Estate planning is crucial for high-net-worth (HNW) individuals who want to protect their assets and pass their legacy on to loved ones after death. HNW individuals have unique tax and non-tax estate planning needs, which require careful consideration of various strategies to protect their assets and minimize tax liabilities.
One of the most effective ways to protect HNW estates is through the use of different types of trusts, which are legal entities that hold assets for the benefit of designated beneficiaries.
Types of Trusts
1. Intentionally Defective Grantor Trusts (IDGTs)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Intentionally defective grantor trusts (IDTs) are irrevocable trusts that are structured to be intentionally disregarded for income tax purposes yet still recognized to remove the assets from the grantor’s gross estate at death. By doing so, they can transfer wealth to beneficiaries while minimizing the impact of the estate tax.
Assume you own assets you expect to significantly appreciate over the years. You want to shift the future value from your gross estate to avoid the death taxes on the appreciation. Using your available gift tax exclusion you transfer the asset to the trust and avoid paying any federal gift tax. If the value of the gift exceeds the available gift tax exclusion, the taxpayer may sell the asset to the trust on an installment sale basis for a long-term note (say 20 years) and incur no capital gains due to the grantor tax status of the trust. As the assets held in the trust grow in value, the death tax on such growth is avoided for multiple generations.
2. Revocable and Irrevocable Trusts
Revocable and irrevocable trusts are two different types of trusts that can be used in estate planning. Revocable trusts are generally used to avoid the process of probate and allow the grantor to make changes to the trust at any time during his or her lifetime.
Irrevocable trusts cannot be changed once they are established unless they are subject to special decanting rules (opens in new tab) provided in many states, or unless a court permits the trust to be amended, usually with the consent of the impacted beneficiaries.
Irrevocable trusts are often used for tax planning and asset protection purposes, while revocable trusts are more flexible, allowing the trust to be changed by written amendment by the grantor/creator.
3. Charitable Lead Trust
Charitable lead trusts are trusts that provide income to a charity for a certain period, after which the remaining assets are passed on to beneficiaries. This type of trust is beneficial for those who want to make charitable donations and still provide for their loved ones.
4. Charitable Remainder Trust
Charitable remainder trusts are trusts that provide income to beneficiaries for a certain period, after which the remaining assets then pass on to the designated charity. This type of trust is beneficial for those who want to provide for themselves and then their loved ones while also supporting a charitable cause.
5. Crummey Trust
A Crummey trust is a type of irrevocable trust that allows the grantor to transfer assets to beneficiaries in the future, while also qualifying for the annual gift tax exemption. The beneficiaries have a limited period (usually 30 days) to withdraw the gifted amount, after which it becomes part of the trust.
The Crummey trust is generally the vehicle used when a life insurance policy is being purchased and the insured desires to remove the proceeds at death from being included in his or her gross estate, and to have the death benefits managed to protect same from creditors of the beneficiaries.
6. Generation-Skipping Trust
Generation-skipping trusts are trusts that allow the grantor to transfer assets to beneficiaries who are two or more generations younger than the grantor. This type of trust is beneficial for those who want to provide for their grandchildren or great-grandchildren and defer the imposition of estate tax for multiple generations.
7. Grantor Retained Annuity Trust
A grantor retained annuity trust (GRAT) is a type of irrevocable trust that allows the grantor to transfer assets to beneficiaries while still retaining the right to receive income from the trust for a certain period. This type of trust is beneficial for those who want to transfer assets to their heirs while also retaining some control over the assets.
If the donor dies within the time he or she is permitted to receive the income stream, the full value of the assets in the GRAT are included in the grantor’s gross estate. If the grantor lives beyond the time he or she is to receive the income, then the full value of the trust property is excluded from the grantor’s gross estate and no estate tax is imposed.
8. Asset Protection Trust
The asset protection trust (APT) is used by HNW families to protect trust assets from future unknown unforeseeable lawsuit creditors and predators. The APT is a trust created by the grantor and for the grantor, during the grantor’s lifetime — so called “self-settled spendthrift trust.”
Twenty states plus many offshore jurisdictions have passed legislation allowing for the grantor to establish and remain a discretionary beneficiary of the trust while protecting the assets inside the trust from future judgment creditors.
Special rules apply to avoid a grantor from creating an APT to defraud his or her known, expected or current creditors, and these rules must be carefully analyzed to ensure they are not violated when establishing an APT.
The Right Direction
The eight types of trusts mentioned here are just a few of the options available to HNW individuals to protect assets and minimize tax liabilities. When it comes to estate planning for HNW estates, it's essential to work with an attorney specializing in this area of law.
The estate planning attorneys at Falcon Rappaport & Berkman (opens in new tab) can help you protect your assets from future unknown judgment creditors, preserving your legacy for your loved ones for generations to come.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab).
-
-
IRS Service Improvements Could Bring Faster Tax Refunds
Recent IRS improvements mean taxpayers could see faster tax refunds next year and beyond.
-
For Best Tax Savings, Year-Round Tax Planning Is Essential
For optimal, ongoing tax reduction, consider employing these nine strategies throughout the entire year.
-
For Best Tax Savings, Year-Round Tax Planning Is Essential
For optimal, ongoing tax reduction, consider employing these nine strategies throughout the entire year.
-
From SECURE Act to SECURE 2.0: Is Your Estate Plan Safe?
The ever-evolving legislative landscape provides both challenges and opportunities when it comes to making plans for your retirement and your estate. A key focus: tax planning.
-
Is Inflation a Big Retirement Worry? How to Protect Savings
Concerns about how inflation eats into your resources or limits your ability to save sufficiently for retirement are real, but there are four things you can do to cope.
-
Short-Term Financial Planning for First-Time Parents
A seasoned wealth adviser shares his experience with the financial planning he and his wife did for the arrival of their first bundle of joy.
-
Longevity: The Retirement Problem No One Is Discussing
Many people saving for retirement fail to take into account how living longer will affect how much they’ll need once they stop working. What should they do?
-
Capital Gains Taxes Trap: How to Avoid Mutual Fund Tax Bombs
It’s bad enough when your mutual fund’s assets lose value, but owing unexpected capital gains taxes after those losses is doubly frustrating.
-
Why Investors Should Avoid Buying the Banking Sector Dip
Even though things appear to have settled after SVB's collapse, that doesn’t mean all is clear. Consider options like healthcare and consumer staples instead.
-
Four Sustainable Investments That Could Have a Positive Impact
As we celebrate Earth Day, consider doing some research aimed at transitioning to a more sustainable and responsible portfolio. These four companies are worth a look.
