Michigan Estate Planning Blog

Is a Trust a Good Idea?

If chosen wisely, with the help of an experienced estate planning attorney, a trust can be a great chance to minimize taxes on your estate.

Forbes’ recent article entitled “Estate Planning Opportunities: How Trusts Can Minimize Taxes On Your Legacy,” explains that trusts are legal arrangements that benefit causes or people you choose down the line. They vary in how they are activated and accessed, according to these basic types.

Revocable or irrevocable: In a revocable trust, a grantor can reclaim assets whenever they want during their lifetime. In an irrevocable trust, a grantor gives up the right to reclaim property once the trust is designated.

Testamentary or living: a testamentary trust, created under a last will, becomes effective when the grantor dies and then becomes irrevocable to administer the inheritance. A living trust, also called an “inter-vivos trust,” is a transitionary method that helps with incapacity planning, putting a trust into action before death, and avoiding potential problems in the probate process.

Grantor or non-grantor: In a grantor arrangement, income is generally taxed to the grantor rather than to the trust. In a non-grantor arrangement, income is generally taxed to the trust (unless it is being distributed that same year).

With the help of an experienced estate planning attorney, you can look at the best opportunities for you to protect your assets from unnecessary charges, leaving behind as much of your legacy as possible.

Reference: Forbes (May 23, 2022) “Estate Planning Opportunities: How Trusts Can Minimize Taxes On Your Legacy”

The Power Of Pet Trusts Saginaw, Michigan

According to the numbers, more and more people are taking in a pet. In fact, from 2010 to 2012, the number of pet-owning households increased from 62% to 68%. Interestingly, more and more people are taking their pets into consideration when it comes to their estate planning. Maybe you have heard the term “pet trust” before. Even if you have, The Wall Street Journal has provided the latest information on planning for your pet and some noteworthy statistics in a recent article titled “More Americans Are Writing Their Pets Into Their Wills.” You see, with human family members, you can take care of them by giving them an inheritance. On the other hand, you cannot give property to your pet because your pet is property. Nevertheless, you can provide financially for your pet with a pet trust. After all, the needs of a pet can be simple, but someone needs to care for them. A pet trust is a legal vehicle that can be designed to be there for your pet when you are not, providing a caretaker and financial resources according to your instructions

Reference: The Wall Street Journal (January 12, 2014) “More Americans Are Writing Their Pets Into Their Wills”

For more information, see www.jerryreiflawyer.com

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QPRT Considerations Saginaw, MI

For every job, there is a tool to get the job done right. The same holds true for trusts. Thankfully, in the present low interest environment, there are especially good estate tax planning tools available. This was the subject of a recent Fox Business article titled “Shielding Your Assets From Estate Taxes.” The two trusts that seem to benefit the most from a low interest environment are GRATs, Grantor Retained Annuity Trusts, and QPRTs, Qualified Personal Residence Trusts. Since I recently reviewed the subject of GRATs, here is the difference between the two – QPRTs can leverage the transfer of your home. The problem with planning for the family homestead is a very practical one. Likely, you are living there and would like to continue doing so for as long as you can. On the other hand, you do not want to subject your home to probate or estate taxation. Properly structured, a QPRT can allow you to live in the home while simultaneously giving it away by holding it in the trust. While there are more than a few tax advantages to this, this ability to preserve the home and transfer it is always key. All that noted, the favorable interest rates and political winds may be about to shift on QPRTs and GRATs. Consequently, do not procrastinate or the window of opportunity may close.

Reference: Fox Business (July 29, 2013) “Shielding Your Assets From Estate Taxes”

For more informaation, see www.jerryreiflawyer.com

 

 

GRATs Can Be Great Saginaw, MI

GRATs are still pretty great, but we might have to act soon! The law and the market conditions that give Grantor Retained Annuity Trusts (GRATs) their power are still favorable. However, as a recent ThinkAdvisor article warns, “The Clock Is Ticking on GRATs.” These past few years have been a perfect time for estate tax planning with GRATs. They thrive in a low interest rate environment where so many other plans languish. Briefly, the GRAT works by allowing the grantor to put assets into the trust which then continues to provide regular annuity payments to the grantor for life or for a term of years. Eventually, at the expiration of those annuity payments, the remainder interest in the GRAT passes to the trust beneficiaries. The taxable gift value of the reminder interest is determined, in part, by the current month’s “applicable federal (interest) rate” (or either of the previous two months, if lower) for the month the trust is funded. Accordingly, a great time to implement a GRAT is when such interest rates are low (and especially if the rate is expected to climb). The value of the assets in the trust simply needs to outperform the low rate you have locked in for the maximum benefit. While there are many complicated ways to make a GRAT do even more wonders, especially for highly appreciated assets, but there are at least two easy ways to ruin them. First, do not die. Seriously, the grantor must outlive the annuity term of the trust. Until the annuity term ends, the assets are “grantor retained” and will wind up counting as part of the grantor’s estate and taxed as such. For this reason GRATs are commonly created with a shorter term than the life expectancy of the grantor. Second, do not procrastinate. As long as there is a sitting Congress and a president in the White House, no tax planning is safe. In fact, more than a few proposals have been advanced to limit GRATs. Even though existing GRATs almost certainly would be grandfathered, why take that risk? Bottom line: If you are considering a GRAT, this may be the perfect window to proceed in earnest.

