Can Estate Taxes Be Avoided with a Trust?
Yes, Estate Taxes can be avoided with a trust. But not just any trust will do. The typical “revocable living trust” is a poor planning device when it comes to estate taxes.
If the federal estate tax exemption is lowered, as is expected, it could go as low as $3 million, reports the article “How Trusts Can Be Used To Counter Tougher Estate Taxes” from Financial Advisor. For Americans who own a home and robust retirement accounts, and even life insurance policies with high death values, this change presents an estate planning challenge—but one with several solutions. Trusts, giving and updating estate plans or creating wholly new estate plans should be addressed in the near future.
Note that these topics aren’t challenging for most people. Confronting the future, including death and incapacity, is difficult. Adult children and their parents may find it hard to talk about these matters; emotions, death and money are tough to talk about on their own, but estate planning includes conversations around all three.
Once those hurdles are overcome, an unemotional approach to the business of estate planning can accomplish a great deal, especially when guided by an experienced estate tax planning attorney who can create for you specific kinds of trusts. Here are a few suggestions for families to consider.
If indeed the lifetime exclusion is reduced, plan to take advantage this year (2021) of the lifetime exclusion if you have significant assets over $5 million per spouse. We should know more toward the end of the year. Although your available lifetime exemption may be effectively eliminated, you may be able to significantly your tax bill.
Estate and gift tax planning begins with taking advantage of the lifetime exclusion for both spouses. Whatever that amount is, it can be lost without good planning. To take advantage of the lifetime exclusion, it is best to have a Bypass Trust, which despite the thoughts of many, has not gone out of style. Second, it is best to have a QTIP Trust in place in order to take advantage of the “no estate tax rule” on the death of the first spouse to die, since the IRS allows a deduction for any amounts bequeathed to a spouse, as long as it is in the proper form.
Estate and gift tax planning techniques include Grantor Retained Annuity Trusts (GRATs) and Spousal Limited Access Trusts (SLATs). A SLAT is an irrevocable trust created when one spouse (the donor spouse) makes a gift into a trust to benefit their spouse (the beneficiary spouse), while retaining limited access to the assets at the same time they remove the asset from their combined estate. One spouse is permitted to indirectly benefit, as long as the couple remains married. In Louisiana, this can be a good way to equalize property amongst the spouses in order for both to qualify for the maximum amount of the lifetime exclusion available to each.
The indirect access disappears, if the spouses divorce or if the beneficiary spouse dies before the donor spouse. Be careful about creating SLATs for both spouses; the IRS does not like to see SLATs with the same date of origin and the same amount for both spouses.
The GRAT and sales to an Intentionally Defective Grantor Trust (IDGT) are useful tools in a low-interest rate environment. For a GRAT, property is transferred to a trust in exchange for an annual fixed payment. A sale to an IDGT is where property is sold to a trust in exchange for a balloon note.
Gifting is an important part of estate planning at any asset level. For 2020 and 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. The simple strategy of aggressive lifetime gifting using that $15,000 exclusion is a good way to get money out of a taxable estate. These annual gifts can be used in conjunction with one or more Crummey Trusts in order to accumulate wealth amongst the next generation.
Protect the estate plan by reviewing it every four or five years, and sooner if there are large changes to the tax law—which is coming soon—and changes in the family’s circumstances.
Thoughtful use of trusts and gifting strategies can avoid the probate of the will and ensure that assets go directly to heirs. Reviewing the estate plan regularly with an eye to changes in tax law will protect the legacy.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “Can Estate Taxes Be Avoided with a Trust?” read these additional articles: What Happens If a Trust Is Invalid? and Does Louisiana Have an Inheritance Tax? and Is Prince’s Estate Settled Yet? and How Do You Split an Estate in a Blended Family?
Reference: Financial Advisor (April 19, 2021) “How Trusts Can Be Used To Counter Tougher Estate Taxes”