Advanced Estate-Planning Strategies - Adviser Investments

Advanced Estate-Planning Strategies

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!

 

 

 


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