Reference: ThinkAdvisor (July 29, 2013) “The Clock Is Ticking on GRATs”

For more information, see www.jerryreiflawyer.com

 

Advanced Planning Techniques To Be Targeted? Saginaw, Michigan

With the fiscal cliff standoff behind us, many Americans are content to rest and catch up on their sleep. Some professionals, however, have started to realize that there were some very real questions left on the fiscal cliff table. That’s right – we are approaching a renewed fiscal debate and inevitable revenue-squeezing. While significant estate planning laws are settled, there remain more than a few important estate planning “tools” left hanging in the air. These tools likely will be low-hanging fruit in future discussions. The American Taxpayer Relief Tax Act Of 2012 (ATRA) finally ended some 12 years of estate planning uncertainty (or so we can only hope). The certainty includes such matters as various tax rates and the exemptions amounts for the estate tax, gift tax, and generation-skipping tax. But ATRA didn’t settle many technical questions raised in the past few years, both on and off the campaign trail. So, what issues and devices should we watch? A recent Forbes article titled “Congress May Tighten The Belt On Cute Tax Tricks” lists some sore subjects and possible new areas of taxation. These include: • Grantor Trusts: might just get added back into the Grantor’s estate. • Dynasty Trusts: might just limit the extent of your dynasty. • GRATs: “Grantor Retained Annuity Trusts” (GRATs) might become much more demanding and risky. • Family Limited Partnerships: might become much less valuable as your ability to take discounts is curtailed. The original article is worth your time, especially if you are concerned that future technical rules may swoop in and sully some well-designed estate planning. However, for those conversant with this subject, they will recognize that this talk is nothing new and these estate planning devices have been repeatedly targeted in the past. The takeaway, as always, is to consult qualified legal counsel regarding how future changes in the law may impact your estate planning.

Reference: Forbes (January 16, 2013) “Congress May Tighten The Belt On Cute Tax Tricks”

For more information, see www.jerryreiflawyer.com

Facebook Founders Find Estate Planning Fix

Not too long ago the taxation and accounting world had a new star in Mark Zuckerberg, the wunderkind behind Facebook. Why? Because his unparalleled control over the company was about to create the biggest tax bill ever when the company went public and his stock became publically valued. Indeed, the taxation and accounting world can be rather morbid in that regard, but at least for Zuckerberg there is some good news that has come out of the woodwork. Tax or no taxes, he has saved a great deal through forethought and proper estate planning. Certainly it’s unique to meet anyone who begins their estate planning at age 25 but Mark Zuckerberg and his partner in business, Dustin Moskovitz, did just that. As reported in a recent article from Deborah Jacobs at Forbes, the pair had the foresight to set up their private stock up with a certain form of trust before the true boom in value. As a result, they locked in that lower value and locked out those incredible taxes. As Jacobs estimates in her article, the pair shifted more than $185 million into what’s often known as a zeroed-out GRAT. In somewhat more plain English this device was a Grantor Retained Annuity Trust in which the rate of appreciation exceeds the rate of interest, thereby securing the excess amount (like all that created from going public) from taxation for the beneficiaries of the GRAT. Sometimes the young do have something to teach their elders, and in this case the crew over at Facebook serves as an incredible example of what has been an incredible technique. For more information and math on Zuckerberg and his partners check out the original article. Also, if you’re interested in learning more about GRATs, then there’s no time like the present to investigate whether you should create your own. Note: Not only is the GRAT most advantageous when an economy is set to rebound, but the process itself is in the sights of many new budget and taxation plans by the current administration. (Translation: This opportunity might not be around much longer!)

