What Type of Trust is best for You?

September 19, 2023

You are beginning the estate planning process. Great! When discussing your situation with your estate planning attorney, you will hear about trusts. But what type of trust is best for you? Fortune’s recent article, “Understanding trusts: An important estate planning tool for everyday Americans,” gives a concise run-down of all of the various types of trusts.

AB Trust. Also called a credit shelter or bypass trust, this trust is used by married couples to get the most benefit from estate tax exemptions. An AB trust is two trusts. The easiest way to remember them is that the A trust is for the person “above ground,” and the B trust belongs to the person “below ground.” Assets up to the annual estate tax exemption are put in the B trust to avoid estate taxes and usually pass to the couple’s children (“bypassing” the spouse). The remaining assets are placed in the surviving spouse’s A trust. When the surviving spouse dies, assets in both trusts pass to the designated beneficiaries.

An AB trust may be best for highly affluent married couples with large estates wanting to max out their estate tax exemptions.

Charitable Trust. This trust can benefit three parties: you, the grantor, your beneficiaries, and a charitable cause. They come in two types—charitable remainder trusts and charitable lead trusts. They still have one thing in common: the benefiting charity must be a qualifying organization per Internal Revenue Service guidelines. A charitable remainder trust is a type of irrevocable trust that provides income for you or your beneficiaries during your lifetime. You typically will move highly-appreciated assets into the trust, which the trust then sells—avoiding capital gains taxes—to create the income stream. After your death, the remaining assets in the trust are distributed to one or more charitable causes. A charitable lead trust is an irrevocable trust that’s the opposite of a charitable remainder trust. It first benefits the charitable beneficiaries of your choice during your lifetime. When you die, the remaining assets are distributed to your beneficiaries. A charitable lead trust can be funded during your lifetime or when you die through instructions in your will. A charitable trust may be best for individuals with highly appreciated assets, like stocks, that can be used to help meet philanthropic goals during or after their lifetimes.

Grantor Retained Annuity Trust (GRAT). A GRAT is an irrevocable trust generally used by the wealthy to reduce tax implications for their beneficiaries. You transfer assets into the trust that are expected to appreciate over time and specify the term for which you’ll receive an annuity payment based on those assets. Once the GRAT’s term expires, the assets and any appreciation of those assets in the trust will pass to your beneficiaries with little to no estate tax burden. A GRAT may be best for wealthy individuals who want to help family members avoid paying estate taxes on their inheritance.

Irrevocable Life Insurance Trust (ILIT). Putting life insurance into a trust is a strategy the wealthy use to cover several fronts. You fund an irrevocable trust using one or several life insurance policies. When you die, the payouts from those policies typically avoid estate taxes but can be used to pay for things like state estate taxes and funeral expenses. The funds in the trust can help avoid the need to liquidate assets to meet these financial needs. An ILIT may be best for people who expect to pay state estate taxes and want to protect life insurance policies from creditors or divorce.

Special Needs Trust. This trust can help provide long-term care for a loved one with physical or mental disabilities who’s under age 65. The big benefit of special needs trusts is that assets held in them don’t affect their eligibility for Social Security and Medicaid benefits. There are three types of special needs trusts. Therefore, it is important to create one with an attorney specializing in special needs trusts. This trust may be best for those with mentally or physically disabled family members.

Figuring out what type of trust is best for you really comes down to the type of assets you have, and how you want to manage and pass down those assets when you pass. If you would like to read more about the different types of trusts, please visit our previous posts.

Reference: Fortune (June 9, 2023) “Understanding trusts: An important estate planning tool for everyday Americans”

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Carefully Consider naming Contingent Beneficiaries

September 18, 2023

If you’ve been married or in a longstanding relationship, it’s almost certain your initial beneficiary will be your spouse or partner. If you have children, it’s likely an easy decision to make them contingent or successor beneficiaries to your estate. More often than not, children inherit equally, explains the article “PLANNING AHEAD: The problems we have naming contingent beneficiaries” from The Mercury. Carefully consider naming contingent beneficiaries when designing your estate plan.

