Achieving Goals with Tax-Friendly Estate Planning Strategies

By Sally Hanley-Whitworth, CFP® | Executive Vice President, Wealth Services | 09.28.2018

It can seem helpful to categorize assets into a few tidy buckets for mental-tracking purposes. Typical groupings might include stocks and bonds, real estate, business interests, and a catch-all bucket for everything else. There are unique estate-planning opportunities available for some of these groups, but for the most part, the Internal Revenue Service is more concerned with an asset’s value than its type.

We expect asset prices to grow over time; that’s how we build wealth. It also creates a major incentive to begin enacting estate plans earlier in life—the sooner you begin transferring assets out of your estate, the less expensive they’ll be for valuation purposes.

The Tax Cuts and Jobs Act, which came into effect this year, expanded the gift and estate tax exemption from about $5.5 million per person (and $11 million per couple) to more than $11 million per person (and $22 million per couple). Like many aspects of the new tax law, the expansion will sunset at the end of 2025, meaning it will revert back to the original lower level. While the expanded exemption is quite helpful, this doesn’t change the fact that it’s impossible to pinpoint the expected future value of an asset decades into the future. Moving assets earlier in life can help maximize how much you’ll be able to transfer before taxes.

Affluent families often use trusts to facilitate orderly asset transfers. Trusts can also help ensure that the goals envisioned by their grantor­—the person who creates the trust—are enacted, whether immediately or several generations from now. When you think about it this way, a trust is simply a legal vehicle for turning your intentions into reality. Different types of assets, goals and family configurations can be matched with different types of trusts, each well-suited to a particular scenario.

Here’s a preview of several estate-planning opportunities that can be captured through different trust structures.

Take a Charitable Path | There’s a significant benefit to creating a philanthropic-minded estate plan. Wealthy individuals and families can use charitable trusts to support the causes and foundations they hold dear with tax-deductible asset transfers, and still continue to receive income from their assets. Donors can move assets to a Charitable Remainder Trust (CRT), which in turn distributes a portion of its asset value to beneficiaries (which often includes the donors themselves) every year; in some cases, the CRT will use the donated assets to purchase an annuity for distribution purposes. The remaining assets then transfer to the charity either after a specified number of years or upon the beneficiary’s death.

A Charitable Lead Trust takes the exact opposite approach: Grantors designate a foundation to be the initial recipient of income produced by their donated assets, which are then eventually transferred to their beneficiaries (most likely, children) after a designated period of time.

Stay Close to Home | A Qualified Personal Residence Trust (QPRT) helps overcome a key hurdle to transferring assets earlier in life. Primary residences tend to represent a significant share of Americans’ net worth, but they exist in an estate planning blind spot since many people assume they can’t move ownership without needing to move out. QPRTs enable the grantor to transfer a personal residence asset to their heirs today while also specifying a time period­—years, or perhaps a decade or more— during which they’ll retain the right to live there.

Endow the Family Tree | The aforementioned doubling of the gift and estate tax exemption has provided bandwidth for more ambitious estate plans. It has apparently spurred renewed interest in Generation Skipping Trusts (GSTs, also known as Dynasty Trusts); affluent families can fund GSTs with assets that will grow slowly, but dramatically, over the course of multiple generations. A specified subset of heirs (grandchildren, great-grandchildren, and so on) can each be assigned to receive a pre-determined distribution from the GST, perhaps explicitly designated to help fund major life expenses if the grantor desires.

There are a multitude of other trust structures we haven’t addressed here, each with a precise set of rules about decision making, distribution levels, and other considerations that must be followed in order to retain the trust’s validity. The overarching benefits, however, come back to their unrivaled ability to control when and how assets are transferred, which can help affluent families minimize the taxable implications of their estate-planning decisions.

If you still have questions or concerns regarding this topic, reach out to our retirement plan team experts—we would be happy to help.

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