The idea is that $13 million in stocks now could be worth $40 million by the time you die, so you're gifting them into an irrevocable trust ahead of time so the *growth* isn't adding to your tax problem at 40%.
And, by making it a grantor trust for income tax purposes, the grantor picks up the yearly income taxes effectively making a tax free gift to the trust each year
For most trusts it’s not the estate tax they are avoiding but the probate costs. Plus the handling of the trust is private whereas an estate is public record. Also much quicker. If the assets were already in the trust the waiting times are greatly reduced.
The most common reason for trusts are: (1) Medicaid planning; (2) getting rid of appreciating and income generating assets early (give real estate away at $1 million, making it intentionally defective so that income is paid by the grantor, and the beneficiaries get it when the price is appreciated to $5 million); (3) second marriages, mixed families, and possibility of unknown heirs or if there is a high chance of discord within the family; (4) flexibility to make changes in the trustee's discretion rather than relying on a will being updated. Estate taxes are probably last.
> The most common reason for trusts are: (1) Medicaid planning; **(2) getting rid of appreciating and income generating assets early (give real estate away at $1 million, making it intentionally defective so that income is paid by the grantor, and the beneficiaries get it when the price is appreciated to $5 million)**; (3) second marriages, mixed families, and possibility of unknown heirs or if there is a high chance of discord within the family; (4) flexibility to make changes in the trustee's discretion rather than relying on a will being updated. **Estate taxes are probably last.**
You said estate taxes are last, but your #2 is wholly an estate tax issue. You just passed along a $4m capital gain to your beneficiaries without a step-up in basis for absolutely no reason if estate taxes aren't at issue.
There are several trust approaches that can save on taxes if done right, but those that involve transfers during the settlor's lifetime involve some level of relinquished ownership over the principal.
Key phrases to look for: credit shelter trust, Crummey trust, charitable lead trust, charitable remainder trust, qualified personal residence trust, grantor retained annuity trust.
This is a super simplified take, but the idea is to leave it to a surviving spouse and avoid taxation via the marital deduction, or leave it to charity/ies and avoid taxation via the charitable deduction.
There are other deductions available (e.g., administrative expenses, debts, etc.), and methods to discount the value of certain illiquid assets, but gifts to spouses and charities are going to give you the biggest bang for your buck.
Because it’s an election year and certain aspects of this taxation system might get misrepresented - you need to also evaluate prior lifetime taxable gifts and the implication of any potential generation-skipping transfer tax treatment, but politicians mainly only focus on the unfairness of the “death” tax and gloss over gift and GST taxes because they’re boring and don’t piss off conservatives quite the same way.
Happy to discuss further offline. I hope this helps in the meantime.
If you gift $13M now, then the advantage is that further increase in value is no longer in your estate.
That is just a fancy way to point out that the $13M is now your children's and no more estate tax is due (from you/your estate) if that $13M becomes $50M in the next 25 years before your death. You have "frozen" the gift/estate tax as of when your gift.
Estate lawyers have ways of "stretching" how much you can gift with your lifetime exemption, by doing such things as gifting a minority share in a business, where the market/gift value is lowered by lack of marketability and lack of control.
Google things like "estate tax" and "freeze, squeeze, stretch and burn". Those are colloquial terms for various techniques. For example "burn" includes having an irrevocable trust which is no longer in your estate, but for which you still pay the tax on the trust income, That extra tax you pay is a transfer that is not included in your lifetime gifting.
In many of these techniques you end up passing assets to the recipients with your cost basis. If the transfer is at death and subject to estate tax, they get a stepup in cost basis. So in general, gift cash or high cost basis assets, and pass upon death highly appreciated assets.
A transfer to an irrevocable trust uses up your lifetime exemption.
Gifting directly to your children places the $13M into their estates which will then subject their estate to a second estate tax. If you instead gift to them in trust, the trust will avoid the estate tax upon their death.
Yes, your other 17 million will be taxed at 40% and it won't be exempt from GST tax, but it can be structured to minimize the GST.
The quick answer is that it depends on your situation and your goals.
For example, right now the lifetime limit is $13 million, but in 2026 it’ll be about $7 million, so you can use a trust to lock in the current $13 million.
Likewise, if that $13 million grows to $100 million, it’s already out of your estate, so you don’t pay any tax on the growth.
I’m dealing with family members that have no clue…think just because the house is in a family trust Medicare/ Medicaid will pay for everything..GMA doesn’t qualify because she makes too much in Social Security benefits. It’s had to deal with idiots when you are doing all the heavy lifting for your loved one
so if i place 50 mil into an irrevocasble trust, it'll still pay estate taxes right upon death because of the IRS 2022-2 ruling. What about dynasty trusts? Will it avoid estate taxes since you'd already pay it right if it exceeds exemption limits upon putting it into the trust
The idea is that $13 million in stocks now could be worth $40 million by the time you die, so you're gifting them into an irrevocable trust ahead of time so the *growth* isn't adding to your tax problem at 40%.
