Read more about the article How Wealthy People Save on Taxes—Can Regular People Do the Same? – Annapolis and Towson Estate Planning
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How Wealthy People Save on Taxes—Can Regular People Do the Same? – Annapolis and Towson Estate Planning

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.

Questions? Contact us to schedule an initial call with one of our experienced estate planning attorneys.

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”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

High Interest Rates Have an Impact on Estate Planning – Annapolis and Towson Estate Planning

The Section 7520 rate has been low for the past 15 years and presented many opportunities for good planning. What happens when inflation has returned and rates are moving up, asks a recent article titled “Estate Planning Techniques in a High—Interest—Rate Environment” from Bloomberg Tax – Annapolis and Towson Estate Planning.

The Section 7520 rate is the interest rate for a particular month as determined by the IRS. It is 120 percent of the applicable federal midterm rate (compounded annually) for the month in which the valuation date falls and rounded to the nearest two-tenths of a percent. It is used for actuarial planning, to discount the value of annuities, life estates and remainders to present value, and is revised monthly.

In January 2022, the 7520 rate was at 1.6%, but as interest rates increased, it shot up and in December 2022 was 5.2%. This was a 225% increase—unprecedented in the history of the 7520 rates. However, there are four key planning concepts which may make 2023 a little brighter for estate planning attorneys and their clients.

Higher inflation equals higher exemptions. Certain inflation adjusted exemptions and exclusions increased on January 1, 2023. The federal transfer tax exemption rose by $860,000 to $12.92 million, and the annual gift tax exclusion increased to $17,000 from $16,000 in 2022.

These increases give wealthy families the opportunity to make generous new gifts to family members without triggering any transfer taxes. Those who have fully used transfer tax exemptions may wish to consider making additional transfers.

Shift charitable giving to CRTs for higher interest rates. People who might have started Charitable Lead Trusts should instead look at Charitable Remainder Trusts. With both CLTs and CRTs, the value of the income and remainder interests are calculated using the 7520 rates. The key difference, for estate planning purposes, is the impact of a rising rate on the amount of the available charitable deduction.

The return of the QPRT. Qualified Personal Residence Trusts have been hibernating for years because of low interest rates. However, the time has come to return them to use for wealth transfer. A QPRT lets a person transfer a residence at a discounted value, while retaining the right to occupy the residence for a number of years. The 7520 rate is used to determine the value of the owner’s retained interest. The higher the rate, the more value retained by the owner and the smaller the amount of the taxable gift to the remainder beneficiaries, usually the owner’s children.

GRATs still have value. A Grantor Remainder Trust should still be considered in estate planning. A GRAT is more appealing in a low interest environment. However, a GRAT can still be useful when rates are rising. The success or failure of the GRAT usually depends on whether the assets transferred to the GRAT appreciate in value at a rate exceeding the 7520 rates, since the excess appreciation is transferred to the remainder beneficiaries’ gift tax-free. A GRAT can also be structured as a zeroed-out GRAT. This means that the transfer of assets to the GRAT doesn’t use any of the grantor’s transfer tax exemption or result in any gift tax due. This is still of value to a person who owns assets with significant growth potential, like securities likely to rebound quickly from depressed 2022 values.  Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Bloomberg Tax (Dec. 23, 2022) “Estate Planning Techniques in a High—Interest—Rate Environment”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article What Is the Point of a Trust? – Annapolis and Towson Estate Planning

What Is the Point of a Trust? – Annapolis and Towson Estate Planning

A trust is an agreement made when a person, referred to as the trustor or grantor, gives a third party, known as the trustee, the authority to hold assets for the trust beneficiaries. The trustee is in charge of the trust and responsible for executing the trust’s instructions as per the language in the trust, explains a recent article from The Skim, “What is a Trust? (Spoiler: They’re Not Just for the Wealthy).”

Some examples of how trusts are used: if the grantor doesn’t want beneficiaries to have access to funds until they reach a certain age, the trustee will not distribute anything until the age as directed by the trust. The funds could also be solely used for the beneficiaries’ health care needs or education or whatever expense the grantor has named, the trustee decides when the funds should be released.

Trusts are not one-size-fits-all. There are many to choose from. For instance, if you wanted the bulk of your assets to go to your grandchildren, you might use a Generation-Skipping Trust. If you think your home’s value may skyrocket after you die, you might want to consider a Qualified Personal Residence Trust (QPRT) to reduce taxes.

