Estate Planning Strategies for "HNW" Clients

 “Knowing is not enough; we must apply. Willing is not enough; we must do.” - Johann Wolfgang von Goethe

The recent tax reforms have made significant positive changes to the estate, gift and GST tax regime. Now is the time to harness what the current tax code offers to help your clients maximize their wealth transfer tax minimization and asset preservation goals. For wealthy clients, estate plans offer the blueprint from which legacy can be established, implemented and endured for decades. In addition, there is a window of opportunity to make unprecedented transfer of wealth without or with minimum federal estate, gift or GST Tax.

 Astute advisors have the opportunity to conduct year-end reviews and powerful conversations with clients about income tax planning, updating revocable trusts, wills & POA’s, Revisiting the ILIT’s, reviewing beneficiary designations, Asset protection, Charitable planning and Wealth transfer planning alternatives. You can help clients with wealth transfer tax avoidance by removing appreciating assets from the estate during client’s life by establishing irrevocable trusts for the spouse -spousal lifetime access trusts, or SLATs, children (qualified personal residence trusts, or QPRTs), and philanthropic intensions by devices such as charitable remainder trusts, or CRTs. Similarly, with removing appreciating assets from the estate at death by electing portability by taking advantage of irrevocable trusts, namely; bypass trusts, including the generation- skipping options. Further, guide clients in Liquidity planning techniques including Life insurance strategies, such as irrevocable life insurance trusts (ILITs), and section 6166 payment deferral elections.

The Federal Gift & Estate Tax:

For wealthy clients, Tax Cuts and Jobs Act (TCJA) increased the basic exclusion amount for the gift, estate, and generation-skipping transfer taxes from $5.59 million to $11.18 million ($22.36 million for a married couple), indexed for inflation. the $11.18 million exclusion amount ($22.36 million per couple) is a substantial limit and enough to cover their lifetime wealth transfer goals. The other clients may choose to gift minority interest in closely help business, private equity funds, or other investment entities, such as family investment partnerships or limited liability companies or small interest in real estate properties. Now is time for your clients to take maximum advantage of the $11.18 million lifetime gift tax exemption and $22.36 million GST tax exemption. In addition, appreciation of assets will be free from estate tax.

What You should know about 20% small business deduction?

What planners need to know about 20% small business deduction is that by modifying businesses and trusts your client can qualify for the new IRC: 199-A deductions by using Multiple Non‐Grantor Trusts. A single person can make Non‐grantor completed gift trusts of $ 157,500 and a married couple of $ 315,000. The Specified service businesses (SSB) will have nearly $1.5 million of QBI this year. Thus, clients can set up separate Non‐Grantor Gift Trusts for Children and Separate Non‐Grantor Gift Trusts for GC’s for up to 10 Trusts. All ten Trusts will get full 20% deductions that means $150,000 QBI per trust with< $157,500 income. However, these deductions are phased out for income great then Taxable income greater than $315,000 but less than $415,000(MFJ)

The Trust planning is the most useful and effective techniques. The advisors can guide clients by carefully constructed effective tax and wealth plans to shield assets legal fees, law suits, family conflicts and to save taxes and protect assets. With experience and expertise, you are able to help clients with sophisticated planning strategies tailored to their unique situation, goals & priorities.

Let’s do a quick brief on the definition of a Trust, types of trust and benchmark estate planning strategies for 2018.

What is a trust?

Generally speaking, a trust is a legal device that allows someone to channel the benefits of an asset to one person while assigning control of the asset to another. Almost all dispositive planning can be achieved with a trust. The person who creates the trust, the original owner of the asset, is known as the grantor. The person who manages the trust is known as the trustee. And the person who receives the benefits is known as the beneficiary.

The trustee is the indispensable person in this trust arrangement. A trustee may be a confidant, relative or business associate of the grantor. But it is usually either a licensed professional such as an attorney or accountant or a corporate entity such as a bank or trust company. Trustees should have access to expertise in taxation, estate law and asset management. Their primary responsibility is to act prudently in the best interests of the beneficiary — something known as fiduciary responsibility of care, diligence and Loyalty.

Trust categories:

Trusts are drafted as either revocable or irrevocable and may take effect during your lifetime or after death.

Revocable trusts:

Revocable trusts can be changed or revoked at any time, so the IRS considers revocable trust assets to still be included in the grantor's taxable estate. This means that the grantor must account for income taxes on revenue generated by the trust and possibly estate taxes on those assets remaining after his or her death. Revocable-living-trust-centered estate plan. The revocable living trust provides privacy and avoids probate and can help reduce future income tax and estate tax.

