7 Estate Planning Trusts that Minimize Estate Taxes for Ultra-High Net Worth Families
As ultra-high net worth families with over $10 million in liquid investable assets, you want to retain the right to decide what to do with your hard-earned wealth, and not hand 40% or more over to the government when you die, now is the best time to start estate plan if you haven’t already. For a most enlightening book about estate, wealth management, and financial serenity, click here on this page.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
Table of Contents
Currently, the federal estate tax sits at 40%. There is an $11.18 million exemption, as well as a gift-tax exclusion that doesn’t amount to much. If you’re a surviving spouse and play your cards right, each spouse can claim the exemption, in effect doubling it.
But if you have $35 million, $75 million, or $1 billion in total net worth, that means tens or hundreds of millions of your wealth are exposed to the 40% estate tax. And that’s just federal. If your state also has an estate tax, you’ll lose even more of your money – money that has already been taxed once. If you need help figuring out what is the best trust for your needs, don’t hesitate to call Hutch Ashoo directly at 925-407-0320 or catch him at the email address [email protected]
So, do you want millions of dollars to go to the government instead of to your loved ones? That is the question. A proper estate plan could be a plan that sends almost nothing to the government and nearly everything to either your trust beneficiaries or charitable causes you care about. Only about 12% of families successfully transfer their wealth beyond the children. The estate tax is one reason. The lack of an estate plan, including the types of trusts like the ones you’re about to discover, is another.
For instance, if you have $300 million when you die and divide it equally among three adult children, about $120 million of that will go to the government. That leaves $60 million for each of your children. The government gets twice as much as your own children!
What are Wills and Trusts?
A Will is a legal document that expresses the wishes of a deceased person, including naming guardians of minor children to grant financial assets to families, relatives, or charities. After one’s death, a will does become active on that day. Unlike a will, a trust becomes active from the day you created it, and the grantor will list the distribution of assets before their death. There are two types of trusts. The first is irrevocable trusts cannot be changed after they are formed. The second is living trusts, which the grantor can change.
There are some terms you have to understand before you learn about types of trust. There are co-trustees and probate courts. Co-trustees are a term used to describe a trustee group that has been appointed to manage a trust. A trustee is in charge of managing and administering a trust, including selling and distributing trust property and, if applicable, paying taxes on trust income. Unless the trust document specifies differently, co-trustees usually have the same responsibilities and powers.
The segment of the judicial system responsible for settling wills, trusts, conservatorships, and guardianships is known as probate court. This court will review your testamentary will after your death, which is a legal document used to transfer your estate, appoint guardians for minor children, choose will executors, and often set up trusts for your survivors.
7 Types of Trusts You Can Employ to Bring About More Desirable Result
Tax laws may have changed, so tread with caution, and each ultra-high net worth family needs to consult with a wealth manager, a CPA, a tax attorney, an estate-planning attorney, and estate planners as you work to create your estate plan strategy. Working out the details involved in utilizing the seven types of trusts below is not simple, and one article on the internet cannot do this content measurement.
There is even power of attorney in certain trusts—trusts can be that complex. And based on our experience, you want them done right the first time to achieve optimum tax minimization.
These seven types of estate plan trusts are for ultra-high net worth families who want to decide where their money goes, rather than letting the government decide. Each is created for a specific purpose, depending on the needs and interests of the family using it. You can use more than one type of trust.
1. Crummey Trust
Named for Dr. Clifford Crummey in the 1960s, a Crummey trust means transferring money to children while avoiding the estate and gift taxes. The basic use is that you contribute money to the children each year, but they have a short window of time, like thirty days, where they can take the money and treat it as an immediate gift. In that instance, it will count as part of your annual gift limit, which counts against your lifetime estate tax exemption.
If the beneficiary of the gift does not exercise their option to take control of the money, it becomes part of the trust. At that point, you regain control of it and can disburse it as you see fit. But, now that it is part of a trust, it no longer counts against your lifetime estate tax exemption.
With the money in the trust, you can decide when and how much of the money will be given to your heirs. For instance, you might give each recipient a fourth of the money at age thirty, half at age forty, and the rest at age sixty. You can make sure the money is distributed to your children. The Crummey trust allows you to maintain control while also availing yourself of the tax break.
Therefore, a Crummey trust works best if the person you are transferring money to is someone you trust and who is financially responsible. That person should recognize the value of delaying their access to this money and preferring to let it become part of a trust that will pay out later.
2. Intentionally Defective Trust
An intentionally defective trust is a type of estate planning tool that freezes a person’s assets for the estate tax, not for income tax. Intentionally Defective Grantor Trusts must be carefully designed to be sure they accomplish your goals.
The basic goal of a defective trust is that the grantor pays the income taxes generated by the trust, rather than the trust itself paying them. A typical trust is its own entity and required by the IRS to pay taxes. Thus, an intentionally defective grantor trust retains more assets for your heirs because it does not have to pay for its own taxes. And because it is a trust, the money you put there also avoids the estate tax.
3. Generation-Skipping Trust
The generation-skipping trust can be a good tool in cases where the beneficiaries are disabled, are poor money managers, or perhaps have issues with drugs or alcohol. This kind of trust will allow them to benefit from the resources, but the control will pass to the next generation while bypassing estate taxes.
You get to decide how much control to give your children over this type of trust. But the money is set aside for your grandchildren, ensuring that your wealth passes to at least the second generation.
