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Category: Estate Tax

There are pros and cons to charitable trusts

There are Pros and Cons to Charitable Trusts

A charitable trust can provide an alternative to meeting your wishes for charities and your loved ones, while serving to minimize tax liabilities. There are pros and cons to charitable trusts, according to a recent article titled “Here’s how to create a charitable trust as part of an estate plan” from CNBC. Many families are considering their tax planning for the next few years, aware that the individual income tax provisions of the 2017 Tax Cuts and Jobs Act will expire after 2025.

Creating a charitable trust may work to achieve wishes for charities, as well as loved ones.

A charitable trust is a set of assets, usually liquid, that a donor signs over to or uses to create a charitable foundation. The assets are then managed by the charity for a specific period of time, with some or all of the interest the assets produce benefitting the charity.

When the period of time ends, the assets, now called the remainder, can go to heirs, or can be donated to the charity (although they are usually returned to heirs).

There are pros and cons to charitable trusts such as Charitable Remainder Trusts and Charitable Lead Trusts. Your estate planning attorney will determine which one, if any, is appropriate for you and your family.

A charitable trust allows you to give generously to an organization that has meaning to you, while providing an equally generous tax break for you and your heirs. However, to achieve this, the charitable trust must be irrevocable, so you can’t change your mind once it’s set in place.

Charitable trusts provide a way to ensure current or future distributions to you or to your loved ones, depending on your unique circumstances and goals.

A Charitable Remainder Trust, or CRT, provides an income stream either to you or to individuals you select for a set period of time, which is typically your lifetime, your spouse’s lifetime, or the lifetimes of your beneficiaries. The remaining assets are ultimately distributed to one or more charities.

By contrast, the Charitable Lead Trust (CLT) pays income to one or more charities for a set term, and the remaining assets pass to individuals, such as heirs.

For CRTs and CLTs, the annual distribution during the initial term can happen in two ways; a Unitrust (CRUT or CLUT) or an Annuity Trust (CRAT or CLAT).

In a Unitrust, the income distribution for the coming year is calculated at the end of each calendar year and it changes, as the value of the trust increases or decreases.

In an Annuity Trust, the distribution is a fixed annual distribution determined as a percentage of the initial funding value and does not change in future years.

Interest rates are a key element in determining whether to use a CLT or a CRT. Right now, with interest rates at historically low levels, a CRT yields minimal income.

The key benefits to a CRT include income tax deductions, avoidance of capital gains taxation, annual income and a wish to support nonprofit organizations.

Your estate planning attorney and a member of the development team from the charity can work together to ensure that your charitable strategy achieves your goals of supporting the charity and building your legacy.

If you are interested in learning more about charitable giving, please visit our previous posts. 

Reference: CNBC (Dec. 22, 2020) “Here’s how to create a charitable trust as part of an estate plan”

 

There are pros and cons to charitable trusts

An Irrevocable Trust may be a Good Idea

An irrevocable trust is mainly used for tax planning, says a recent article from Think Advisor titled “10 Facts to Know About Irrevocable Trusts.” Its key purpose is to take assets out of an estate, reducing the chances of having to pay estate taxes. For estate planning purposes, placing assets inside the irrevocable trust is the same as giving it to an heir. If the estate exceeds the current limit of $11.7 million, then an irrevocable trust would be a smart move. Remember the $11.7 million includes life insurance policy proceeds. Many states with estate taxes also have far lower exemptions than the federal estate tax, so high income families still have to be concerned with paying estate taxes. When it comes to taxes, an irrevocable trust may be a good idea.

However, let’s not forget that beneficiaries must pay taxes on the income they receive from an irrevocable trust, usually at ordinary income tax rates. On the plus side, trusts are not subject to gift tax, so the trust can pay out more than the current gift tax limit of $15,000 every year.

If the trust itself generates income that remains inside the trust, then the trust will have to pay income taxes on the income.

Asset protection is another benefit from an irrevocable trust. If you are sued, any assets in the irrevocable trust are beyond the reach of a legal judgment, a worthwhile strategy for people who have a greater likelihood of being sued because of their profession. However, the irrevocable trust must be created long before lawsuits are filed.