Reference: Forbes (March 7, 2012) “Facebook Billionaires Shifted More Than $200 Million Gift-Tax Free

Facebook Founders Find Estate Planning Fix

Not too long ago the taxation and accounting world had a new star in Mark Zuckerberg, the wunderkind behind Facebook. Why? Because his unparalleled control over the company was about to create the biggest tax bill ever when the company went public and his stock became publically valued. Indeed, the taxation and accounting world can be rather morbid in that regard, but at least for Zuckerberg there is some good news that has come out of the woodwork. Tax or no taxes, he has saved a great deal through forethought and proper estate planning. Certainly it’s unique to meet anyone who begins their estate planning at age 25 but Mark Zuckerberg and his partner in business, Dustin Moskovitz, did just that. As reported in a recent article from Deborah Jacobs at Forbes, the pair had the foresight to set up their private stock up with a certain form of trust before the true boom in value. As a result, they locked in that lower value and locked out those incredible taxes. As Jacobs estimates in her article, the pair shifted more than $185 million into what’s often known as a zeroed-out GRAT. In somewhat more plain English this device was a Grantor Retained Annuity Trust in which the rate of appreciation exceeds the rate of interest, thereby securing the excess amount (like all that created from going public) from taxation for the beneficiaries of the GRAT. Sometimes the young do have something to teach their elders, and in this case the crew over at Facebook serves as an incredible example of what has been an incredible technique. For more information and math on Zuckerberg and his partners check out the original article. Also, if you’re interested in learning more about GRATs, then there’s no time like the present to investigate whether you should create your own. Note: Not only is the GRAT most advantageous when an economy is set to rebound, but the process itself is in the sights of many new budget and taxation plans by the current administration. (Translation: This opportunity might not be around much longer!)

Reference: Forbes (March 7, 2012) “Facebook Billionaires Shifted More Than $200 Million Gift-Tax Free”

Fiscal Green Book Fidgets with IDGTs

The calm before the storm. That would be an accurate characterization of how 2012 is shaping up, especially when it comes to estate planning. Our regular readers will likely remember why. Nevertheless, along with the estate and gift taxes, there are a few more laws to watch as they worm through Capitol Hill. As a result, 2012 may be the last truly advantageous year for certain trusts like Grantor Retained Annuity Trusts (GRATs) and a somewhat lesser known vehicle, the Intentionally Defective Grantor Trust (IDGT). A recent Forbes article cast the spotlight on the IDGT, so I thought I’d do the same here. An IDGT lives up to the name, or at least it does when formed properly. In essence, the trust is set up by a Grantor (i.e., the Trustmaker) who then sells assets to the trust in exchange for a note at a very low interest rate. This is not uncommon with many trusts, but since it’s defective it also places the interest rate burden back on the grantor. Result: The Grantor gets an initial market value on their sale, which is likely to be low, and then continues to pay for those assets. Sounds a little weird, but stick with me. Here’s what the Grantor is betting: The asset sold is presently legitimately “undervalued” right now, but is expected to greatly increase in value if the economy returns to full swing. As a consequence, the undervalued asset appreciates at a greater rate than the very low interest rate and thereby locks that value into the trust for beneficiaries, and keeps that added value from ballooning the size of an estate instead. Moreover, since the assets were sold in the first place, the use of such a trust won’t waste the valuable lifetime gift tax exemption. Not everyone likes this strategy, however. The threat, at the moment, to GRATs and IDGTs is the most recent budget proposal put forward by President Obama. Accordingly, the seeds are thereby sown and we can only expect much more (negative) attention to be drawn to these estate planning tools in the future. For more information you can take a look at the original article or you can learn more about the budget challenge to IDGTs and GRATs here.

Reference: Forbes (February 22, 2012) “Estate and Gift Tax Considerations for 2012: IDGTs - And you Must Act Now!”

Obama Budget… And Estate Planning Consequences

As you are likely to have heard, President Obama unveiled his budget proposal not too long ago and it packs a wallop. We are living an era of fierce partisanship, and election season hasn’t exactly put a damper on that. As a result, the media and the critics have been quick to pounce on a number of points, to include accusations that the President’s proposal is mere election-season partisanship. That media din aside, it truly is an important proposal to understand, especially when you are planning your estate. Why? Because you can at least attempt to hedge your bets against political tides, if not also plan for what may become law. Fortunately, there are a few straightforward analyses of the proposal from an estate planning perspective, like this one from the Wills, Trusts & Estates Professor (and the second part, here). Here are a few topics to whet your appetite: Wealth Transfer Taxes: The proposed budget would permanently roll back the Estate, Gift, and Generation-Skipping Transfer (GST) taxes to their 2009 levels. The exemptions and rates would remain unified and “portability” between spouses of unused exemptions would also become permanent. However, that means going back to an exemption amount of $3.5 million and a taxation rate of 45%, thereby saving us from the possible default of falling to 2001 levels (a $1 million exemption at a 55% rate), but still representing a serious hike from the current exemptions and rate (at $5 million and 35%, respectively). Grantor Trusts: Grantor trusts, and grantor retained annuity trusts (GRATs) in particular, get some special attention. For GRATs, the proposal calls for longer “minimum” terms, with 10 years as the minimum. For those of you familiar with the device, you know this makes the prospect inherently more risky, since you have to “outlive” the term of the GRAT before transfer of the trust assets. There’s more to GRATs, but even with Grantor trusts in general the proposal is intended to beef up transfer taxes. Why? Because, as a class of trusts, they have been so useful for disseminating wealth. Those are two of the bigger – and to a certain extent, less nuanced topics – but it ought be clear that there are myriad changes in the works (also see the changes regarding “valuation”) and you are well-advised to stay tuned and keep informed. It is politics, of course, and not yet actual law. On the other hand, it can help you understand the evolving debate and your own estate plans. If these changes were to become law, the impact would expansive.

