personal and financial matters, says a recent article from Kiplinger, “For Business Owners, Estate and Exit Planning Join Forces.” Business owners also need to have an exit plan to be sure that their business and personal affairs will be managed according to their wishes.

Estate planning is critical because business owners are relied upon by their families and employees, customers, vendors, and the communities they serve.

Planning for the smooth transfer of ownership and management upon their retirement or death is vital for the owner, their family and all those impacted. This involves identifying and preparing successors, establishing a clear succession plan, and addressing leadership, ownership and management continuity.

Who will take over the business, how will it be valued and how can the transfer of ownership be handled to minimize tax implications and disputes among heirs? If heirs work in the business, will their roles be transitioned, and how will that happen?

Unlike personal estate planning, business owners must have their company valued by a professional, as this information will be needed to determine estate tax liabilities, equitable distribution and protect the financial well-being of surviving family members. Valuation methods include assessing the fair market value of the business, considering future earning positions, and factoring in relevant sector standards.

Estate planning for business owners also involves specific tax considerations, including minimizing estate taxes, gift taxes and capital gains taxes associated with transferring business assets. Some strategies include establishing trusts, gifting shares over time, or utilizing tax-efficient entities, such as Family Limited Partnerships (FLPs) or Grantor Retained Annuity Trusts (GRATs). An estate planning attorney will know the most appropriate strategy for each situation.

Business owners also have a vested interest in ensuring the continuity of their business. Estate planning may involve creating a continuity plan outlining how the business will be managed, who will have decision-making authority and how key roles and responsibilities will be fulfilled.

For business owners with partners or co-owners, implementing buy-sell agreements is crucial. These agreements establish the terms and conditions under which ownership interests can be transferred or sold in the event of a triggering event, such as disability, retirement, or death. A buy-sell agreement ensures a smooth ownership transition and prevents disputes among remaining owners. This should be in place long before it’s needed.

Business owners must work with trusted professionals, including estate planning attorneys, tax advisors and business valuation experts, to effectively navigate the complexities of estate and exit planning.

Reference: Kiplinger (June 7, 2023) “For Business Owners, Estate and Exit Planning Join Forces”

What Strategies Minimize Estate Taxes?

“With 2022 bringing very little change to trust and estate law, 2023 remains a prime opportunity to take advantage of the favorable tax landscape.”

The gift and estate tax benefits from the Tax Cuts and Jobs Act (TCJA) are still in effect. However, many provisions will sunset at the end of 2025, according to a recent article “Trust and estate planning strategies” from Crain’s New York Business.

The most important aspect for estate planning was the doubling of the estate, gift and generation-skipping transfer tax exemptions. Adjusted for inflation, the current federal estate, gift and GST exclusion is $12.92 million in 2023. This is more than double the pre-TCJA amount, which will return in 2026, unless Congress makes any changes.

While these levels are in effect, there are strategies to consider.

• Maximize gifting up to the 2023 annual exclusion of $17,000 per taxpayer, or $34,000 for married couples.
• Depending on the value of the entire estate, consider strategies to keep it below the current exemption among of $12.92 million or $25.84 (married). If the estate is less than the exemption amount, no federal estate tax will need to be paid.
• Plan charitable giving, including charitable IRA rollovers to make the most of the deduction on 2023 income tax returns. Qualified charitable distributions made directly from an IRA could be used to satisfy Required Minimum Distributions (RMDs) and exclude them from taxable income.
• Set up 529 Plan accounts for children and/or grandchildren and consider making five years of annual exclusion gifts. Take into account any gifts made during the year to children and/or grandchildren when doing this.
• Submit tuition or any non-reimbursable medical expenses directly to the school or medical provider to avoid having these amounts count towards the annual or lifetime gift tax exemption.
• Discuss the use of a Grantor Retained Annuity Trust (GRAT), an irrevocable trust created for a certain period of time. Assets are placed in the trust and an annuity is paid out every year. When the trust expires and the last annuity payment is made, assets pass to beneficiaries outright or remain in a trust for beneficiaries.
• Ask your estate planning attorney if a Qualified Personal Residence Trust is a good fit for you. This is an irrevocable trust allowing homeowners to transfer their home at a significantly discounted rate.
• Explore intrafamily lending, which is used to transfer partial earnings to family members without lowering the lifetime estate tax exemption or triggering gift taxes.
• Re-evaluate insurance coverage, which can provide opportunities to defer or avoid income taxes, or both, and provide assets to pay estate taxes or replace assets used to pay estate taxes.

Not all of these steps will be appropriate for everyone. However, understanding the options and discussing with your estate planning attorney will ensure that you are using the most effective strategies to achieve wealth preservation.

Reference: Crain’s New York Business (Feb. 13, 2023) “Trust and estate planning strategies”

How GRATs can Transfer Wealth Across Generations

“Grantor-retained annuity trusts, or ‘Grats,’ are a wealth-transfer technique that shift investment growth out of an estate to heirs tax-free.”

The first thing to know—GRATs are not just for the uber-wealthy, despite the title of the article “Here’s how uber-rich pass wealth to heirs tax-free when markets are down” from CNBC. “Regular” people and their families may benefit from using Grantor Retained Annuity Trusts. The second thing to know–GRATs work well when stocks are down in value and are expected to rebound relatively quickly. While no one knows what the markets will do today or six months from today, GRATs are good estate planning strategy for many people.

The GRAT works like this: assets like stocks in a privately-held business are placed into the trust for a specific amount of time—maybe two, five or ten years. Any investment growth passes to heirs and the original owner gets the principal back. This is, of course, a highly simplified description.

The family can avoid or reduce estate taxes at death by shifting future appreciation out of the estate. The investment growth is the tax-free gift to heirs. If there’s no growth, the asset passes back to the owners. Lowered assets likely to return in value over the life of the trust are the most likely to make this strategy work best.

The S&P 500, a commonly used barometer for U.S. stock markets, is down by about 24% as of this writing, making now an excellent time to consider a GRAT.

The GRAT makes the most sense for families who are subject to the federal estate tax. While the federal estate tax is applied to estates is now valued at more than $12.06 million, the federal estate tax is expected to drop precipitously when the Tax Cuts and Jobs Act of 2017 expires on December 31, 2025.

GRATs are said to have been used by some of the nation’s wealthiest people, including Michael Bloomberg, Mark Zuckerberg, the Walton family (of Walmart fame), Charles Koch and his late brother David Koch, Laurene Powell Jobs (the widow of Apple-founder Steve Jobs), Oprah Winfrey and others. However, a GRAT can work for people who are not among the top wealthiest in the country.

In 2026, the estate-tax threshold will be cut in half, unless Congress extends the Act. Individuals with $6 million estates, or $12 million for married couples, should start considering how to transfer their wealth now.

Rising interest rates put another wrinkle in planning for the future. The complex inner workings of GRATs concern interest rates, which must technically exceed a certain threshold—the “7520 interest rate,” also known as the “hurdle” rate—to pass tax free from the estate. This rate is currently up by 4% from October 2021.

Here’s an example of how this applies to a grantor-retained annuity trust. If investments in a two-year trust grew by 6% over two years, a trust pegged to the hurdle rate of October 2021 would allow 5% of the overall growth pass to heirs, but this would fall to 2% for a trust established in October 2022.

Your estate planning attorney will be able to explain whether a GRAT is a good fit for your wealth strategy, considering your tax liabilities, the size of your estate and your comfort level with any strategies tied to interest rates and markets.

Reference: CNBC (Oct. 10, 2022) “Here’s how uber-rich pass wealth to heirs tax-free when markets are down”

How to Plan in a Time of Uncertainty

“Pandemics, inflation, rising interest rates, war in the Ukraine—uncertain times indeed! And yet, in the world of estate planning, almost every change in the zeitgeist offers its own suite of planning opportunities and applicable techniques.”

There’s a saying in estate planning circles that the only people who pay estate taxes are those who don’t plan not to pay estate taxes. While this doesn’t cover every situation, there is a lot of truth to it. A recent article from Financial Advisor entitled “Estate Planning In This Particular Time of Uncertainty” offers strategies and estate planning techniques to be considered during these volatile times.

Gifting Assets into Irrevocable Trusts to Benefit Family Members. If done correctly, this serves to remove the current value and all future appreciation of these assets from your estate. With the federal estate tax exemption ending at the end of 2025, the exemption will drop from $12.06 million per person to nearly half that amount.