To avoid conflict, parents often decide to name children equally, even if they’d prefer a greater share to go to one child over another, usually because of a greater need. This is, of course, a matter of individual preference.

However, as you move down the line in naming a successor or contingent beneficiaries, you may encounter some unexpected stumbling blocks.

If there is a beneficiary who is disabled, whether a child, grandchild or more distant relative, or even a spouse, you have to determine if naming them is a good idea. If the disabled individual is receiving Medicaid or other government assistance, an inheritance could cause this person to become ineligible for local, state, or federal government benefits. An estate planning attorney with knowledge of special needs planning will help you understand how to help your loved one without risking their benefits.

A Supplemental Needs Trust may be in order, or a Special Needs Trust. If the person’s only benefit is Social Security Disability—different from Supplemental Security Income or some others—they may be free to inherit without a trust and will not impact benefits. Social Security Disability recipients cannot work in “substantial gainful employment.”

Another issue in naming successor and contingent beneficiaries is the choice of a trustee or manager to handle funds if a beneficiary cannot receive benefits directly. A grandparent will sometimes be reluctant to name a son-in-law or a daughter-in-law as trustees for minors if their daughter or son predeceases and the inheritance is intended for a minor or disabled grandchildren. The grandparents may be concerned about how the funds will be used or how well or poorly the person has handled financial matters in the past.

The same concern may be at issue for a child. A trust can be structured with specific parameters for a grandchild regarding the use of funds. If a supplemental needs trust is established, the trustee must understand clearly what they can and cannot do.

What happens if you’ve run out of beneficiaries? For those with small families or who live into their 90s, many family members and friends have passed before them. These seniors may be more vulnerable to scams or new “friends” whose genuine interest is in their assets. In these cases, an estate plan prepared by an experienced estate planning attorney will need to consider this when mapping out the distribution of their estate, however large or small, to follow their wishes. Carefully consider naming contingent beneficiaries when designing your estate plan. If you would like to learn more about beneficiaries, please visit our previous posts.

Reference: The Mercury (Aug. 28, 2023) “PLANNING AHEAD: The problems we have naming contingent beneficiaries”

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Choosing an Executor can be a Difficult Decision

September 13, 2023

Choosing an executor can be a difficult decision. Planning for death-related events isn’t as much fun as planning a weekend getaway. Therefore, you’d be forgiven for procrastinating. However, that doesn’t mean you can put off naming an executor forever, says a recent article from AARP, “7 Things to Know About Appointing an Executor.”

Your executor needs to possess the stamina, patience, and persistence to complete the tasks of this role. If they don’t, having your estate administered may become difficult or impossible. Serving as an executor can be harder than people think. Problems begin when someone names a family member just because they are family—which is not the best reason.

It’s best to name someone rather than no one, advises the article. You can always change the executor if they decide they don’t want the responsibility or die before you. If you don’t name anyone, the court will decide for you, It may not be someone you know or the last person you want to handle your estate.

Things can get even more complicated if you don’t leave clear instructions, including where to find your important documents, the keys to your home and car and usernames and passwords to various digital assets. Instead of making everything harder for the ones you love, it’s best to make it easier.

There are seven main tasks for the executor to complete. The first is planning the funeral. You can make that easier by expressing your wishes to your executor and leaving the information in documents. Don’t add it to your will—the executor may not see the will until long after you’ve been buried or cremated.

The executor must obtain a death certificate, find the will and retain an estate planning attorney. The death certificate is issued by your county of residence and is signed by the physician who verified your death. If you’ve had a valid will prepared, your property will be distributed according to the terms of the will. Assets in trusts or accounts with beneficiary designations will go directly to your heirs. Everyone should review their beneficiary designations regularly and update as needed. The beneficiary designations surpass any wishes in the will.