A physician who transfers a million-dollar home into the trust on the eve of a malpractice lawsuit, for instance, may be challenged with having made a fraudulent transfer to the trust.

There is a cost to an irrevocable trust’s protection. You have to give up control of the assets and have no control over the trust. Legally you could be a trustee, but that means you have control over the trust, which means you will lose all tax benefits and asset protections.

Most people name a trusted family member or business associate to serve as the trustee. Consider naming a successor trustee, in case the original trustee is unable to fulfill their duties.

If you don’t want to give someone else control of your assets, you may wish to use a revocable trust and give up some of the protections of an irrevocable trust.

Despite the name, changes can be made to an irrevocable trust by the trustee. Trust documents can designate a “trust protector,” who is empowered to make certain changes to the trust. Many states have regulations concerning changes to the administrative aspects of a trust, and a court has the power to make changes to a trust.

An irrevocable trust can buy and sell property. If a house is placed into the irrevocable trust, the house can be sold, as long as the proceeds go into the trust. The trust is responsible for paying taxes on any profits from the sale. However, you can request that the trustee use the proceeds from selling a house to buy a different house. Be sure the new house is titled correctly: owned by the trust, and not you.

Asset swaps may be used to change irrevocable trusts. Let’s say you want to buy back an asset from the trust, but don’t want that asset to go back into your estate when you die. There are tax advantages for doing this. If the trust holds an asset that has become highly appreciated, swap cash for the asset and the basis on which the asset’s capital gains is calculated gets reset to its fair value, eliminating any capital gains on a later sale of the asset.

Loss of control is part of the irrevocable trust downside. Make sure that you have enough assets to live on before putting everything into the trust. You can’t sell assets in the trust to produce personal income.

Transferring assets to an irrevocable trust helps maintain eligibility for means-tested government programs, like Medicaid and Supplemental Security Income. Assets and income sheltered within an irrevocable trust are not counted as personal assets for these kinds of program limits. However, Medicaid has a look-back period of five years, so the transfer of a substantial asset to an irrevocable trust must have taken place five years before applying for Medicaid.

Talk with your estate planning attorney first. Not every irrevocable trust satisfies each of these goals. It is also possible that an irrevocable trust may not fit your needs. An experienced estate planning attorney will be able to create a plan that suits your needs best for tax planning, asset protection and legacy building.

If you would like to learn more about using trusts to address tax liabilities, please visit our previous posts.

Reference: Think Advisor (Dec. 16, 2020) “10 Facts to Know About Irrevocable Trusts”

 

There are pros and cons to charitable trusts

Creating a Successful Business Exit Plan

Motley Fool’s recent article titled “What Robert Redford’s Sale of Sundance Can Teach Investors About Exit Planning” says that, in announcing the sale, Redford told the Salt Lake Tribune that he’s been thinking of selling for several years. However, he wanted to find the right partners. Broadreach and Cedar plan to upgrade the resort, add hotel rooms and build a new inn. The companies have also said that they will keep the resort sustainable and practicing measured growth, as well as also continuing to host the Sundance Film Festival. So how did he set about creating a successful business exit plan?

The 2,600-acre resort has 1,845 acres of land saved from future development through a conservation easement and protective covenants. The 84-year-old actor has had a lifelong interest in the environment and in land stewardship. Redford and his family have also arranged with Utah Open Lands to create the Redford Family Elk Meadows Preserve at the base of Mt. Timpanogos. The gift will reduce Redford’s tax liability on his estate.

Both Broadreach and Cedar have extensive hospitality experience, but neither looks to have much ski resort experience. However, they’re working with Bill Jensen, an industry legend, who recently left his role as CEO of Telluride Ski and Golf Resort in Colorado.

Creating a successful business exit plan can be difficult—in part, because people don’t like to address such unwelcome topics. Most investors don’t have the luxury of waiting years to find the right buyer, but the Redford deal does show that planning ahead may be critical to creating a mechanism that supports the vision for the property.

When selling a large investment property, you must first understand why you’re selling, and your desired end result. Of course, a return on investment is nice, but there may be other considerations, like in Redford’s case. Another key is ascertaining the updated worth of what you’re selling. Get a valuation, especially with an irreplaceable asset.