4. Grantor-Retained Trust
With grantor-retained trusts, the grantor can gift assets for a set number of years to an irrevocable trust. At the end of that period, those assets might be distributed to the beneficiaries or remain held in trust. This type of trust has several variations, including grantor retained annuity trusts, grantor-retained unitrusts, grantor-retained income trusts, and qualified personal residence trusts. These can become quite complicated. Before you set up this type of trust, you’ll need to seek the advice of qualified and specialized professionals.
5. Irrevocable and Revocable Trust
Irrevocable trusts cannot be changed after they are formed. Life insurance can serve many good purposes. But if you’re not careful, it can lead to a huge increase in your ultra-high net worth estate, increasing your already high estate taxes.
For instance, suppose you and your spouse have listed each other as beneficiaries on your life insurance policies. If one of you passes away, the other will receive your life insurance payout. If you have $40 million in your estate and each own $5 million life insurance policies, the surviving spouse will now have $45 million.
And 40% of that sudden increase will go to the government when the second spouse dies. In effect, then, after estate taxes, it’s not a $5 million life insurance policy. It’s a $3 million policy. Not exactly what you signed up for.
The irrevocable life insurance trust, or ILIT, helps you avoid this problem. It removes both of you from having any control of life insurance. In effect, the life insurance proceeds are paid out of the estate, not into the estate.
On the other hand, you also have a revocable trust. Revocable trust terms may be changed at any time by the trust’s holders. They can change the beneficiaries, add new ones, and change the rules on how the trust’s assets are handled. Since revocable trust or living trust is more flexible than irrevocable trusts, it seems that all trusts should be revocable. The explanation for this is that revocable trusts have a few disadvantages.
For many reasons, many individuals or families and estate planning professionals prefer a revocable living trust. Maintaining and financing a revocable living trust can avoid probate at death (including several probates if you own property in other states), avoid court control of your estate if you become incapacitated throughout your lifetime, but all of your assets (including those with beneficiary classifications) are integrated into one scheme, and improve your privacy.
6. Charitable Remainder Trust
These last two estate plan trusts result in your assets being distributed to charities of your choice as opposed to your heirs or the government. Charitable trusts are trusts that support a specific charity or the general public. In most cases, charitable trusts are created as part of an estate plan to reduce or prevent estate and gift taxes. A charitable remainder trust allows you to sell highly appreciated assets like stocks and real estate to have the remaining assets in the trust go to charities of your choice after you pass away. But before that happens, you can also continue earning income from the trust.
There are a couple of different types of charitable remainder trusts. In a charitable remainder unitrust or CRUT, you, the donor, will receive a percentage of the assets within the trust. In a charitable remainder annuity trust or CRAT, you will receive a fixed dollar amount. There are formulas to figure out the specific amounts of income, which depend on age, current interest rates, and other factors.
7. Charitable Lead Trust
The main difference between a charitable lead trust and the previous one is that the trust is paid to the charity for a certain number of years. After that, the trust assets pass on to the grantor’s beneficiaries, who typically will face lower taxes as a result. Both these charitable trusts are very complicated to set up, and as with all trusts, you need to work with qualified professional legal and tax advisors.
Although it is a relatively easy concept to understand, we do not recommend you delve into these types of trusts on your own without the proper advisors, both tax and legal. Many factors play into whether a charitable remainder trust is appropriate in your situation—and one of the most important factors is whether all of your family members are on board with the decision.
If you’d like to discuss this with one of our founders, we would be happy to chat with you before offering you specialists who can help you execute the strategy. Just call 925-407-0320 or email us at [email protected]. Also – see 3 more tax minimization strategies for ultra-high-net-worth estate planning.
Disadvantages of A Trust
While a Living Trust is frequently the safest and most comprehensive way to protect your family and assets, it does come with its own set of complications. Although the benefits of a Living Trust far outweigh the disadvantages, you should be conscious of them while considering your Estate Planning choices.
The extra paperwork is one of the drawbacks of a Trust. To make a Living Trust work, you must ensure that all of the Trust’s assets are legally transferred to you as the Trustee.
Keep accurate records
If you are both the Grantor and the Trustee, you won’t need separate income tax reports once you’ve established a Living Trust. Any revenue you earn from the Trust’s property will be listed on your personal tax returns. You must, however, keep correct written records if you move property into or out of the Trust.
Estate Planning Trust – Don’t Wait Any Longer.
Estate planning means deciding how an individual’s assets will be protected, handled, and allocated after they pass away. It also considers how an individual’s property and financial commitments would be managed in the situation that they become disabled.
You can’t wait until you’re in your seventies to get started on some of these estate plan trusts. To fully benefit from them, you need to initiate them years in advance. We hope that you have a sense of how important this is after reading through these brief descriptions. You stand to save tens of millions of dollars in estate taxes if you invest some time doing proper estate planning and take advantage of some of the trusts that are appropriate for your situation.
Pillar Wealth Management has served as the financial advisor on many estate planning teams. We know specialists in all the related fields. And we know quite a bit about this ourselves. Use our expertise!
Talk to Hutch
Here’s our estate planning strategy: At Pillar Wealth Management, clients are plugged into a network of best-of-class experts. If you’d like to discuss your assets with Hutch Ashoo, one of our co-founders, you can call 925-407-0320 or email us at [email protected].
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We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
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