Once the trust owns the home, the client must pay it fair market rent to live there. "If a monthly rent of $20,000 is justified and the annual interest that the trust pays the client is $200,000 (4% AFR times the $5 million note principal), then the trust will grow by $40,000 each year ($240,000 rent received, minus $200,000 interest paid), which is shifted to the next generation free of gift and income taxes," Rothschild says. Should rents rise in the future, the trust could net even more tax-free cash annually.
No. 5: Transfer Wealth To A GRAT
Placing assets in a grantor-retained annuity trust transfers their title to the remainder beneficiaries. That is a gift, and a low Section 7520 rate lowers its value, all else being equal.
The GRAT pays the client a fixed income for a term established up front. "If the client lives until the end of the term, the GRAT assets are not counted in his estate," says Gregg Parish, an estate-planning professor at the College for Financial Planning. Further, if the assets appreciated faster than the IRS rate that was in effect when the transaction closed, the excess shifts to the heirs free of further gift or estate tax.
"But because the client must survive the term to achieve these benefits, setting the right length is critical," Parish cautions.