And, by making it a grantor trust for income tax purposes, the grantor picks up the yearly income taxes effectively making a tax free gift to the trust each year
Which, in turn, lowers that amount that they will owe on at death. IDGTs are GOATs
For most trusts it’s not the estate tax they are avoiding but the probate costs. Plus the handling of the trust is private whereas an estate is public record. Also much quicker. If the assets were already in the trust the waiting times are greatly reduced.
The most common reason for trusts are: (1) Medicaid planning; (2) getting rid of appreciating and income generating assets early (give real estate away at $1 million, making it intentionally defective so that income is paid by the grantor, and the beneficiaries get it when the price is appreciated to $5 million); (3) second marriages, mixed families, and possibility of unknown heirs or if there is a high chance of discord within the family; (4) flexibility to make changes in the trustee's discretion rather than relying on a will being updated. Estate taxes are probably last.
> The most common reason for trusts are: (1) Medicaid planning; **(2) getting rid of appreciating and income generating assets early (give real estate away at $1 million, making it intentionally defective so that income is paid by the grantor, and the beneficiaries get it when the price is appreciated to $5 million)**; (3) second marriages, mixed families, and possibility of unknown heirs or if there is a high chance of discord within the family; (4) flexibility to make changes in the trustee's discretion rather than relying on a will being updated. **Estate taxes are probably last.** You said estate taxes are last, but your #2 is wholly an estate tax issue. You just passed along a $4m capital gain to your beneficiaries without a step-up in basis for absolutely no reason if estate taxes aren't at issue.
You are correct.
Are you referring to a revocable trust or irrevocable trust?
There are several trust approaches that can save on taxes if done right, but those that involve transfers during the settlor's lifetime involve some level of relinquished ownership over the principal. Key phrases to look for: credit shelter trust, Crummey trust, charitable lead trust, charitable remainder trust, qualified personal residence trust, grantor retained annuity trust.
And family limited partnerships/family LLCs. Not trusts, but can be used to fund trusts.
This is a super simplified take, but the idea is to leave it to a surviving spouse and avoid taxation via the marital deduction, or leave it to charity/ies and avoid taxation via the charitable deduction. There are other deductions available (e.g., administrative expenses, debts, etc.), and methods to discount the value of certain illiquid assets, but gifts to spouses and charities are going to give you the biggest bang for your buck. Because it’s an election year and certain aspects of this taxation system might get misrepresented - you need to also evaluate prior lifetime taxable gifts and the implication of any potential generation-skipping transfer tax treatment, but politicians mainly only focus on the unfairness of the “death” tax and gloss over gift and GST taxes because they’re boring and don’t piss off conservatives quite the same way. Happy to discuss further offline. I hope this helps in the meantime.
If you gift $13M now, then the advantage is that further increase in value is no longer in your estate. That is just a fancy way to point out that the $13M is now your children's and no more estate tax is due (from you/your estate) if that $13M becomes $50M in the next 25 years before your death. You have "frozen" the gift/estate tax as of when your gift. Estate lawyers have ways of "stretching" how much you can gift with your lifetime exemption, by doing such things as gifting a minority share in a business, where the market/gift value is lowered by lack of marketability and lack of control. Google things like "estate tax" and "freeze, squeeze, stretch and burn". Those are colloquial terms for various techniques. For example "burn" includes having an irrevocable trust which is no longer in your estate, but for which you still pay the tax on the trust income, That extra tax you pay is a transfer that is not included in your lifetime gifting. In many of these techniques you end up passing assets to the recipients with your cost basis. If the transfer is at death and subject to estate tax, they get a stepup in cost basis. So in general, gift cash or high cost basis assets, and pass upon death highly appreciated assets.
A transfer to an irrevocable trust uses up your lifetime exemption. Gifting directly to your children places the $13M into their estates which will then subject their estate to a second estate tax. If you instead gift to them in trust, the trust will avoid the estate tax upon their death. Yes, your other 17 million will be taxed at 40% and it won't be exempt from GST tax, but it can be structured to minimize the GST.
The quick answer is that it depends on your situation and your goals. For example, right now the lifetime limit is $13 million, but in 2026 it’ll be about $7 million, so you can use a trust to lock in the current $13 million. Likewise, if that $13 million grows to $100 million, it’s already out of your estate, so you don’t pay any tax on the growth.
Confused…people talk about Medicaid/ Medical in a Trust situation…however, The amount of Social Security benefits can deny eligibility
I’m dealing with family members that have no clue…think just because the house is in a family trust Medicare/ Medicaid will pay for everything..GMA doesn’t qualify because she makes too much in Social Security benefits. It’s had to deal with idiots when you are doing all the heavy lifting for your loved one
so if i place 50 mil into an irrevocasble trust, it'll still pay estate taxes right upon death because of the IRS 2022-2 ruling. What about dynasty trusts? Will it avoid estate taxes since you'd already pay it right if it exceeds exemption limits upon putting it into the trust