Combine this with a time of volatile asset prices and it becomes fairly obvious: this would be a good time to take investments with a lowered value out of the individual owner’s hands and gift them into an irrevocable trust. The lower the value of the asset at the time of the gift, the less the amount of the lifetime exemption that needs to be used. If assets are expected to recover and appreciate, this strategy makes even more sense.

Spousal Limited Access Trust (SLAT). This may be a good time for a related technique, the SLAT, an irrevocable trust created by one spouse to benefit the other and often, the couple’s children. Access to income and principal is created during the spouse’s lifetime. It can even be drafted as a dynasty trust. Assets can be gifted out of the estate to the trust and while the grantor (the person creating the trust) cannot be a beneficiary, their family can. Couples may also create reciprocating SLATs, where each is the beneficiary of the other’s trust, as long as they are careful not to create duplicate trusts, which have been found invalid by courts. Talk with an experienced estate planning attorney about how a SLAT may work for you and your spouse.

What about interest rates? A Grantor Retained Annuity Trust (GRAT), where the grantor contributes assets and enjoys a fixed annuity stream for the life of the trust, may be advantageous now. At the end of the trust term, remaining assets are distributed to family members or a trust for their benefit. To avoid a gift tax on the calculated remainder, due when the trust is created, most GRATs are “zeroed out,” that is, the present value of the annuity stream to the grantor is equal to the amount of the initial funding of the trust. Since you get back what’s been put in, no taxable gift occurs. The lower the interest rate, the higher the value of the income stream. The grantor can take a lower annuity amount and with decent appreciation of assets in the trust, there will be a larger amount as a remainder for heirs. Interest rates need to be considered when looking into GRATs.

Qualified Personal Residence Trust (QPRT) is a trust used to transfer a primary residence to beneficiaries with minimal gift tax consequences. The grantor retains the right to live in the house at no charge for a certain period of time. After the time period ends, the property and any appreciation in value passes to beneficiaries. The valuation for the value of the initial transfer into the trust for gift tax purposes is determined by a calculation relying heavily on interest rates. In this case, a higher interest rate results in a lower present value of the remainder and a lower gift value when the trust is created.

Reference: Financial Advisor (July 8, 2022) “Estate Planning In This Particular Time of Uncertainty”

Should You have a GRAT?

“It took a lot of hard work and dedication to acquire your wealth. You want to transfer as much of it as you can to your beneficiaries. As a result, having a large estate means you’ll have to pay quite a bit in gift and estate taxes.”

Estate planning includes using various methods to reduce gift and estate taxes, as described in a recent article titled “Grantor Retained Annuity Trust Questions Answered” from Entrepreneur. GRATs are one type of irrevocable annuity trust used by estate planning attorneys to reduce taxes.

An annuity is a financial product, often sold by insurance companies, where you contribute funds or assets to an account, referred to as premiums. The trust distributes payments to a beneficiary on a regular basis. If you have a Grantor-Retained Annuity Trust (GRAT), the person establishing the trust is the Grantor, who receives the annuities from the trust.

The GRAT payments are typically made annually or near the anniversary of the funding date. However, they can be made any time within 105 days after the annuity date. Payments to the GRAT may not be made in advance, so consider your cash flow before determining how to fund a GRAT. For this to work, the grantor must receive assets equal in value to what they put into the GRAT. If the assets appreciate at a rate higher than the interest rate, it’s a win. At the end of the GRAT term, all appreciation in the assets is gifted to the named remainder beneficiaries, with no gift or estate tax.

Here is a step-by-step look at how a GRAT is set up.

• First, an individual transfers assets into an irrevocable trust for a certain amount of time. It’s best if those assets have a high appreciation potential.
• Two parts of the GRAT value are the annuity stream and the remainder interest. An estate planning attorney will know how to calculate these values.
• Annuity payments are received by the grantor. The trust must produce a minimum return at least equal to the IRS Section 7520 interest rate, or the trust will use the principal to pay the annuity. In this case, the GRAT has failed, reverting the trust assets back to the grantor.
• Once the final annuity payment is made, all remaining assets and asset growth are gifted to beneficiaries, if the GRAT returns meet the IRS Section 7520 interest rate requirements.

The best candidates for GRATS are those who face significant estate tax liabilities at death. An estate freeze can be achieved by shifting all or some of the appreciation to heirs through a GRAT.

