Consider a Trust for Upcoming Estate Tax Exemption Change

As the expiration of the Tax Cuts and Jobs Act provisions about federal estate taxes comes closer, people who have enjoyed ultra-high exemptions in recent years may find themselves paying estate taxes if they don’t plan ahead. A recent article in Financial Advisor, “Looming Cut in Estate Tax Exemption Has Advisors Looking To Trusts,” provides a look into how trusts, created with an estate planning attorney to align with the overall estate plan, can mitigate estate tax changes and more.

A revocable living trust is not part of the public record, so assets in the trust aren’t available to creditors or litigants after your last will and testament goes through probate. A revocable trust, created and funded during the grantor’s lifetime, allows the grantor full access and control over the trust and assets.

Upon the grantor's death, the trust's assets may pass directly to the beneficiaries without going through probate.

For estate tax exemption, another kind of trust is the Qualified Terminable Interest Property Trust, or QTIP. This kind of trust can own different assets; a spouse is the beneficiary. The assets in the trust can include stocks, bonds, real estate, business interests, or just plain cash. The beneficiary must get all the income thrown off by the trust, and any remaining assets must go to other beneficiaries.

Then there’s the “ILIT”—an irrevocable life insurance trust—allowing individuals to remove policy proceeds from the estate. With the guidance of an estate planning attorney, the policy owned by the trust can generate streams of tax-free income for the surviving spouse.

For younger people, a GRAT—grantor-retained annuity trust—returns some or all of the value in the trust plus interest to the person creating the trust and transfers appreciation outside of the estate. This works best when the GRAT grows quickly in the first few years. At the end of the GRAT, the remaining assets are distributed to an irrevocable trust for beneficiaries.

These are just a few ways that trusts can be used to minimize estate taxes strategically. Talk with your estate planning attorney to ensure that you are ready if and when the estate tax exemption changes. Bear in mind that the estate planning and financial community are already preparing for these changes, which take time. Waiting until the last minute could be an expensive mistake.

Reference: Financial Advisor (May 28, 2024) “Looming Cut in Estate Tax Exemption Has Advisors Looking To Trusts”