August 08, 2019
Fortunately, there are a number of strategies that can help preserve your assets, facilitate the transfer of wealth and ease the tax burden on yourself and your estate.
Here are five commonly-used lifetime gift strategies for you and your family to consider if you have significant wealth to transfer to future generations.
A grantor retained annuity trust (GRAT) is an irrevocable trust that can be helpful when you wish to transfer hard-to-value assets. In addition, GRATs allow you to preserve your income stream, split interests in property and make discounted gifts to future generations.
With a GRAT, the grantor transfers assets to a trust but retains a right to an annual income stream, or annuity payment, for a designated period. The value of the income stream is subtracted from the value of the transferred assets when determining the gift’s full taxable value. Any remaining amount in the GRAT after the annuity period expires is passed on to the trust’s beneficiaries without triggering additional gift or estate taxes.
If the grantor dies prior to the end of the trust term, however, the entire value of the trust will be included in the taxable estate as if the trust had never been created. Therefore, it’s important to select the term of the trust with care, so that the grantor is likely to live beyond its termination.
The installment sale to defective grantor trust strategy is one way to benefit from the differences in income and transfer-tax treatments of irrevocable trusts. Ultimately, this strategy can allow you to transfer the anticipated appreciation of your assets at a reduced gift-tax cost.
To implement this strategy, the grantor transfers property to a trust in return for a note that carries a market rate of interest and a balloon payment at the end of the note’s term. In most instances, the grantor and trust are treated as the same entity for income tax purposes. However, the grantor and the trust are considered separate entities for transfer tax purposes. This discrepancy in tax treatment typically allows the grantor to effect a sale to the trust without incurring a capital gain.
Family limited liability entities are complex strategies that can provide numerous benefits to high net worth families with personal, business and investment assets. Their flexible nature makes them particularly attractive since their governing documents can be modified as family dynamics and family business structures evolve.
Family limited liability entities are often used to help families consolidate investments, share income with family members in lower tax brackets, protect assets from lawsuits and develop a long-term estate plan. However, because of their many complexities, this strategy isn’t right for everyone. It’s important to consult a wealth advisor or estate planning attorney to determine whether a family limited liability entity makes sense for you and your family.
A lifetime credit shelter trust can be a helpful tool if you want to take advantage of the increased lifetime gift-tax exemption amount but aren’t ready to transfer significant assets just yet. With this type of trust, the grantor makes a gift to the trust for the benefit of his or her spouse and other family members. Because of the spouse’s rights to the assets in the trust as a beneficiary, the grantor also maintains his or her access.
One of the benefits of lifetime credit shelter trusts is that they allow you to allocate your lifetime exemption while the gifted assets, including any appreciation, remain outside your estate for estate tax purposes. Both you and your spouse can create lifetime credit shelter trusts, but the two trusts cannot be identical.
Another strategy to consider when transferring assets is making an intra-family loan. The Internal Revenue Code allows you to make loans to family members at lower rates than commercial lenders without the loan being considered a gift. A key benefit of this strategy is that you can help your family members financially without incurring additional gift tax.
To take advantage of this strategy, the IRS requires that a bona fide creditor relationship with a minimum interest rate be established. This can be an efficient way to transfer wealth if the borrowed assets are invested and earn a higher rate of return than the interest rate on the loan. An additional advantage is that interest is paid within the family and not to a third party.
The Tax Cut and Jobs Act of 2017 has motivated many families to review their existing estate plans and evaluate new family wealth transfer strategies. The strategies mentioned above can be valuable in the right situations. However, they each have many variations and offer unique advantages and limitations. Since estate planning strategies are often complex, it’s critical to work with a qualified professional when planning.
To learn more, please contact my colleague, Theresa Marx, or read our white paper on the same topic, Lifetime Gift Planning.
Cathy Schnaubelt is a senior wealth strategist in CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This article originally appeared on Forbes.com
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