Notify the probate court. Your executor or attorney will need to petition the probate court in the area where you live. They’ll complete a form to obtain a Letter of Administration or Letters Testamentary. These are used to prove that they are the court-approved executor.

Inform all interested parties. Deaths must be reported to employers, Social Security, friends, and family members. Anyone who might have an “interest” in the estate needs to be notified. In some jurisdictions, this requires publishing a death notice in the local paper several times shortly after the person has passed. Banks and other financial institutions also need to be notified.

Pay all debts and file taxes. If applicable, the executor must settle all obligations with creditors and file income, inheritance, or estate taxes.

Create an inventory of assets and plan for distribution. This includes probate and non-probate assets. This includes assets that are jointly owned or held in trust. Next, the executor determines what is sold, kept, donated, or discarded.

Distribute assets among beneficiaries. This occurs only after any estate liabilities, including taxes and paying creditors, are settled.

Complete the final accounting and all required forms. Your executor must dissolve existing accounts and ensure that the court has everything needed to settle your estate.

Your will helps your loved ones navigate the process of settling your estate. Include clear instructions in a letter of intent, so they know what accounts they must deal with. Above all, make sure that the person you name to serve as executor can handle the tasks and the family dynamics accompanying grief.

Choosing an executor can be a difficult decision to make. Consult with your estate planning attorney. He or she will have the experience and expertise to help you make an important decision. If you would like to learn more about the role of the executor, please visit our previous posts.

Reference: AARP (Aug. 8, 2023) “7 Things to Know About Appointing an Executor”

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Avoid a Tax Nightmare with your Trust

September 11, 2023

The other message is to be certain that the person serving as a trustee has the knowledge to administer the trust properly or the wisdom to retain an experienced estate planning attorney who will know how to administer a trust. Avoid a tax nightmare with your trust with the correct forms. Not every CPA has detailed knowledge about trust taxation, reports the recent article, “Trust’s Incorrect Tax Form Forfeited large Tax Refund Claim: A Lesson For Trustees,” from Forbes.

For income tax purposes, there are several types of trusts. “Grantor trusts” are those whose income is taxed to the person, the settlor, who created the trust. The trust at issue was a grantor trust. However, when the taxpayer who created the trust died, the trust became a non-grantor trust. These are also called “complex” trusts. The income is not reported by the person creating the trust. Complex trusts usually pay their own income taxes. The beneficiaries receiving distributions then report the income for tax purposes included in the income received from the trust. This is referred to as the trust’s Distributable Net Income or “DNI.”

In this case, the trust is the remainder trust after the termination of a Qualified Personal Residence Trust or “QPRT.” This is a trust used to transfer a valuable house from the taxpayer’s estate to descendants or to a trust for them at a discount from the trust’s current value.

The trust had income to report for income tax purposes, which will be done on Form 1041, U.S. Income Tax Return for Estates and Trusts. The trust felt it was entitled to a refund of some of the taxes it paid, so it filed for a refund. Refund claims are supposed to be filed by amending the trust income tax return, but the trust filed Form 843, a form to claim a refund. The wrong form led the Court to determine that the trust failed to take appropriate action, and the refund was lost. The trust’s filing did put the IRS on notice that the claim was the wrong action.

The IRS said the taxpayer’s filing of Form 843 was insufficient as a formal claim because an amended Form 1041 is the proper form. The Court found that the IRS is authorized to demand information in a particular form and to insist that the form is observed. The instructions on Form 853 advise that the form is for a refund of taxes other than income tax, while the instructions on Form 1041 indicate that it must be used to claim a refund.

What happened in this case? Someone managing the trust didn’t know enough about trust taxation. The family may not have had regular meetings with their estate and trust attorney who created the trust. The deceased taxpayer in this case was a judge, and the trustee was the son of the judge. The taxpayer died in 2015, and the house was sold for $1.8 million the next year. The IRS demanded $930,127 in taxes, penalties, and interest from the Trust. The Trust paid that amount assessed on September 24, 2021. The court opinion was handed down on August 7, 2023. The amount of costs in accounting and legal fees must have been enormous.

