Advanced Estate-Planning Strategies - Adviser Investments

Advanced Estate-Planning Strategies

December 20, 2021

Passing on wealth to heirs is one of the primary objectives of most financial plans, and there has never been a more favorable time to do so.

Under current law, you can leave up to $11.7 million ($23.4 million for couples) in cash, securities or other assets to your heirs without incurring any gift tax. You can also give $15,000 annually ($30,000 if you’re married) to anyone you wish during your life. (However, these exemptions expire at the end of 2025, and they could change even sooner as part of a budget deal or infrastructure package passed by Congress.)

Here are four ways trusts can help you maximize the amount your loved ones receive under current law.

  1. Roth IRA Conversion. The SECURE Act eliminated the “stretch IRA” provision that allowed non-spouse IRA beneficiaries and trusts to stretch required minimum distributions (RMDs) out over the life of the heir. Now, those assets must be distributed to beneficiaries at ordinary income rates within 10 years of the original owner’s death. And when trusts are the beneficiaries, the tax rate is even higher than that of ordinary income. One simple solution is to keep the trust as beneficiary but convert the IRA to a Roth IRA—thus making future distributions tax-free.
  2. Irrevocable Life Insurance Trusts. An irrevocable life insurance trust (ILIT) is another tax-efficient way to pass significant assets down to your heirs. The ILIT owns a life insurance policy on the grantor’s life. When they pass, the proceeds fund the trust and are distributed to beneficiaries according to the ILIT’s terms. Life insurance proceeds not held in an ILIT are taxed as part of the insured’s estate. With an ILIT, those proceeds are excluded from the insured’s estate, reducing the estate tax burden.
  3. Intentional Grantor Trusts. These irrevocable trusts are funded with your assets during your lifetime. Normally such a trust would utilize estate, gift and generation-skipping tax (GST) exemptions, but still owe income taxes on the growth of the assets. However, if structured properly, a so-called intentional grantor trust can maintain the gift and GST exclusion while enabling the grantor to pay income taxes on the growth of the assets while they are living. This allows the trust to grow without triggering high taxes when you pass, leaving a larger pool of assets for your heirs.
  4. Grantor Retained Annuity Trusts. Historically low interest rates make this an excellent time to set up a grantor retained annuity trust (GRAT). Basically, GRATs are funded by the grantor in exchange for a stream of annuity payments, including the original deposit over a specified period and at a predetermined interest rate. After the final annuity payment occurs, whatever remains in the trust is transferred to the beneficiary. With interest rates remaining low, many asset types and classes should appreciate faster than the distribution rate. That growth is then passed on to the trust’s beneficiaries free from gift and estate taxes. However, there’s a catch: If the grantor dies before the term of the trust ends, the beneficiary gets nothing and the trust is included in their estate.

These are smart estate-planning tools, but they’re not for everyone—they can be complex and expensive to set up. Consult your adviser and lean heavily on a tax expert before pursuing any of these options. We are happy to help!

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit or call 800-492-6868.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

The Planner You Can Talk To is a trademark of Adviser Investments, LLC, registration pending.

© 2021 Adviser Investments, LLC. All Rights Reserved.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.