The structure of the sale is important. You will likely be liable for tax on your capital gains, so ask an attorney. If you’re also structuring your estate plans at the same time, you’ll need to know what amount you can give and what your heirs may have to pay. Talk to an experienced estate planning attorney before you begin creating a business exit plan to be certain that you’re covering all the bases.

If you are interested in learning more about succession planning and other business related planning topics, please visit our previous posts. 

Reference: Motley Fool (Dec. 12, 2020) “What Robert Redford’s Sale of Sundance Can Teach Investors About Exit Planning”

 

There are pros and cons to charitable trusts

Probate can affect Real Estate Transactions

Probate can affect real estate transactions. For a family whose 91-year-old mother lives in her home, has a will and has appointed two sisters as Power of Attorney and executors of her estate, the question of handling the transfer of the home is explored in a recent article from the Herald Tribune, “Transfer title now or go through probate in the future?”

The family wasn’t sure if it made more sense to transfer the title to her two daughters and son while she was still living, or let the children handle the transfer as part of the estate. The brother may wish to purchase the home after the mother passes, as he lives with his mother.

If nothing is done, the house will be part of the probated estate. A case will have to be opened, a representative will be appointed by the court (usually the executor of the will) and then the executor can sell assets in the estate, close accounts and deal with the IRS and the Social Security Administration. The probate process can be time-consuming and expensive, depending on where the mother lives.

There are a number of steps that could be taken to simplify things. The mom’s assets can be held jointly, so they pass to the surviving owner, or a trust can be created, and her assets be titled to the trust, so they pass automatically to beneficiaries.

The issue of the house becomes a little more complicated because there are so many options. This is where probate can affect real estate transactions. If the house has appreciated significantly over the years, keeping it in the estate will minimize taxes that have to be paid if and when it is sold.

For example, let’s say the house has increased in value by $250,000. Under current tax law, the mother can exclude up to $250,000 in profits from the sale of the home. This is the exclusion before the sale of a primary residence where the owner has lived in the home for two out of the last five years.

If she signs a quitclaim deed now to give the home to her three children, the IRS will consider this a gift to the three children. Her cost basis in the property (what she paid for the home, plus the cost of any material or structural improvements) will be transferred to the children. However, when the children go to sell the property, they won’t have that same $250,000 exclusion. The three siblings will have to pay federal income or capital gains tax on the same of the home.

However, if the home remains in the mother’s estate when she passes, the siblings inherit the home at the stepped-up basis. In other words, the value of the house (for estate tax purposes) will rise to the current market value at the time of her death, and not the value when she paid for the house. If the children decide to sell the house immediately, there won’t be any profit and there won’t be any taxes.

Depending on the state’s probate laws, the children might be able to use a transfer on death deed that would let the property transfer automatically to heirs upon the mother’s death. The siblings then inherit the property at the stepped-up value.

Here’s another question to consider: how does the cost of setting up trusts and transfer on death deeds compare to the estimated cost of probating the estate?

This family, and others in the same situation, should speak with an estate planning attorney to evaluate their options. The siblings in this case need to clarify whether their brother wants to buy the house and if he is able to do so. The mom then needs to make a decision, while she is still able to do so, because after all, it’s still her home.

If you would like to learn more about how to protect the family home for future generations, please visit our previous posts.

Reference: Herald-Tribune (Nov. 7, 2020) “Transfer title now or go through probate in the future?”

 

There are pros and cons to charitable trusts

Implementing Succession Plans Before Year Ends

Anyone with a taxable estate that includes an operating business should be looking into the efficacy of making gifts in 2020 to take advantage of a unique set of circumstances, advises the article “Why Now is the Right Time to Execute Succession Plans” from Worth. This could include implementing succession plans before the year ends.

The federal exemption from transfer taxes is at a historically high level. Individuals may transfer up to $11.58 million of assets during their lifetime without incurring federal gift, estate or generation skipping transfer tax (GST). The current maximum federal gift and estate tax rate and the current maximum federal GST tax rate is now 40 percent. As the law stands now, this amount is not scheduled to be reduced until the end of 2025, but whether that will remain is anyone’s guess.