A GRAT can also be used to permit an S-Corporation owner to preserve control of the business, while freezing the asset’s value and taking it out of the owner’s taxable estate. Caution is required here, because if the owner of the business dies during the term of the GRAT, the current stock value is returned to the owner’s estate and becomes taxable.

GRATs are most beneficial in transferring large amounts of money to beneficiaries, while paying little or no gift tax. A GRAT allows you to give a beneficiary more than $16,000 without triggering a gift tax, which is especially useful for wealthy individuals with healthy estates.

There are some downsides to GRATs. When the trust term is over, remaining assets become the property of the beneficiaries. Setting a term must be done mindfully. If you have a long-term GRAT of 20 years, it is more likely that you may experience serious health challenges as you age, and possibly die before the term is over. If the assets in the GRAT depreciate below the IRS’s assumed return rate, any benefits of the GRAT are lost.

Reference: Entrepreneur (March 17, 2022) “Grantor Retained Annuity Trust Questions Answered”

Do Gifts Count Toward Estate Taxes?

“A recipient of a gift does not pay income taxes on the gift. However, the gift-giver may pay gift taxes, unless one of two exemptions applies.”

With all of the talk about changes to estate taxes, estate planning attorneys have been watching and waiting as changes were added, then removed, then changed again, in pending legislation. The passage of the infrastructure bill in early November may mark the start of a calmer period, but there are still estate planning moves to consider, says a recent article “Gift money now, before estate tax laws sunset in 2025” from The Press-Enterprise.

Gifts are used to decrease the taxes due on an estate but require thoughtful planning with an eye to avoiding any unintended consequences.

The first gift tax exemption is the annual exemption. Basically, anyone can give anyone else a gift of up to $15,000 every year. If giving together, spouses may gift $30,000 a year. After these amounts, the gift is subject to gift tax. However, there’s another exemption: the lifetime exemption.

For now, the estate and gift tax exemption is $11.7 million per person. Anyone can gift up to that amount during life or at death, or some combination, tax-free. The exemption amount is adjusted every year. If no changes to the law are made, this will increase to roughly $12,060,000 in 2022.

However, the current estate and gift tax exemption law sunsets in 2025. This will bring the exemption down from historically high levels to the prior level of $5 million. Even with an adjustment for inflation, this would make the exemption about $6.2 million. This will dramatically increase the number of estates required to pay federal estate taxes.

For households with net worth below $6 million for an individual and $12 million for a married couple, federal estate taxes may be less of a worry. However, there are state estate taxes, and some are tied to federal estate tax rates. Planning is necessary, especially as some in Congress would like to see those levels set even lower.

Let’s look at a fictional couple with a combined net worth of $30 million. Without any estate planning or gifting, if they live past 2025, they may have a taxable estate of $18 million: $30 million minus $12 million. At a taxable rate of 40%, their tax bill will be $7.2 million.

If the couple had gifted the maximum $23.4 million now under the current exemption, their taxable estate would be reduced to $6.6 million, with a tax bill of $2,520,000. Even if they were to die in a year when the exemption is lower than it was at the time of their gift, they’d save nearly $5 million in taxes.

There are a number of estate planning gifting techniques used to leverage giving, including some which provide income streams to the donor, while allowing the donor to maintain control of assets. These include:

Discounted Giving. When assets are transferred into an entity (commonly a limited partnership or limited liability company), a gift of a minority interest in the entity is generally given a discounted value, due to the lack of control and marketability.

Grantor Retained Annuity Trusts. The donor transfers assets to the trust and retains right to a payment over a period of time. At the end of that period, beneficiaries receive the assets and all of the appreciation. The donor pays income tax on the earnings of the assets in the trust, permitting another tax-free transfer of assets.

Intentionally Defective Grantor Trusts. A donor sets up a trust, makes a gift of assets and then sells other assets to the trust in exchange for a promissory note. If this is done correctly, there is a minimal gift, no gain on the sale for tax purposes, the donor pays the income tax and appreciation is moved to the next generation.

These strategies may continue to be scrutinized as Congress searches for funding sources, but in the meantime, they are still available and may be appropriate for your estate. Speak with an experienced estate planning attorney to see if these or other strategies should be put into place.

Reference: The Press-Enterprise (Nov. 7, 2021) “Gift money now, before estate tax laws sunset in 2025”

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”