Wealth Transfer Planning
Wealth transfer planning, a form of estate planning, involves structuring gifts or bequests of assets to beneficiaries to minimize gift and estate taxes while achieving numerous important non-tax objectives. The current unified gift and estate tax exemption for each individual is $11,580,000 ($10,000,000 as indexed for inflation).
However, this amount is scheduled to decrease to approximately $6,000,000 or so on January 1, 2026 ($5,000,000 as indexed for inflation), or perhaps sooner if the exemption amount is changed before then. If this higher exemption amount is not utilized before the decrease, it may be lost.
How Our Florida and Palm Beach County Estate Planning Attorneys Create a Wealth Transfer Plan
This “use it or lose it” system and the current significant exemption are driving forces right now in new estate planning, and changes being made to existing planning. The following is a summary of the most popular advanced techniques used by our Florida and Palm Beach County estate planning attorneys to address these issues and other ongoing wealth transfer planning concerns.
Grantor Retained Annuity Trust
With a grantor retained annuity trust (GRAT), the donor transfers assets to a GRAT and retains the right to receive a set annuity payment from the GRAT. A GRAT can be structured so there is no taxable gift at inception because the value of the assets given is equal to the actuarial value of the annuity payments retained. However, if the GRAT’s assets grow in excess of a rate specified by the IRS (1.2% as of April 2020, for example), the excess passes to the children transfer-tax-free. If the assets decrease in value by the end of the GRAT’s term, the donor receives all of the assets back from the GRAT without having used any gift tax exemption. Accordingly, a GRAT is sometimes considered a “heads I win, tails I don’t lose” planning tool.
Intentionally Defective Grantor Trust
An intentionally defective grantor trust (IDGT) is one of the most powerful techniques used by our Florida and Palm Beach County estate planning attorneys. A transfer to an IDGT is a completed gift for estate tax purposes; however, under federal tax law, the donor is treated as owning the assets of the IDGT.
Accordingly, the donor is legally obligated to pay the income taxes on the IDGT’s earnings. Further, any transactions between the donor and the IDGT, such as a sale of assets or interest payments, are not taken into account for income tax purposes. Additionally, the donor’s payment of income taxes on the IDGT’s earnings represents continuing tax-free gifts to the IDGT.
Spousal Lifetime Access Trust
A Spousal Lifetime Access Trust (SLAT) is a form of IDGT that can benefit the donor’s spouse among other family members and beneficiaries. Despite benefiting the donor’s spouse, the SLAT is considered a completed gift for estate tax purposes.
A SLAT can be particularly attractive to a client who wants to lock in the currently high exemptions given the “use it or lose it” concerns, but still have the assets available, if necessary, indirectly through his or her spouse’s beneficial interest.
Family Limited Partnerships
A family limited partnership (FLP) is a family entity, typically holding business assets and/or marketable securities. Control of the FLP is divided between general partnership interests and limited partnership interests. The limited partnership interests are generally given or sold to family members, an IDGT, or a SLAT.
The value of the limited partnership interests is frequently discounted, which allows additional assets to pass to the next generation. FLPs and other discounting entities/techniques are a core part of advanced estate planning techniques.
Irrevocable Life Insurance Trust
An irrevocable life insurance trust (ILIT) holds an insurance policy on the donor’s life or on the lives of a married couple. By holding the policy in the ILIT, the death benefit is not included in the insured’s estate(s). Annual gifts can be made to the ILIT in amounts not to exceed the annual exclusion amount ($15,000) per beneficiary without having to use any lifetime exemption.
Qualified Personal Residence Trust
A qualified personal residence trust (QPRT) allows the donor to retain an interest in a personal residence and give the remainder interest to beneficiaries at the end of the QPRT’s term. The donor’s retained interest in the residence reduces the value of the gift. Accordingly, a house can be transferred to the next generation at a discounted value.
Develop a Wealth Transfer Strategy with Our Palm Beach County Estate Planning Attorneys
For more information on how to develop your wealth transfer strategy, contact the Florida and Palm Beach County estate planning attorneys of Comiter, Singer, Baseman & Braun, either online or by calling us at 561-626-2101 or toll-free at 800-226-1484. We work with clients throughout the state of Florida.