The IRS has stated that it will not attempt a claw back of taxes if the exemption amount decreases soon, so taxpayers who put off taking action before December 31, 2020 will miss out.

Lower Value Another Incentive to Develop a Succession Plan

It is important not forget the impact of the global pandemic. Valuations in some parts of public markets continue to be high, but many private companies have lost a lot of value. The lower appraised values can be beneficial for succession planning. If a business owner is willing to transfer all or a portion of the private company to successive generations now, that lowered appraisal value means that more wealth can be shifted. There is the possibility of growth in the future, free of gift, estate, or GST tax.

How Do Interest Rates Impact Succession Plans?

Many strategies used to transfer assets between generations are based on interest rates which are near the lowest they have ever been. Every month, the IRS releases the updated Section 7520 and Applicable Federal Rates (AFR). These are the rates used for transfer techniques like GRATs and intra-family loans. In October, the 7520 rate was 40 basis points (“bps”), and the Mid-Term Annual AFR, used for loans with terms of three to nine years was 39 bps.

Succession Plans Take Time to Create

This unique combination of exemptions, low business valuations and low interest rates is likely to lead many business owners to their estate planning attorney’s offices to implement succession plans before the calendar years ends. The smart move is to contact your estate planning attorney, CPA, and financial advisor as soon as possible to discuss options, and get succession plans going. There will likely be a more-than-usual last minute rush to complete many financial and legal tasks this December, and getting started as early as possible will make it more likely that your succession plan can be completed before December 31, 2020.

If you would like to learn more about gifting, and other means of reducing estate taxes, please visit our previous posts. 

Reference: Worth (Nov. 2, 2020) “Why Now is the Right Time to Execute Succession Plans”

 

 

understanding what legacy planning means

Understanding What Legacy Planning Means

Asset distribution is how many estate plans begin, but we can create legacies for generations to come through our estate planning, says Kiplinger in the article “Legacy Planning: Create a Lasting Legacy.” You may not realize it until you sit down to prepare an estate plan, or even until you prepare a second estate plan. Your life has been devoted to building wealth and now it’s time to plan for the next generation. This is when estate planning becomes legacy planning. Let’s start by understanding what legacy planning means.

Why is Legacy Planning Important?

If the goal is to leave wealth to children, the plan may be simply to bequeath assets.

However, if children are not good at handling money or if there is a concern about a marriage’s longevity, then you’ll want to look past a simple transfer of assets on death. For some families, a concern is leaving too much wealth to children, undermining the parent’s life of work and respect for their accomplishments. Understanding legacy planning addresses these and other serious issues.

Which Documents are Necessary for Estate Planning?

Most people need the following documents:

Revocable Living Trust, or RLT. The person who creates this trust maintains full control of assets that are titled to the trust while they are living, and then directs how assets are to be passed on when one spouse dies and then after both spouses die.

Pour-Over Wills. Used in conjunction with a RLT, these work to direct assets to the RLT.

Durable Power of Attorney. These documents are part of planning for incapacity. They designate a person who will make financial and/or legal decisions for you, if you cannot do so.

Health Care Directives. Note that these have different names and details, depending on the state. For most people, they consist of a Living Will and a Durable Power of Attorney for Health Care. Together, these two documents provide a platform for you to share wishes about medical care. The Living Will gives guidance about your wishes, if you become too sick to communicate, including your wishes on pain medication, artificial feeding and hydration and resuscitation. The Durable Power of Attorney (sometimes called a Health Care Proxy) names a person who can make health care decisions, if you can’t do so for yourself.

How Do I Leave a Lasting Legacy?

Many people believe that their children should be the only beneficiaries of their wealth. However, for others, even those with modest estates, supporting an organization that has meaning to them through a gift in their will is just as important as leaving money to children and grandchildren.

Here are a few questions to consider when thinking about legacy planning:

  • How much wealth is “enough” for heirs?
  • At what age should money be transferred to heirs?
  • Should incentive milestones be created, like completing college, attaining higher education goals, or staying sober?

If assets are left directly to children, there is always the risk that they may lose the wealth. Sometimes that is not the child’s fault, but this can be prevented with good planning. Inherited assets can be protected in trusts, which can be created to protect wealth and provide for professional management.