Irrevocable trusts:

Irrevocable trusts cannot be changed once they are executed. Therefore, the assets placed into a properly drafted irrevocable trust are permanently removed from a grantor's estate and transferred to the trust. However, income and capital gains earned by trust assets are normally taxable as earned. If the trust retains the investment proceeds it generally pays any taxes due. If the trust pays out investment proceeds to beneficiaries, they typically account for the taxes. These trusts may be either living or testamentary.

Living trusts:

Living trusts (a.k.a. as inter vivos trusts) take effect during the grantor's lifetime, allowing the grantor to be both the trustee and beneficiary. Upon the grantor's death or incapacity, a designated successor trustee manages or distributes the remaining assets according to the terms set in the trust. These trusts may be either revocable or irrevocable.

Testamentary Trusts:

Testamentary trusts take effect upon the grantor's death and are generally activated as part of the grantors will Benefits of a trust Typically, most people use trusts to help maintain control of assets while they're alive and medically competent, as well as to maintain control of the disposition of assets indirectly if they're medically unable to do so or in the event of death.

Benefits of a Trust:

• Protecting assets from future creditors, future ex-spouses and spendthrift heirs.
• Control assets and provide security for beneficiaries
• Provide for beneficiaries who are minors or require expert assistance managing money
• Minimize the effects of estate or income taxes
• Maintain expert management of estate assets
• Minimize probate expenses
• Maintain privacy -Avoid public scrutiny
• Protect real estate, business & unique assets such as vacation home and heirlooms
• Planning for second marriages and blended families

ALIGN STRATEGIES TO CLIENTS’ GOALS:

Different kinds of trusts are designed to meet different needs and objectives. The examples that follow are a small subset of trusts that may be available to you. These instruments have huge potential reward of effective wealth transfer planning. Establishing a sound estate plan and periodic reassessment will help determine that it reflects recent market events, capital markets and regulatory changes, and changing legacy objectives of clients. An effective state plan may reduce the chances of family disputes, reduce estate costs, reduce taxes, and preserve wealth and tax efficiently pass on the estate to chosen beneficiaries or philanthropic/charitable goals. Here are a few estate plan instruments /devices for your planning consideration.

Irrevocable life insurance trust (ILIT)

An irrevocable life insurance trust (ILIT) helps your beneficiaries meet your estate tax obligations by providing tax-free proceeds on a life insurance policy the trust purchases for you. Completed Gifts to ILIT is that could be set up for the purpose of owing Life Insurance policy on the life of the maker of the trust. The trust pays the life insurance premium to keep the policy in for, fixes the DB upon the insured death, and

distributes the money according to the terms of the trust. Because the insured does not own the policy (trust owns it) the death proceeds are not included in the insured estate for purposes of estate taxes. Each year the maker of trust can make a gift to the trust in the amount t of annual exclusion that is $15,000 of $30,000 K for couple without having to pay gift taxes or use any of the gift tax credits.

Qualified personal residence trust (QPRT)

A qualified personal residence trust (QPRT) allows you to remove your residence from your estate, and reduce gift taxes, through an arrangement in which you live in the home for a predetermined number of years, after which time ownership is transferred to the trust or beneficiaries. Note that if you die before the term of the trust ends, the home is considered part of your estate.

Generation-skipping trust (GST)

A generation-skipping trust can help you leave bequests to your grandchildren and minimize any generation-skipping transfer tax exposure. (Federal generation-skipping transfer tax applies to large estates and can be up to 40% in 2018).

Charitable lead trust (CLT)

For your clients pursuing tax efficiency, there are many areas that require thoughtful consideration in terms of type of assets to donate, the timing of the gifts and trust vehicle to fund the gifts and prospective organization to receive such gifts.

Charitable lead trust (CLT) may be useful when the assts being contributed has high potential for future appreciation. It permits a donation to charity while keeping assets in the family. It helps to mitigate gift and estate taxes. This is also appropriate for clients whose heirs are still young and not capable of taking control of a substantial amounts of assets. Additionally, clients have sufficient income producing assets to provide for the family need s during the term of a Charitable trust. A CLT lets you pay a charity income from the trust for a designated amount of time, after which the principal goes to the beneficiaries, who receive the property free of estate taxes. However, keep in mind that you'll need to pay gift taxes on a portion of the value of the assets your clients transfer to the trust.

Charitable giving planning for income tax deductions for contributions to charity. Generally, an individual can deduct up to 60% of his or her AGI for cash contributions or up to 30% for non-cash contributions this year. A CLT assist when contributions exceed Charitable AGI Limit. If your client wants to contribute $1 million of appreciated securities increase of cash. Be aware that noncash gifts over $500 k need a qualified appraisal. In this case the client can deduction up to 30% of AGI or $150 K in 2018 and $150 k for the next five years. So, the total deductions will be only $ 750 K because of 30% AGI deductibility limit.