Trusts fall into a few categories:

Testamentary Trust vs. Living Trust

A testamentary trust is known as a “trust under will” and is created based on provisions in the will after the grantor dies. A testamentary trust fund can be used to make gifts to charities or provide lifetime income for loved ones.

In most cases, trusts don’t have to go through the probate process, that is, being validated by the court before beneficiaries can receive their inheritance. However, because the testamentary trust is tied to the will, it is subject to probate. Your heirs may have to wait until the probate process is completed to receive their inheritance. This varies by state, so ask an estate planning attorney in your state.

Living trusts are created while you are living and are also known as revocable trusts. As the grantor, you may make as many changes as you like to the trust terms while living. Once you die, the trust becomes an irrevocable trust, and the terms cannot be changed. There’s no need for the trust to go through probate and beneficiaries receive inheritances as per the directions in the trust.

What are the key benefits of creating a trust? A trust doesn’t always need to go through probate and gives you greater control over the assets. If you create an irrevocable trust and fund it while living, your assets are removed from your probate estate, which means whatever assets are moved into the trust are not subject to estate taxes.

Are there any reasons not to create a trust? There are costs associated with creating a trust. The trust must also be funded, meaning ownership documents like titles for a car or deeds for a house have to be revised to place the asset under the control of the trust. The same is true for stocks, bank accounts and any other asset used to fund the trust.

For gaining more control over your assets, minimizing estate taxes and making life easier for those you love after you pass, trusts are a valuable tool. Contact us to speak with one of our estate planning attorneys to find out which trust works best for your situation. Your estate plan and any trusts should complement each other.

Reference: The Skim (Oct. 26, 2022) “What is a Trust? (Spoiler: They’re Not Just for the Wealthy)”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How to Plan in a Time of Uncertainty – Annapolis and Towson Estate Planning

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 does not 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”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Is the Proposed IRS Anti-Clawback Provision? – Annapolis and Towson Estate Planning

The proposed amendment is designed to fix some loopholes in a 2019 regulation passed in response to the 2017 Tax Cuts and Jobs Act. The 2017 law doubled the value of the estate and gift tax exemption until December 31, 2025, when it goes from $12.06 million to $5.49 million. According to this recent article from Financial Advisor titled “Amending The IRS’s Anti-Clawback Provision on Gifting,” the law generated concern among those who wanted to make large gifts to take advantage of the historically high federal estate and gift tax exemption.

The concern was whether the IRS would attempt to clawback the taxes, if the taxpayer died after 2025. This is when the estate tax reverts back to a much lower number. A regulation was issued in 2019 to reassure taxpayers and explain how they could take advantage of the high exemption as long as they made gifts before 2026, regardless of the exemption at the time of their death.

The IRS recognized this as a good step. However, it had a loophole and hence the new proposed amendment. The amendment provides clarity on what constitutes an actual gift. If the donor garners a benefit from the gift or maintains control over the gift, is it really a gift?

Giving the gift of a promissory note worth $12.06 million to lock in the high exemption and leaving it unpaid until death, for instance, is not a gift. The person is not actually giving anything away until after death. Therefore, the note is part of the taxable estate and bound by the estate tax exemption amount in place at the day of death.

The same goes for a person who gives ownership interests in a limited liability company, while continuing to serve as the company’s manager. Taxpayers must be very careful not to mischaracterize their gifts to stay on the right side of this regulation.

Another example: let’s say a person puts a $12 million vacation home into an LLC, with clear directions for home to be kept in the family, and then makes gifts of the LLC ownership interests to the children. If the donor wants those gifts to max out the current $12.06 million exemption, rather than be subject to the lower exemption in place at the date of death, the owner should not be the manager of the LLC. The same goes for the owner living rent-free in any property he’s gifted to anyone, if the wish is to take advantage of the gifting exemption.

In the same way, a mother who places money into a trust fund for a child may not serve as a trustee and control the assets and distributions, if she wishes to take advantage of the tax benefit.

If your estate plan uses grantor annuity trusts (GRATs), Grantor Retained Income Trusts (GRITs) and qualified personal residence trusts (QPRTs), speak with your estate planning attorney. If you die during the annuity period or term of the trust, your estate may lose the benefit of the anti-clawback regulation.

If the amendment is approved, which is expected in late summer, make sure your estate plan follows the new guidelines. If you are truly giving gifts before 2026, you will likely be able to take advantage of this substantial tax benefit and pass more of your estate to your heirs.

Reference: Financial Advisor (May 27, 2022) “Amending The IRS’s Anti-Clawback Provision on Gifting”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys