• Take advantage of grantor trusts to minimize your estate taxes:
• Spousal lifetime access trust (SLAT) for a married couple takes advantage of the current high gift tax exemption of $11.7 million when you put that amount into a trust for your spouse. This grantor trust permits your spouse continued access to the income to sustain your current cash flow, as long as divorce or premature death are not concerns. The risk of a premature death can usually be addressed with life insurance owned through of an irrevocable life insurance trust (ILIT). It is possible to have each spouse create a SLAT for the other spouse, but each SLAT must have substantially different assets, different trustees, different terms, and the trusts must be established at different times to avoid the Reciprocal Trust Doctrine rules. This should be addressed with your estate tax advisors.
• Irrevocable life insurance trusts (ILITs) are used in conjunction with many estate planning strategies to provide liquidity and to address the risks of premature death. The ILIT can be a grantor trust and is typically funded using annual exclusion gifts to pay the premiums on first or second-to-die life insurance policies owned by the trust; the policy proceeds are not included in the insured’s estate. The trust beneficiaries can use the life insurance proceeds to purchase estate assets to provide cash to pay estate taxes.
• Grantor retained annuity trusts (GRATs) are used to transfer assets that have a high potential for appreciation from parent to child. Current low interest rates and low values make these trusts attractive, and any asset appreciation over the current low values is passed on to GRAT beneficiaries without a downside, i.e., if the assets fail to appreciate, the entire asset returns to the grantor. Rolling GRATs with short terms of three years or so are often used for shares of stock with the expectation of high appreciation. If the there is none, the shares come back to the grantor and are placed into a new GRAT.
• Gifts and Sales to intentionally defective grantor trusts (IDGTs) can be used to transfer large business interests, real property and other investment assets that have strong cash flow. The sale of assets from the parents/grantors to IDGTs for the benefit of their children is not subject to income tax, but is respected for estate or gift tax purposes. The cash from the business interests to the IDGTs remains in trusts for the children and grows outside the parents’ estates. The parents/grantors continue to pay the income taxes related to the assets gifted or sold to the IDGTs, and making these income tax payments on behalf of their children’s trusts is a powerful tool for burning down the value of large estates.
Opportunities for estate planning still appear to exist for now, but for how long is uncertain. Before legislation closes the door, reach out to trusted advisors for more information.
Joe Kitts is an Of Counsel of Tax with accounting and advisory firm BPM LLP. He is a specialist in the planning of estates and trusts. He may be reached at [email protected].