This is an excellent example of why families need to have regular, ongoing meetings with their estate planning attorneys and tax advisors to be sure everyone is on the same page. Annual reviews and an estate planning attorney focusing on trust taxation could avoid a tax nightmare with your trust. It would have saved this family money, time, and the stress of an unresolved IRS issue. If you would like to learn more about taxation in estate planning, please visit our previous posts.

Reference: Forbes (Aug. 19, 2023) “Trust’s Incorrect Tax Form Forfeited large Tax Refund Claim: A Lesson For Trustees”

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Benefits and Drawbacks to a Funeral Trust

September 7, 2023

An irrevocable funeral trust allows you to save for your end-of-life costs. It can be an excellent way to make arrangements for your burial. However, there are benefits and drawbacks to a irrevocable funeral trust. Be sure you have the flexibility you need since irrevocable trusts can’t be modified after they go into effect.

The main point is that you cover the costs yourself. Remember that even if your will leaves behind money to pay for your funeral, it must go through the probate process. Your heirs may still be required to pay for your funeral upfront and hope to collect reimbursement from your will. But with a funeral trust, these payments are handled automatically.

The next point is that you (or your heirs) can pay less. The funeral trust pays for your funeral with the proceeds of its life insurance policy or other investments. This means that you may pay less upfront than you would otherwise, explains Yahoo Finance’s recent article, “Pros and Cons of an Irrevocable Funeral Trust.”

The details of those costs are varied based on the individual trust fund. Some funeral trusts only cover basic services, like a casket, burial, or cremation. But others will pay for a full funeral ceremony, with any associated officiants, transportation, and other costs. This can make the planning process easier for your family because if you set up a funeral trust that comes with specific, pre-arranged costs and services, all of those details will already be arranged when you pass away. Your family won’t have to go through finding a funeral home and making arrangements.

Another benefit to an irrevocable funeral trust is Medicaid eligibility. Because you no longer own these assets, they won’t count against your net worth when determining Medicaid coverage and any other government benefits. But that’s true only for irrevocable trusts. The money in a revocable trust is still legally yours. As a result, it counts against eligibility determinations.

As with all irrevocable trusts, you should know that once this money is in the trust, it’s no longer under your control. So be sure this is money with which you can comfortably part. Also, confirm these plans with your family if you set up a funeral trust with pre-arranged services. Be sure they’ll want what you’ve planned because this will be for their comfort.

Finally, you can lose all the money if you set up this trust with a funeral home that goes out of business or has financial issues. And these trusts aren’t always portable, which can also be a problem. Remember, there are both benefits and drawbacks to a funeral trust. Discuss these potential outcomes with your estate planning attorney to decide if a funeral trust is a good option for you. If you would like to learn more about irrevocable trusts, please visit our previous posts.

Reference: Yahoo Finance (April 29, 2023) “Pros and Cons of an Irrevocable Funeral Trust”

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Cancelling Irrevocable Trust can cause Tax nightmare

September 5, 2023

Cancelling an irrevocable trust can cause a tax nightmare. For those in the high-income bracket, the potential tax consequences of canceling an irrevocable trust could be a major deterrent. And for those from middle-income backgrounds, the immediate financial impact, like the possible loss of income from the trust, the ramifications may be more, says Yahoo Finance’s recent article entitled, “Will Terminating an Irrevocable Trust Affect My Taxes?”

For example, if the trust holds significantly appreciated assets like real estate or vintage cars, the beneficiaries could face a large tax bill upon dissolution and may benefit from an alternative strategy. So, instead of dissolving the trust, it might be worth looking at ways to alter it better to fit the beneficiaries’ current needs and circumstances. This may include decanting—moving assets from one trust to another with more favorable terms— or moving the trust to a state with more favorable laws.

Income Taxes. An irrevocable trust may hold assets that generate income, including bank accounts, bonds, and dividend-paying stocks whose profits are taxed as ordinary income. Note that distributions from a trust’s principal aren’t subject to income taxes – only the gains. But if an irrevocable non-grantor trust is terminated, the income the assets have generated will presumably be distributed to the beneficiaries. It will be their responsibility to pay the taxes on the money. However, if the trust that’s dissolved is a grantor trust, the income tax liability will stay with the person who created the trust.

Capital Gains Taxes. Assets that appreciate within an irrevocable trust are subject to capital gains taxes. When these profits are realized and distributed at the termination of a trust, the beneficiaries will be required to pay the tax rate that corresponds with their income level.

Estate Taxes. When assets are transferred to an irrevocable trust, they’re removed from the grantor’s taxable estate, lowering the person’s potential estate tax liability when they die. Only large estates worth more than $12.92 million are subject to the federal estate tax in 2023, so it’s not an issue for most people. But in March 2023, the IRS announced that the step-up in basis doesn’t apply to assets held in irrevocable grantor trusts. For those assets to receive the step-up, they must be included in the grantor’s gross estate and be subjected to the federal estate tax. As a result, the termination of an irrevocable grantor trust could trigger the estate tax if assets return to their taxable estate.

Cancelling an irrevocable trust can cause a tax nightmare that may take years to resolve. Discuss your situation with your estate planning attorney for viable alternatives that may be less risky. If you would like to learn more about irrevocable trusts, please visit our previous posts.

Reference: Yahoo Finance (Aug. 13, 2021) “Will Terminating an Irrevocable Trust Affect My Taxes?”

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The Safe way to Pass on Family Heirlooms

August 30, 2023

Family feuds are more likely over Aunt Josephine’s jewelry than the family home. Putting sticky notes on personal items before you die or expecting heirs to figure things out after you’ve passed often leads to ugly and expensive disputes, says a recent article from The Wall Street Journal, “Pass On Your Heirlooms, Not Family Drama. The safe way to pass on family heirlooms is via a trust of will.

Boomers handling parents’ estates and assessing their personal property are having more conversations around inheritance and heirlooms. However, there are better ways to plan and distribute property to avoid family fights over cars, jewelry, furniture and household items.

The person you name to handle your estate, the executor, typically distributes personal property. Therefore, pick that person with care and clarify how much power they will have. An example of this comes from a police officer in Illinois who has been settling his father’s estate for nearly two years. His father owned more than twelve vehicles, a water-well drill rig and two semitrailers of car parts and guns dating back to the Civil War. He also listed 19 heirs, including stepchildren and friends. He told his son he knew he could handle everyone and the stress of people who “aren’t going to be happy.”

If you want a particular item to go to a specific person, make it clear in your will or trust. Describe the item in great detail and include the name of the person who should get it. A sticky note is easily removed, and just telling someone verbally that you want them to have something isn’t legally binding.

Without clear directions, one family with five siblings used a deck of cards and played high card wins for items more than one sibling wanted. Only some families have the temperament for this method.

In one estate, two sisters wanted the same ring. However, there were no directions from their late parents. An estate settlement officer at their bank had a creative solution: a duplicate ring was made, mixed up with materials from the original ring, and each daughter got one ring.

The safe way to pass on family heirlooms is via a trust of will. Ask your estate planning attorney how to address personal heirlooms best. In some states, you can draft a memo listing what you want to give and to whom. It is legally binding, if the memo is incorporated into a will or trust. If not, the personal representative can consider your wishes. Make sure to sign and date any documents you create.

Get heirlooms appraised to decide how to divide items equitably, which to sell and what to donate. If heirs don’t want personal property, they can donate it and use the appraisal to substantiate a tax deduction. Appraisals will also be needed for estate tax and capital gains tax purposes. If you would like to learn more about personal property, please visit our previous posts.