Reference: Wills, Trusts & Estates Prof Blog (February 15, 2012) “Obama’s Budget Proposal Part 1” and “Obama’s Budget Proposal Part 2”

GRATs, GRUTs, GRITs And QPRTs

Unfortunately, estate planning opportunities tend to be hard to time. Practically speaking, you tend to not be “done” with your estate when the law creates a planning window. Certainly, that was the joke in 2010 when the estate tax lapsed and it become “the year to die.” [Just ask the family of George Steinbrenner!] As I and many others have noted previously, both 2011 and 2012 are incredibly favorable years for gifting. While the law (and other factors) have made these scant two years such a great window, that doesn’t mean you’re done with those assets of your estate you might otherwise want to gift. Thankfully, there are a number of legal “tools” that allow you to give without giving up (at least not yet.) such assets. I was surfing the internet and found an excellent article in The Des Moines Register regarding this issue. In fact the article provided a brief overview of those legal tools I thought it you might enjoy. Bottom line: The solution to giving without giving up via a class of trusts called “retained interest trusts.” Why this name? Because, literally, you retain an interest in the assets and the type of interest retained, in turn, determines the exact kind of trust. As with most things in life, each flavor of trust has its own strengths, weaknesses, and a terrible acronym. The GRAT, or “Grantor Retained Annuity Trust” is the most commonly talked about these days for a number of reasons (like those in this recent article). Essentially, a GRAT allows you to retain an interest in the assets in the form of an “annuity” that will provide a steady income to you. The GRUT, or “Grantor Retained Uni-Trust” allows you to keep an interest in the assets in the form of a regular payment which is a “fixed percentage” of the value of the assets in the trust. This means if the value of the assets appreciates, so to will your regular payment. Then there’s the GRIT or “Grantor Retained Income Trust,” which allows you to retain an “income” from the assets. Note: This generally is less flexible when it comes to giving to heirs, except when it is used to give away a residence. Surprise! A GRIT can be a QPRT instead, which is a “Qualified Personal Residence Trust.” With a QPRT the asset is a residence and the income to be retained is the “right to live there.” In other words, putting your home into a QPRT is giving the home away, but without the hassle of moving (yet.) In all cases, whatever you would give away to your loved ones outright is, instead, put into the trust. You retain the respective interest in the asset and name your heirs as beneficiaries, effectively transferring the asset and taking advantage of a good estate planning opportunity well before your time. In all cases, though, a great deal depends on your specific situation and certainly qualified legal counsel will be required to assess how to best weave the plan together (not to mention in implementing the appropriate trust).

Reference: Des Moines Register (August 27, 2011) “Retained Income Trusts Benefit Heirs”

ESTATE PLANNING / GRATs

July offers a GRAT opportunity to make some strategic estate planning moves. The IRS just published the applicable federal rates (AFR) for July: • Section 7520 Interest Rate: 2.4% • Applicable Federal Mid-term, Annual Rate: 2.0% These rates continue to slide, and are set now at historical lows. These low rates make certain estate planning opportunities much more attractive, to include: • loans to family members • installment sales to grantor trusts • grantor retained annuity trusts (GRATs) and • charitable lead annuity trusts (CLATs). A recent article in Forbes focuses primarily on the GRAT opportunity for savvy planners. As Forbes writes, GRATs are particularly attractive now, with low AFRs, under-valued assets (particularly real estate) and the ability to create a GRAT with a term as short as three years. Here’s why the low rates make GRATs such a good deal. The idea with a GRAT is to transfer an appreciating asset into a trust for a set number of years, say three years. After the three years, any appreciation over the applicable federal rate goes to your heirs, free of estate and gift tax. So, if you own rapidly appreciating assets, particularly if they are currently under-valued, and you anticipate the three-year appreciation to exceed the low AFR, then this strategy could result in some GRAT tax savings.

Reference: Forbes (June 28, 2011) “A GRAT Opportunity: Taking Advantage of Low July 2011 AFRs”