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Estate Tax Exemption- How to Best Take Advantage

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  • Estate Tax Exemption- How to Best Take Advantage

    Hello Everyone,

    As we know the estate tax exemption under trump has been increased to approximately 22 million from the previous amount of 5 million. This exemption is to end in 2025 or so.

    My questions are the following:
    1. What is the best mechanism/type of trust to take advantage of this large estate tax exemption, while it's still in effect?
    2. If my parents already have a revocable trust for their assets, how do they take advantage of exemption since, from my understanding, the revocable trust is not the best mechanism to take advantage of the estate tax exemption? Similarly, I already have a revocable trust set up. I anticipate having hopefully 10 million or more in assets to pass on to my children.

    I live in california, if that info is needed.

    I appreciate the help.



  • #2
    if your parents are indeed rich enough that they'll get hit with the estate tax after exemption (let's even assume they pass after 2025 and the exemption goes back down to $5m)then the best thing they can do now is gift you $30k (each parent effectively gifts you $15k). If you are married they can do the same to your spouse. So now they've transferred $60k tax-free to you and spouse and don't even need to fill out any additional tax forms. If they want to get rid of more of their money, you mentioned wanting to pass your own assets to your kids. Do you have kids yet? If so, set up a 529 if you haven't already. Have your parents directly contribute to the 529. It's being gifted to your kids rather than you. They can each put $30k (one from each parent) into the 529, or they can fill out a form and front-load the 529 with 5 years' worth of gifting contributions, so that would be 2 people X $15,000 X 5 years = up to $150k can be put in their 529. Consider then that you don't need to contribute any more to the 529 if the kids are young enough

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    • #3
      Thank you for the reply. Yes, I have thought of the mechanisms that have been suggested and will consider pursuing them.

      here is a quote from an article I read:

      ”If you are among the fortunate few who will be subject to the estate tax, consider making those large gifts before you lose the opportunity. This can be done through direct gifts – which are generally not a good idea – or a variety of irrevocable trusts.”

      it seems that certain types of irrevocable trusts are the way to go, presumably because one can “gift” larger amounts.
      My questions are:

      1. does anyone here know which type of trusts these are
      2, how they should be set up
      3. why they specifically are the way to go?

      thanks again.

      Comment


      • #4
        Best to consult with estate or tax planning attorneys or accountants who can specifically guide you. There are many options. All this can very very expensive to plan and execute but if done correctly from the start, will pay off in the future.

        Personally ( 2 physician couple) hold minority of our assets jointly in our estate (titled tenants by entirely for some degree of asset protection) but most held within a family LLC which in turn is 100% operated by me+wife (class A partners with voting rights) and Class B ownership shares owned by Spousal Limited Access Trusts (SLATs) and Irrevocable Trusts for our kids. Setting ourselves with a few layers of asset protection and executing estate planning as well.
        I would consider making the trusts grantor trusts ( with a toggle provision) such that the grantor (you) pays tax on behalf of the trust so as to tax leverage growth of gifted $ outside your estate. I would make sure to include generation skipping tax planning in your trust documents. Also consider getting an attorney specializing in valuation to perform an accounting valuation of the LLC assets you gift to the trusts as they typically can be discounted by 30-35% for lack of investment control and marketablity. Strongly consider holding any life insurance policies in Irrevocable Life Insurance Trusts. If you are a business owner and expect some sort of large sale proceeds in the future, could consider holding some business interests in a Grantor Retained Annuity Trust (GRAT ) for further tax benefits. The list goes on and on......

        Comment


        • #5
          Originally posted by scurry1 View Post
          Thank you for the reply. Yes, I have thought of the mechanisms that have been suggested and will consider pursuing them.

          here is a quote from an article I read:
          This can be done through direct gifts – which are generally not a good idea – or a variety of irrevocable trusts.

          .
          what article is saying that? Is it possible that it's from a place that does business with irrevocable trusts?! always look into the sources as they might have a financial agenda. I don't see the problem at all with direct gifts unless those direct gifts are being given to irresponsible people who are using the money on hookers and coke

          Comment


          • #6
            Originally posted by Sparky View Post
            Best to consult with estate or tax planning attorneys or accountants who can specifically guide you. There are many options. All this can very very expensive to plan and execute but if done correctly from the start, will pay off in the future.

            Personally ( 2 physician couple) hold minority of our assets jointly in our estate (titled tenants by entirely for some degree of asset protection) but most held within a family LLC which in turn is 100% operated by me+wife (class A partners with voting rights) and Class B ownership shares owned by Spousal Limited Access Trusts (SLATs) and Irrevocable Trusts for our kids. Setting ourselves with a few layers of asset protection and executing estate planning as well.
            I would consider making the trusts grantor trusts ( with a toggle provision) such that the grantor (you) pays tax on behalf of the trust so as to tax leverage growth of gifted $ outside your estate. I would make sure to include generation skipping tax planning in your trust documents. Also consider getting an attorney specializing in valuation to perform an accounting valuation of the LLC assets you gift to the trusts as they typically can be discounted by 30-35% for lack of investment control and marketablity. Strongly consider holding any life insurance policies in Irrevocable Life Insurance Trusts. If you are a business owner and expect some sort of large sale proceeds in the future, could consider holding some business interests in a Grantor Retained Annuity Trust (GRAT ) for further tax benefits. The list goes on and on......
            Our accountant has proposed something like this for us. He wants us to gift our assets into trusts now while the estate tax exemption is still high. Taking this action now gives gifts that fall under the current estate tax exemptions, preserving those large estate tax exemptions for the future if the exemptions go down with a change in the tax laws. As I understand it, the gifts given now are able to pass outside the estate. There are a bunch of rules that must be followed to preserve that status of passing outside the estate. And these trusts add complexity. And if you put real estate into the trusts, you lose the stepped up basis at death. And if I understand this correctly, you cannot put tax deferred accounts in these trusts. I hate all the complexity, but we are looking into this and at least considering doing something. I also hate all the accounting and legal fees, so I am not sure if I will pull the trigger or not.

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