The Testamentary Charitable Lead Annuity Trust (TCLAT) is also an instrument to use in some situation because you can use a formula to avoid estate tax by contributing the amount that would have subject to estate tax to the Charitable Lead Annuity Trust., the charity received a fixed annuity payment for specified numbers of years. At the end of the trust term, the remaining property passes to the client beneficiaries.

Charitable remainder trust (CRT)

A charitable remainder trust (CRT) is useful for Donor who require a current stream of income and want to defer large capital gains taxes. And also, for those who donate appreciated property to fund the trust and anticipate having a need for income during the trust term allows you to receive income and a tax deduction at the same time, and ultimately leave assets to a charity. The trustee will use donated cash or sell donated property or assets, tax-free, and establish an annuity payable to you, your spouse or your heirs for a designated period of time. Upon completion of that time period, the remaining assets go directly to the charity.

The CRT benefit include Charitable contribution deduction is allowed for the present value of the remainder interest of the trust. It provides annual payout to non charitable beneficiary and allows for deferral of gain on assets to be sold.However, there are a few disadvantages of CRT It is irrevocable and hence cannot be changed and you are limited on the types of assets in which to invest.

Domestic Asset Protection Trusts (DAPT)

Yet another strategy to explore could be regarding the asset’s protection in case of unforeseen and uncontrollable life events happen with the family providers.

The combination of the DAPT Domestic Asset Protection Trust with an LLC is an effective asset protection strategy to consider. The LLC will hold the couple’s income producing real estate, as well as other types of investments, this is effective in keeping the creditors and escape lawsuits and judgements again the family. The lawsuits and judgments can’t be enforced against the trust.

Credit Shelter Trust (CST)

A Credit Shelter Trust (CST) allows a married couple to minimize their estate taxes while still allowing the surviving spouse to have access to the entire estate. The CST is appropriate for clients who expect to face estate taxes and is a potent alternative to using the unlimited marital deduction (UMD) for all assets in order to reduce total estate taxes. 

In this approach for taking UMD on all property of the first to die, the two estates are essentially merged into one larger estate that will be subject to estate tax at the second death. At the survivor's death, the estate can claim unified credit to offset a portion of the taxes. The exemption equivalent in 2018 is $5.6 million. A couple can protect over $11 million from estate taxes using a CST in 2018. The exemption amount is indexed for inflation in future years. 

The CST is funded with assets from the estate of the first to die. During the surviving spouse's lifetime, he/she can receive income from the CST assets and, under certain limitations, even invade principal. At the survivor's death, trust assets are generally not included in the survivor's estate and are passed to the non-spousal heirs as described in the trust. By funding a CST with assets up to the exemption amount, the couple successfully uses both unified credits and minimizes total estate taxes

Donor Advised Funds (DAF)

For those clients who wish to maintain control over the assets they wish to contribute to charity, or to maintain a cash flow stream from such assets. If clients primary concern is to exercise control over the assets assigned to a charity, then using a vehicle such as (DAF) Donor Advised fund or a private foundation may be appropriate

A donor to a DAF can take an immediate deductible contribution. While the Donor to DAF’s do not have legal control over the estate or investments or grant choices. Generally, barring some exceptions, contributions are deductible up to 50% of Donor’s AGI for cash contributions and 30% of AGI for noncash. The Donor does not control grant making but can deliver advise and Donor pays a fee to sponsoring organization to provide administrative services. The growth of the Assets is tax -free and returns on assets in a DAF are not subject to income tax unless there is unrelated business income.

Private Foundations (PF):

Private foundation has more favorable treatment than the Donor Advised Funds. The Donor who establish foundation or their heirs may continue to control the foundation by being the director s of trustees and can receive salary for their services. Creating a private foundation allows the wealthy family members to not only control the estate to a foundation but also have their children involved and draw salaries. The second benefit of foundation is basically greater freedom in grant making the can give grants to individuals and entities for charitable purposes, if certain conditions are fulfilled.

A donor to a private foundation can take an immediate deduction bot the federal and state taxes. At the federal level, contributions are deductible up to 30% of Donor’s AGI for cash contributions and 20% of AGI for noncash. The Donor manages the operations and administer the organization. The Donor also controls the investment decisions. The growth of the Assets is tax -free and returns on assets in a private foundation are not subject to income tax. The Annual distribution requirements is 5% of FMV of noncharitable use assets There is however a small 2% excise tax on the Net Investment Income (NII). A private Foundation can be used to pre-fund several years of normal charitable giving.

What type of Trust is right for your Client?

Different types of trusts and trustees can require a variety of fees for administration and wealth management. As you develop your trust strategies, remember to consider the costs that may be involved and weigh them carefully in relation to the benefits. Based on your clients objectives and needs you should seek help from an experienced Estate and Trust for strategies  & planning support on gift, bequest, or trusts and estate planning. The success mantra is simple “Get the Right Solutions to Right People, in the Right Way and at the Right Time”.