Reference: The Wall Street Journal (July 30, 2023) “Pass On Your Heirlooms, Not Family Drama”

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The Estate of The Union Season 3|Episode 3

The Estate of The Union Season 2|Episode 9 is out now!

August 29, 2023

The Estate of The Union Season 2|Episode 9 is out now!

All good musicians eventually have a Greatest Hits album. We’ve got one too!

We send our blog out most business days and we track which blog entries are the most popular. The posts we did on the new tax rules regarding “Grantor Trusts” and our article on “How to Leave Assets to Minors” were the BIG Winners. Given how popular each of the posts were, we have dedicated an entire episode of our podcast to them.

In this edition of The Estate of the Union, Brad Wiewel expands on both of these topics in a way that makes them a bit easier to understand and perhaps implement.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 2|Episode 9 is out now! The episode can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the links below to listen to or watch the new installment of The Estate of The Union podcast. We hope you enjoy it.

Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

Complexities of Determining Who is a Descendant

August 28, 2023

Not using specific names and terms open to definition could significantly impact who might inherit from your estate or trust. The complexities of determining who is a descendant can make beneficiary distribution more difficult. There are situations where some people may choose to deliberately restrict or expand the definition of the group, which might be included in these definitions, explains the article “Who Is Your Descendant: Intentional Limitations Or Broadening Of Definitions In Your Will Or Trust” from Forbes. For some people, creating a new role of a special trust protector who holds a limited or special power of appointment to determine who should be included or removed from the definition of “issue” or descendant is worth considering.

What might arise if the wish only considers children descendants if they belong to a particular faith? Is this type of legal restriction permitted? Clauses limiting heirs to members of a particular faith or a sect within the faith may raise questions about the constitutionality of the clause. Potential heirs excluded under such provisions have argued that a religious restriction on marriage violates constitutional safeguards under the Fourteenth Amendment protecting the right to marry.

Courts have held clauses determining if potential beneficiaries qualify for distributions based on religious criteria enforceable, if the potential beneficiaries have no vested interest in the assets. Another court upheld the provisions of a will conditioning bequests to their sons as long as they married women of a particular faith.

These decisions are narrowly tailored to the specific fact patterns of the cases, since individuals are generally allowed to disinherit an heir with the exception of a spousal elective share or a community property interest. The courts have reasoned that the restriction is not on the heir to marry but on the right of the testator to bequeath property as they wish.

An alternative approach to addressing the complexities of determining who is a descendant is to create a single trust for all heirs, mandating the funds in the trust be used for the cost of religious education, attending religious summer camps, taking relevant religious studies, religious institutional membership, etc. The trust could use the assets to encourage religious observance. However, it may only partially address the question. What about the remainder of the assets—should it be used for all heirs regardless of religious affiliations?

An estate plan compliant with Islamic law may involve a different determination of who is a descendant. The Sharia laws of inheritance are similar to the intestacy statute. One-third of the estate may be distributed as the decedent wishes. However, the remainder must be distributed as mandated under Islamic law. The residuary inheritance shares after the first third are restricted to Muslim heirs. Additional laws prescribe specified shares of the estate to be distributed to certain heirs, depending upon which heirs are living at the moment of the decedent’s death.

Suppose you or a family member is lesbian, gay, bisexual, transgender, or queer (LGBTQ). The law may not address the unique considerations regarding who may be considered a descendent. Special steps may be needed to carry out your wishes as to who your descendants are. What if you view a particular child as your own, but share no genetic material with a child? Children may be adopted or born through surrogacy, so neither parent nor only one parent is biologically related to the child. While some states may recognize an equitable parent doctrine, this may be limited and not suffice to protect the testator.

The many new complexities of determining who is a descendant are complicated and evolving. Changing family structures and religious beliefs based on different values all impact estate planning. A special trust protector may make decisions when uncertainty arises from provisions in a will designed to carry out the wishes. This is a relatively new role and not permitted in some states, so speak with your estate planning attorney to protect your wishes and heirs. If you would like to learn more about beneficiary designations, please visit our previous posts.

