Clinton Township is a great place to build wealth, and we are fortunate enough to be able to work with many elite clients. Accumulating a significant store resources is the name of the game, but once you have achieved your goals, you have to do everything possible to prevent asset erosion. There is a looming threat in the form of the federal estate tax, and it can have a significant negative impact on your legacy.
At the time of this writing, the estate tax exclusion is $11.4 million. This is the amount can be transferred before the estate tax would kick in. Transfers to your spouse are not taxed because there is an unlimited marital deduction, but inheritances that you leave to anyone else could potentially be taxed.
If the death tax carried a relatively modest rate, it would be a nuisance, but it would not be truly devastating. Unfortunately, the federal estate tax has a whopping 40 percent maximum rate. This can significantly reduce the amount of wealth that your family can draw from after your passing.
There is a federal gift tax in place that is unified with the estate tax. As a result, the lifetime exclusion is a unified exclusion that encompasses gifts along with your estate. You can give up to $15,000 tax-free to any number of different recipients each year, because there is an annual gift tax exclusion. However, if you give more than this to any one individual, you reduce the amount of unified exclusion that can be used during the estate administration process.
Fortunately, there are estate tax efficiency strategies that can be implemented if your estate is in taxable territory. We will look at two of them here.
The Zeroed-Out Grantor Retained Annuity Trust (GRAT)
If you have assets that are highly appreciable, you could convey them into a grantor retained annuity trust. You name a beneficiary that will inherit anything that remains in the trust after you pass away. When you establish and fund the trust, you arrange to take annuity payments from it on an annual basis.
The Internal Revenue Service adds anticipated interest to the taxable value of the trust, since there is a beneficiary, and the gift tax may be applicable on a transfer after the expiration of the trust term. They use the hurdle rate or 7520 rate to calculate the anticipated appreciation, which is 120 percent of the federal midterm rate.
To “zero out” the GRAT, you arrange to accept annuity payments that are equal to the entire taxable value of the assets that you conveyed into the trust. If they appreciate at a rate that is higher than the hurdle rate, there will be a remainder in the trust after the expiration of the term. The beneficiary would assume ownership of this remainder, and the gift tax would not be applicable.
Qualified Personal Residents Trusts
Your home may be one of your most valuable assets, and it can be transferred at a tax discount if you convey the property into a qualified personal residence trust. When you do this, you are removing the home from your estate for tax purposes. However, you name a beneficiary that will assume ownership of the home after the expiration of the term. This transfer will be subject to the gift tax.
When you are establishing the trust declaration, you decide on a term during which you remain in the home as usual, living rent-free. This is commonly referred to as the retained income period.
Let’s say that you set a 10 year retained income period. If you were to sell the home, and you told the buyer that they could not live in the house for a decade, they would not give you full fair market value. The IRS takes this into account when they are calculating the taxable value of the gift. When the transfer does take place, the taxable value of the home will be much less than its fair market value, so gift tax exposure would be minimized.
Attend a Free Estate Planning Seminar!
In this blog post, we looked at a scenario that most people do not face, but there are a number of very wealthy people in the Clinton Township area. We can definitely help if you are exposed to the estate tax, and we provide assistance to people that are not in the economic stratosphere as well.
If you would like to learn more about many different important estate planning topics, we have some great opportunities coming up in the near future. Our attorneys are offering a series of seminars, and they are free to attend. You have everything to gain and nothing to lose if you attend the session that fits into your schedule, and you can click this link to get all the details.