7 Estate Planning Trusts that Minimize Taxes for Ultra-High Net Worth Families
As an ultra-high net worth family 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 planning if you haven’t already. For a most enlightening book about estate, wealth management and financial serenity click here.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
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.
In our more than thirty years of experience working with affluent investors, especially entrepreneurs and those with highly concentrated wealth, we know that far too many folks with high and ultra-high net worths are putting this off, even though it is one of the most important tasks of their lives.
Table of Contents
If you do already have an ADVANCED estate plan (not just a living trust), well done. But when was the last time you had someone look it over?
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 married 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 best in your situation then don’t hesitate to call Hutch Ashoo directly at 925-407-0320 or email him at [email protected]
So, do you want millions of dollars to go to the government, or to the people and the causes that you care about?
That is the question. Proper estate planning could produce a plan that sends almost nothing to the government, and nearly everything to either your beneficiaries or to charitable causes you care about.
Only about 12% of families successfully transfer their wealth beyond the second generation. The estate tax is one reason. The lack of an estate plan, including the use of trusts like the ones you’re about to discover, is another.
Think of it this way: Roughly speaking, 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 kids. The government gets twice as much as your own children!
Is that what you want?
There are at least seven types of trusts you can employ to bring about a much more desirable result.
But before we get into the details, please keep in mind that what you are about to read barely scratches the surface of this complex topic. 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 other specialists as you work to create your estate plan strategy. We are not attorneys. Working out the details involved in utilizing the seven trusts below is not simple, and one article on the internet cannot do this subject justice.
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 situation with Hutch Ashoo, one of our co-founders, you can call 925-407-0320 or email us at [email protected]
There are even attorneys that specialize in certain trusts—trusts can be that complex. And based upon our experience, you want them done right the first time to achieve optimum tax minimization.
Talk to Hutch
These seven types of estate planning 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 is a means of transferring money to others while avoiding the estate and gift taxes. The basic idea is that each year, you contribute money to the trust, but the recipient has 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 recipient 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 then 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 satisfaction. The Crummey trust allows you to maintain control while also availing yourself of the tax break.
A Crummey trust therefore 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. Defective Trust
Defective trusts must be carefully designed to be sure they accomplish your goals.
The basic goal of a defective trust is that you, the grantor, pay 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, a defective 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.
Have an Ultra-High Net Worth Friend Who Needs Help with Estate Planning Trusts?
Share this blog with them via email or social media
4. Grantor-Retained Trust
With grantor-retained trusts, the donor 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.
There are several variations of this type of trust, 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 Life Insurance Trust
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.
This is a common and easily overlooked problem that you can ward off in advance using an irrevocable life insurance trust.
Here’s the situation:
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 dollar life insurance policy. It’s a $3 million dollar 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 the life insurance. In effect, the life insurance proceeds are paid out of the estate, not into the estate.
Typically this is set up by appointing a family member or close friend as the trustee, and that person pays the life insurance premium using money you send them as part of your annual gifts.
6. Charitable Remainder Trust
These last two estate planning trusts result in your assets being distributed to charities of your choice as opposed to your heirs or the government.
A charitable remainder trust allows you to sell highly appreciated assets like stocks and real estate, with the objective of having 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 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, and these depend on age, current interest rates, and other factors.
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.
For instance, suppose you own a luxury condo tower worth $80 million with a low cost basis of $10 million. Once you gift it to a charitable remainder trust, the tower can be sold, and the proceeds will go into the trust.
Because it has been donated to charity, you will not owe capital gains on the sale, and you will get an $80 million tax deduction. Its value has also been removed from your estate, which slashes your potential estate tax by about $32 million.
But, your heirs now have no control over that sizable amount of money.
If you combine a charitable remainder trust with the irrevocable life insurance trust, you can keep your heirs happy by ensuring them a life insurance payout, while also removing your highly-appreciated assets from your estate.
The other benefit, of course, is that you will be making a huge impact on a charity of your choice.
7. Charitable Lead Trust
The main difference between a charitable lead trust and the previous one is that the income from 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.
If you’d like to have a discussion 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]
Estate Planning Trusts – Don’t Wait Any Longer
You can’t wait until you’re in your seventies to get started on some of these estate planning trusts. To fully benefit from them, you need to initiate them years in advance.
Our hope is that, after reading through these brief descriptions, you have a sense of how important this is. 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
- 10 Ways to Avoid Estate Tax for Ultra-High Net Worth Families
- Exploring the Nature of Ultra-High Net Worth Families
- Ultra-High Net Worth Families Would Be Well Served To Plan For Predictable and Recurring Major Market Shocks
- Securing YOUR Ultra-High Net worth Portfolio And Estate In Light Of The Federal Reserve & 2017 Trump Administration Policy Changes: Part 2