Do Trusts Avoid Estate Taxes?

Now that you have an understanding of what legacy planning means, another important consideration is minimizing tax liabilities. Not every estate plan is designed with taxes in mind, so you’ll want to discuss this with your estate planning attorney.  The issue of taxes can become more complex, if the estate includes illiquid assets, including real estate or a family owned business. If you are interested in learning more about advanced planning, please visit our previous posts. 

Reference: Kiplinger (Oct. 30, 2020) “Legacy Planning: Create a Lasting Legacy”

 

There are pros and cons to charitable trusts

Creating a GRIT Could Have Some Benefits

Creating a GRIT (grantor retained income trust) could have some benefits, particularly if you’re seeking for ways to minimize taxes in your estate plan. A GRIT is a type of irrevocable trust. This means that the transfer of assets is permanent and can’t be reversed.

Yahoo Finance’s recent article entitled “What Is a Grantor Retained Income Trust (GRIT)?” explains that a grantor retained income trust lets the person who creates the trust transfer assets to it, while still being able to receive net income from trust assets. The grantor keeps this right for a set number of years.

By creating a GRIT, the grantor (or creator of the trust) has the right to receive net income from the assets held in the trust. The trustee distributes income to the grantor, according to the trust terms. After the initial term during which the grantor is eligible to receive income from the trust expires, one of two things can happen. The remaining assets in the trust can be distributed to its beneficiaries. If you don’t want the assets to pass on to beneficiaries immediately, you can set it up so the assets continue to be held in trust.

However, unlike other types of trusts, there are rules on who can get a transfer of GRIT assets. Specifically, there are certain people who can’t be named as a beneficiary to a GRIT, including your spouse, your parents or spouse’s parents, your children or spouse’s children, or your siblings or spouse’s siblings (or their spouses).

However, you can designate the children of your siblings or other distant relatives as the beneficiary to a GRIT.

A GRIT is typically used for one specific purpose, which is to minimize taxes in estate planning. Keeping estate taxes as low as possible results in additional assets to pass on to your beneficiaries when you pass away.

When assets are transferred to a GRIT, they’re valued at a discount. This is based upon on the number of years for which you plan to draw income from the trust as the grantor, and the principal value of assets included in the trust are excluded from your estate for estate and gift tax purposes. However, you’ll be taxed on the income you receive from a GRIT during the initial term. It’s taxed at your ordinary income tax rate. It’s important to know about creating a GRIT for the benefit of minimizing estate taxes, that you must outlive the initial term. If you die during the period when you’re still receiving income from the trust assets, no estate or gift tax benefit would pass on to your beneficiaries.

A grantor retained income trusts can serve a specialized objective as part of your estate plan. However, whether you need one can depend on a variety of factors, so speak with an experienced estate planning attorney about the specifics of a GRIT.

If you would like to learn more about GRITs and other types of trusts, please visit our previous posts. 

Reference: Yahoo Finance (Oct. 23, 2020) “What Is a Grantor Retained Income Trust (GRIT)?”

 

There are pros and cons to charitable trusts

Federal Estate Tax Exemption is set to Sunset

In 2018, the Tax Cuts and Jobs Act (TCJA) doubled the lifetime gift, estate and generation-skipping tax exemption to $11.18 million from $5.6 million. With adjustments for inflation, that exemption in 2020 is $11.58 million, the highest it’s ever been, reports the article “Federal Estate Tax Exemption Is Set to Expire—Are You Prepared?” from Kiplinger. However, this won’t last forever. There’s a limited time to this historically high exemption. The window for planning may be closing soon. The federal estate tax exemption is set to sunset at the end of 2025, but the impact of a global pandemic and the presidential election will likely accelerate the rollback.

As of this writing, many states have already eliminated their state estate taxes, although 17 states and the District of Columbia still have them. The estate planning environment has changed greatly over the last decade. However, for families with large assets, and for those whose assets may reach Biden’s proposed and far lower estate tax exemption, the time to plan is now.

