WEALTH TRANSFER TAX STRATEGIES
Death taxes have been part of the United State's laws since 1862. Although they morph and change over time, they are not going anywhere.
The tax rates are severe. Historically, 40-55% of an estate will have to be paid within a short time (often 9-15 months) to the IRS in the form of a tax payment. Interest and penalties accrue if an underpayment or no payment is made.
The estate and gift tax system is a “unified” tax system. Therefore, the single exemption amount applies to both transfers during life in excess of $18,000 per person per year (gift tax) and transfers upon death (estate tax).
At VanNess Law PLLC, we specialize in wealth transfer strategies that reduce or eliminate taxes as a result of death.
The tax code and associated authorities are very GENEROUS…. IF YOU KNOW THEM.
The strategies to reduce wealth transfer taxes we may use include:
- Irrevocable Gifting Trusts
- Irrevocable Life Insurance Trusts (ILITs)
- Spousal Lifetime Access Trusts (SLATs)
- Beneficiary Defective Inheritors Trusts (BDITs)
- Grantor Retained Annuity Trusts (GRATs)
- Charitable Remainder/Lead Trusts (CRTs/CLTs)
- Qualified Personal Residence Trusts (QPRTs)
- Installment Sales to Irrevocable Trusts
- Family Limited Partnership (FLPs)
- Family Limited Liability Companies (FLLCs)
GIFT
An individual with a potential taxable estate should consider making gifts of assets to use their lifetime gift exemption and/or to maximize the use of the marital deduction.
This may allow the client to avoid the future appreciation in assets from being subject to estate tax. Such gifts would typically be made to irrevocable trusts for the benefit of a spouse and/or family members.
Using an irrevocable trust to receive the gifts allows the assets to be protected from the beneficiaries’ creditors (including divorcing spouses), the assets may avoid estate tax at the client’s and beneficiaries’ deaths, and the client can specify how the assets are used.
FREEZE
Installment sales from the client to irrevocable trusts and GRATs may be used to transfer assets expected to appreciate in value.
All appreciation that takes place after the strategy is implemented (in excess of the generous Applicable Federal Rate (AFR) or 7520 rate) is not subject to estate or gift tax.
SQUEEZE
Clients should consider gifting, selling or otherwise transferring assets that may be transferred at a reduced value due to “valuation discounts“ for “lack of control” and “lack of marketability.”
For example, a client may be able to give $10 million of assets while only using $7 million of estate and gift tax exemption.
BURN
Using irrevocable trusts taxable as “grantor trusts” can make the client responsible for the income tax payments attributable to the trust assets after transfer. This further reduces the client’s estate, and “burns“ the value of the remaining assets in the client’s taxable estate that would otherwise be subject to estate tax upon their death.
This allows the assets in the trust to grow undiminished by income taxes. Essentially, paying the income tax is the equivalent to making additional “tax free gifts” to the trust.