Reference: Forbes (Aug. 4, 2023) “Who Is Your Descendant: Intentional Limitations Or Broadening Of Definitions In Your Will Or Trust”

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How an Intentionally Defective Grantor Trust Protects Wealth

August 23, 2023

Most parents want their children to inherit as much wealth as possible, which drives their focus to shield heirs from unnecessary taxes when they inherit. As of this writing, federal gift and estate tax laws are very friendly for building generational wealth, says a recent article from Kiplinger, “One Way to Secure Your Child’s Inheritance in an Uncertain Tax Future.” The article discusses how an Intentionally Defective Grantor Trust protects wealth.

However, this is temporary, as the Tax Cuts and Jobs Act will expire in 2025. When it does, gift and estate tax exemptions will be cut in half. How can you transfer the most wealth possible to heirs? The best tool is often the Intentionally Defective Grantor Trust or IDGT.

The incentive to take advantage of the current tax laws is even greater for those living in one of the 17 states with their own estate or inheritance taxes, especially considering those states’ exemptions are considerably lower than the federal estate taxes.

The IDGT, despite its name, is not at all defective. Removing assets from an estate lowers or eliminates taxation on the estate and heirs. By selling assets from the estate to a grantor trust, they are no longer subject to estate taxes. The trust then pays an installment note over a number of years, which is designated when the trust is created.

So, why is it called Intentionally Defective? The term refers to the fact that the trust is not responsible for paying its own income taxes. Instead, they pass to the grantor or person who created the trust. Consider an estate with $20 million placed in an IDGT. This might generate a $500,000 tax bill, paid by the grantor. This accomplishes two things: The $500,000 paid in taxes is removed from the estate, lowering the estate’s value and the estate tax. Second, the trust is not responsible for paying income taxes on the appreciation of assets so that it can grow faster. Since the trust is not subject to estate taxes, any appreciation of assets inside the trust won’t add to any estate taxes due upon the grantor’s passing.

IDGTs and S Corporations. Many family-owned businesses are S-corporations that shield personal assets from business-related liabilities. If someone successfully sues the business, any judgment will be placed on the business, not the family’s assets. S corp owners hold shares in the corporation, which can be transferred to the IDGT. When family members move their stock into the trust, business ownership is transferred to heirs free of estate tax. If the business grows between the time the trust is established and your death, the growth happens separately from the estate, so there is no estate tax implication to continued business growth.

What’s the downside? The IDGT removes assets from the estate and provides cash flow in installment payments to fund retirement. However, if you die before the installment term ends, the trust pays out the rest of what it owes to your estate, which increases the value of your estate and the estate taxes owed. However, there’s a remedy for this. The IDGT can be set up with a self-canceling installment note or SCIN. The SCIN automatically cancels the trust’s obligation to pay installments upon your death.

Remember that you will be responsible for the trust’s tax liability, so don’t gift so many assets to the trust that you’re scrambling to pay the tax bill.

IDGTs are complex and require the help of an experienced estate planning attorney to ensure that they follow all IRS requirements. He or she will explain how an Intentionally Defective Grantor Trust protects wealth and if it is a useful planning tool for your family situation. If you would like to learn more about Trusts, please visit our previous posts.

Reference: Kiplinger (July 28, 2023) “One Way to Secure Your Child’s Inheritance in an Uncertain Tax Future”

Category: Trusts

What Type of Trust is best for You?

Carefully Consider naming Contingent Beneficiaries

Choosing an Executor can be a Difficult Decision

Avoid a Tax Nightmare with your Trust

Benefits and Drawbacks to a Funeral Trust

Cancelling Irrevocable Trust can cause Tax nightmare

The Safe way to Pass on Family Heirlooms

The Estate of The Union Season 2|Episode 9 is out now!

Complexities of Determining Who is a Descendant

How an Intentionally Defective Grantor Trust Protects Wealth

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