There are different types of trusts that can be used when you are planning your estate. The typical layperson is not going to be aware of all of the options that are out there and why you may use one rather than another. This is why it is important to discuss everything in detail with a licensed estate planning attorney when you are devising your legacy plan.
Taxation can be a major consideration for people who have been financially successful, and there are wealth preservation trusts that can be used to ease your tax burden if you are exposed to estate taxes. The first death tax that everyone in the country has to be aware of is the federal estate tax.
Everyone does not pay the tax, because there is an exemption or exclusion, and it is relatively high. The estate tax exclusion is the amount that can be transferred tax-free. The portion of an estate that exceeds the amount of this exclusion would potentially be subject to taxation.
A $5 million exclusion was installed for the 2011 calendar year, and after the American Taxpayer Relief Act of 2012 was enacted, this figure was made permanent, but there are annual adjustments to account for inflation. After a series of inflation adjustments, the exact amount of the federal estate tax exclusion in 2016 is $5.45 million. The maximum rate of federal estate tax is 40 percent.
There is a federal gift tax in place that is unified with the estate tax. This tax exists to stop people from giving gifts to avoid the estate tax. The $5.45 million exclusion applies to the estate that will be passed along after you are gone, but it also applies to large tax-free gifts that you give while you are living.
There are 14 states that have state-level estate taxes. We practice in the state of Connecticut, and there is a state-level estate tax in our state. You can be exposed to the state-level estate tax even if you are exempt on the federal level, because the Connecticut state estate tax exclusion is just $2 million. The top rate on the state level is 12 percent.
Now that you understand the parameters, let’s look at five trusts that can potentially ease your estate tax burden and save you money.
Qualified Personal Residence Trust
If you were to convey your home into a qualified personal residence trust, you could remain in the home as usual for a period of time that you determine. At the conclusion of this term, a beneficiary that you choose would assume ownership of the home, and this would be a taxable gift.
The IRS would reduce the taxable value of the gift to the beneficiary, because you would be remaining in the residence for a prescribed period of time. Ultimately, the transfer would take place at a significant tax discount.
Grantor Retained Annuity Trust
You could potentially use a grantor retained annuity trust to gain estate tax efficiency if you are in possession of highly appreciable assets at a time when federal interest rates are low.
Generation-Skipping Trust
When you establish a generation-skipping trust, you would name your grandchildren as the beneficiaries rather than your children. However, your children could still benefit from assets in the trust while they are living. There would be no taxation during this period of time.
Your grandchildren would assume ownership of assets in the trust after the passing of your children, and this transfer would be taxable, but there would be just one instance of taxation over two generations.
Charitable Lead Trust
If you were to establish a charitable lead trust, you could support a charity that you care about as you simultaneously facilitate a tax efficient asset transfer to a non-charitable beneficiary.
Qualified Domestic Trust
There is a marital estate tax deduction that allows for unlimited tax-free asset transfers between spouses who are American citizens. If you are an American citizen who is married to a citizen of another country, you cannot use this marital deduction.
Under these circumstances, you could provide for your spouse through the creation of a qualified domestic trust. Your surviving spouse could receive income from the earnings of the trust throughout his or her life, and these distributions would not be subject to estate taxes.
Schedule a Consultation
We have provided a bit of basic information about trusts that can provide estate tax efficiency in this blog post. If you would like to take things a step further, we would be glad to help.
Our firm offers free consultations, and you can send us a message through our contact page or call us at 860-548-1000 to set up an appointment.
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- The SECURE Act and What It Means for You - February 25, 2020
