They say that you should use the right tool for the right job, and this old saying applies to the field of estate planning. There are numerous different asset transfer vehicles in the estate planning toolkit, and you can optimize your position if you make the right choices.
Estate tax efficiency is something that is very important for high net worth families. The federal death tax comes with a 40 percent rate that can take a huge bite out of your legacy. If you are married to an American citizen, you can use the marital deduction to transfer any amount of property to your spouse tax-free, but transfers to others are potentially taxable.
You determine your position relative to the estate tax by comparing the value of your estate to the amount of the federal estate tax exclusion. There are annual adjustments to account for inflation, but at the time of this writing late in 2015, the exclusion stands at $5.43 million.
In addition to the estate tax, there is also a gift tax that exists to stop you from giving gifts to sidestep the estate tax. The exclusion is a unified exclusion that applies to lifetime gifts along with transfers that will take place after you are gone.
Appreciable Assets
If you are exposed to the estate tax and you are in possession of highly appreciable assets, there is a technique that could facilitate a tax efficient asset transfer to a beneficiary. This strategy is implemented through the creation of a grantor retained annuity trust or GRAT.
As the grantor of the trust, you set the duration of the term, and you accept annuity payments from the trust throughout the length of this term. You name a beneficiary when you create the trust, and the beneficiary would assume ownership of anything that may be left in the trust after the term expires.
Since the beneficiary could be receiving a gift, the gift tax applies. To determine the entire taxable value of the trust, the IRS adds the hurdle rate to account for anticipated appreciation during the term. This is equal to 120 percent of the federal midterm rate.
The idea here is to zero out the grantor retained annuity trust, so you arrange for the total of your annuity payments to equal the entire taxable value of the trust.
If the assets appreciate at a rate that exceeds the hurdle rate that was applied by the Internal Revenue Service, there will be a remainder left in the trust after the term expires, even though your annuity payments equaled the entire taxable value of the trust. The transfer of this remainder to the beneficiary would not be subject to the gift tax.
Contact Our Firm
The zeroed out GRAT strategy is one possibility, but there are other ways to facilitate tax efficient asset transfers. To explore your options, contact us to set up a case evaluation: Indianapolis IN Estate Planning Attorneys.
Paul A. Kraft, Estate Planning Attorney
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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