Gifting Assets Now to Reduce Estate Taxes. The IRS has stated that there will be no claw back on lifetime gifts, so any gifts made under the current exemption will not be subject to estate taxes in the future, even if the exemption is reduced.

Keep in mind that when gifting assets, to make a gift complete for estate tax purposes, you must relinquish ownership, control and use of the assets. If that is a concern, married couples can use the Spousal Lifetime Access Trust or SLAT option: an irrevocable trust created by one spouse for the benefit of the other. Just be mindful when funding irrevocable trusts of gifting any low cost-basis assets. If the trust holds assets that appreciate while in the trust for extended periods of time, beneficiaries could be hit with tax burdens.

Take Advantage of Lower Valuations and Low Interest Rates. The value of many securities and businesses have been impacted by the pandemic, which could make this a good time to consider gifting or transferring assets out of your estate. Lower valuations allow a greater portion of assets to be transferred out of the estate, thereby reducing the size of the estate tax.

With interest rates at historical lows, intra-family loans may be an effective wealth-transfer strategy, letting family members make loans to each other without triggering gift taxes. Intra-family loans use the IRS’ Applicable Federal Rate–now at a record low of between 0.14%-1.12%, depending upon the length of the loan. These loans work best when borrowed funds are invested and the rate of return earned on the invested loan proceeds exceeds the loan interest rate.

Avoid Last-Minute Rush by Starting Now. This type of estate planning takes time. The more time you have to plan with your estate planning attorney, the less likely you are to run into challenges and hurdles that can waste valuable time. When estate tax laws change, estate planning attorneys get busy. Creating a thoughtful plan now may also help prevent mistakes, including triggering the reciprocal trust doctrine or the step transaction doctrine. Planning for asset protection and distribution allows families to control how assets are distributed for many generations and to create a lasting legacy. Take the time to consider your planning before federal estate tax exemption is set to sunset.

If you would like to learn more about exemptions and gifting, please visit our previous posts.

Reference: Kiplinger (Oct. 14, 2020) “Federal Estate Tax Exemption Is Set to Expire—Are You Prepared?”

 

There are pros and cons to charitable trusts

How Do I Keep Money in the Family?

That seems like an awfully large amount of money. You might think only the super wealthy need to worry about estate planning, but you’d be wrong to think planning is only necessary for the 1%. So how do I keep money in the family?

US News and World Report’s recent article entitled “5 Estate Planning Tips to Keep Your Money in the Family” reminds us that estate taxes may be only part of it. In many cases, there are income tax ramifications.

Your heirs may have to pay federal income taxes on retirement accounts. Some states also have their own estate taxes. You also want to make certain that your assets are transferred to the right people. Speaking with an experienced estate planning attorney is the best way to sort through complex issues surrounding estate planning. When trying to keep money in the family, here are some things you should cover:

Create a Will. This is a basic first step. However, 68% of Americans don’t take it. Many of those who don’t have a will (about a third) say it’s because they don’t have enough assets to make it worthwhile. This is not true. Without a will, your estate is governed by state law and will be divided in probate court. Ask an experienced estate planning attorney to help you draft a will.  You should also review it on a regular basis because laws and family situations can change.

Review Your Beneficiaries. Perhaps the simplest way to keep money in the family. There are specific types of accounts, like retirement funds and life insurance in which the owners designate the beneficiaries, rather than this asset passing via the will. The named beneficiaries will also supersede any directions for the accounts in your will. Like your will, review your account beneficiaries after any major life change.

Consider a Trust. Ask an experienced estate planning attorney about a trust for possible tax benefits and the ability to control when a beneficiary gets their money (after they graduate college or only for a first home, for example). If money is put in an irrevocable trust, the assets no longer belong to you. Instead, they belong to the trust. That money can’t be subject to estate taxes. In addition, a trust isn’t subject to probate, which keeps it private.

Convert to Roth’s. If you have a traditional 401(k) or IRA account, it will help keep money in the family, but it might unintentionally create a hefty tax bill for your heirs. When your children inherit an IRA, they inherit the income tax liability that goes with it. Regular income tax must be paid on distributions from all traditional retirement accounts. In the past, non-spousal heirs, such as children could “stretch” those distributions over their lifetime to reduce the total amount of taxes due. However, now the account must be completely liquidated within 10 years after the death of the owner. If the account balance is substantial, it could necessitate major distributions that may be taxed at a higher rate. To avoid leaving beneficiaries with a large tax bill, you can gradually convert traditional accounts to Roth accounts that have tax-free distributions. The amount converted will be taxable on your income taxes, so the objective is to limit each year’s conversion, so it doesn’t move you into a higher tax bracket.

Make Gifts While You’re Alive. A great way to make certain that your money stays in the family, is to just give it to your heirs while you’re alive. The IRS allows individuals to give up to $15,000 per person per year in gifts. If you’re concerned about your estate being taxable, these gifts can decrease its value, and the money is tax-free for recipients.

Charitable Donations. You can also reduce your estate value, by making charitable donations. Ask an experienced estate planning attorney about setting up a donor-advised fund, instead of making a one-time gift. This would give you an immediate tax deduction for money deposited in the fund and then let you make charitable grants over time. You could designate a child or grandchild as a successor in managing the fund.

Complicated strategies and a constantly changing tax code can make keeping money in the family feel intimidating. However, ignoring estate planning can be a costly mistake for your heirs. Talk to an estate planning attorney. If you would like to learn more about estate tax planning, please visit our previous posts.

Reference:  US News and World Report (Sep. 30, 2020) “5 Estate Planning Tips to Keep Your Money in the Family”

 

There are pros and cons to charitable trusts

What is a GRAT and Does Your Family Need One?

What is a GRAT and does your family need one? It is a technique where an individual creates an irrevocable trust and transfers assets into the trust to benefit children or other beneficiaries. However, unlike other irrevocable trusts, the grantor retains an annuity interest for a number of years.

As a result of the low interest rate environment, some families may have a federal estate tax problem and need planning to reduce their tax liability. A Grantor Retained Annuity Trust, known as a GRAT, is one type of planning strategy, as described in the article “Estate planning with grantor retained annuity trust” from This Week Community News.

Here’s an example. Let’s say a person owns a stock of a closely held business worth $800,000. Their estate planning attorney creates a ten-year GRAT for them. The person transfers preferably non-voting stock in the closely held business to the GRAT, in exchange for the GRAT paying the person an annuity amount to the individual who established the GRAT for ten years.

The annuity amount payment means the GRAT pays the individual a set percentage of the amount of the initial assets contributed to the GRAT over the course of the ten-year period.

Let’s say the percentage is a straight ten percent payout every year. The amount paid to the individual would be $80,000. At the end of the five-year period, the grantor would have already received an amount back equal to the entire amount of the initial transfer of assets to the GRAT, plus interest.

At the end of the ten-year term, the asset in the trust transfers to the individual’s beneficiaries. If the GRAT has grown greater than 1%, then the beneficiaries also receive the growth. The GRAT makes the annuity payment with the distribution of earnings received from the closely held business, which is likely to be an S-Corp or a limited liability company taxed as a partnership. Assuming the distribution received is greater than the annuity payment, the GRAT uses cash assets to make the annuity payment. For the planning to work, the business must make enough distributions to the GRAT for it to make the annuity payment, or the GRAT has to return stock to the individual who established the GRAT.

There are pitfalls. If the individual dies before the term of the GRAT ends, the entire value of the assets is includable in the estate’s assets and the technique will not have achieved any tax benefits.

If the plan works, however, the stock and all of the growth of the stock will have been successfully removed out of the individual’s estate and the family could save as much as 40% of the value of the stock, or $320,000, using the example above.

It is possible to structure the entire transaction, so there is no gift tax consequence to the grantor. If the person is concerned about estate taxes or the possible change in the federal estate tax exemption, which is due to sunset in 2026, then a GRAT could be an excellent part of your family’s plan. When the current estate tax exemption ends, it may return from $11.58 million to $5 or $6 million. It could even be lower than that, depending on political and financial circumstances. Planning now for changes in the future is something to consider and discuss with your estate planning attorney.

If you like to learn more about various types of trusts, and how they work, please visit our previous posts.

Reference: This Week Community News (Sep. 6, 2020) “Estate planning with grantor retained annuity trust”

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