You might remember a flurry of activity in advance of the 2016 presidential election, when concerns about changes to the estate tax propelled many people to review their estate plans. In 2020, COVID-19 concerns have added to pre-presidential election worries. A recent article from Kiplinger, “Pre-Election Estate Planning Moves for High Net-Worth Families,” describes an extensive selection of trusts that can are used to protect wealth, and despite the title, not all of these trusts are just for the wealthy.
The time to make these changes is now, since there have been many instances where tax changes are made retroactively—something to keep in mind. Tax changes could be enacted well into next year but they could be made applicable retroactive to January 1. Thus strategies may need to be implemented before December 31. The biggest opportunity is the ability to gift up to $11.58 million to another person free of transfer tax. This amount will be reduced by about half in 5 years even if there are no new changes to the law. However, there are many more.
Spousal Lifetime Access Trust (SLAT) The SLAT is an irrevocable trust created to benefit a spouse funded by a gift of assets, while the grantor-spouse is still living. The goal is to move assets out of the grantor spouse’s name into a trust to provide financial assistance to the spouse, while sheltering property from the spouse’s future creditors and taxable estate. Thus, you don’t need to gift assets to children to take advantage of the estate exemption before it is reduced.
Beneficiary Defective Inheritor’s Trust (BDIT) The BDIT is an irrevocable trust structured so the beneficiary can manage and use assets but the assets are not included in their taxable estate.
Grantor Retained Annuity Trust (GRAT) The GRAT is also an irrevocable trust. The GRAT lets the grantor freeze the value of appreciating assets and transfer the growth at a discount for federal gift tax purposes. The grantor contributes assets in the trust and retains the right to receive an annuity from the trust, while earning a rate of return as specified by the IRS. GRATs are best in a low interest-rate environment because the appreciation of assets over the rate goes to the beneficiaries and at the end of the term of the trust, any leftover assets pass to the designated beneficiaries with little or no tax impact. Because the initial contribution comes back to the grantor, no estate exemption is used up.
Gift or Sale of Interest in Family Partnerships. Family Limited Partnerships are used to transfer assets through partnership interests from one generation to the next. Retaining control of the property is part of the appeal. The partnerships may also be transferred at a discount to net asset value, which can reduce gift and estate tax liability. They can be combined with other strategies to produce further tax savings.
Charitable Lead Trust (CLT). The CLT lets a grantor make a gift to a charitable organization while they are alive, while creating tax benefits for the grantor or their heirs. An annuity is paid to a charity for a set term, and when the term expires, the balance of the trust is available for the trust beneficiary. This will be at a much lower value for tax purposes than the actual value of the trust.
Charitable Remainder Trust (CRT) The CRT is kind of like a reverse CLT. In a CRT, the grantor receives an income stream from the trust for a certain number of years. At the end of the trust term, the charitable organization receives the remaining assets. The grantor gets an immediate income tax charitable deduction when the CRT is funded, based on the present value of the estimated assets remaining after the end of the term.
These are a sampling of the types of trusts used to protect family’s assets. Your estate planning attorney will be able to determine if a trust is right for you and your family, and which one will be most advantageous for your situation. Please call me to discuss these ideas or any other concerns you may have. We can schedule a consultation in person or virtually by Zoom if that is more comfortable for you.
Reference: Kiplinger (Aug. 16, 2020) “Pre-Election Estate Planning Moves for High Net-Worth Families”