Is a Defect a Good Thing? Intentionally Defective Grantor Trusts in Estate Planning

The notion that your estate plan contains a defect would not normally be welcomed as good news. But despite the moniker, an intentionally defective grantor trust (IDGT) can be an advantageous tool for minimizing estate taxes and maximizing the money and property that are passed on to a spouse, descendants, or other beneficiaries.

The defect in this case refers to trust provisions that make the grantor (the person creating the trust)—not the trust—the trust owner and therefore liable for trust income taxes. By not having annual income taxes come directly out of the trust’s money and property, more value remains for beneficiaries. Further, the appreciation of accounts and property is excluded from the trust owner’s taxable estate.

How an Intentionally Defective Grantor Trust Works

Typically used by wealthy families to preserve intergenerational wealth, IDGTs are a type of irrevocable trust best suited to holding appreciating assets, such as real estate and securities.

These assets are held outside of the grantor’s estate for transfer tax purposes (gift and estate tax), but for federal income tax purposes, they are treated as though they are owned by the grantor. Thus, the grantor pays income tax on the appreciation of the assets placed in the trust, but the appreciation of those assets is excluded from the grantor’s estate, which amounts to a tax-free gift to the trust. In other words, once the assets are placed in the trust, their value is effectively frozen. Any appreciation that occurs does so outside of the grantor’s estate.

The “defective” part of this arrangement is the intentional inclusion of a right of power that results in the grantor being treated as the trust owner from an […]

2023-02-25T13:06:37-08:00December 7th, 2022|Asset Protection Trusts, Estate Planning, Gifts, Trusts|

Legal Perils of Gifts and Joint Ownership between Unmarried Couples

Cohabitation without marriage is becoming more common in the United States. Among eighteen- to forty-four-year-olds, the percentage of adults who have lived with an unmarried partner at some point is now higher than the percentage of adults who have been married.

When you live with a romantic partner, it may feel as though you share everything. And to some extent, this may be true, legally speaking. For example, there is a trend toward unmarried couples buying homes together. While this might make economic sense, especially at a time when household budgets are being stretched, it can also create legal complications.

Gifts that are given purely out of affection can create unintended consequences as well. This includes gift taxes and the relinquishing of control over the gift once it is accepted. Your heart might be in the right place, but without understanding gifts and joint ownership, you could be making a decision that you will come to regret.

Unmarried Partners and Cohabitation: A New Norm

Decades ago, it was rare—and even scandalous—for unmarried couples to live together. However, like many aspects of American life, this is changing.

Over the last two decades, the number of unmarried partners living together has almost tripled from 6 million to 17 million.[1] Among young adults ages eighteen to twenty-four, cohabitation is now more common than living with a spouse.[2] Among adults ages eighteen to forty-four, 59 percent have cohabitated as compared to 50 percent who have ever been married. Since 2002, the share of U.S. adults who are married is down. Over the same period, the share of adults living with an unmarried partner has more than doubled.

Can I Give My Kids $15,000 a Year?

Chambliss: “If you have it to give, you certainly can, but there may be consequences should you apply for Medicaid long-term care coverage within five years after each gift. The $15,000 figure is the amount of the current gift tax exclusion (for 2018), meaning that any person who gives away $15,000 or less to any one individual in one particular year does not have to report the gift to the IRS, and you can give this amount to as many people as you like. If you give away more than $15,000 to any one person in a single year (other than your spouse), you will have to file a gift tax return. However, this does not necessarily mean you’ll pay a gift tax. You’ll have to pay a tax only if your reportable gifts total more than $11.18 million (2018 figure) during your lifetime.”

2018-11-06T14:21:14-08:00November 9th, 2018|Estate Planning, Estate Tax, Gifts, Trusts|

You’ve won the Mega Millions jackpot! Time to hide.

The Washington Post:  “First things first: Quadruple-check your ticket after Tuesday’s Mega Millions drawing. Then do it again. Do they match the winning numbers (5-28-62-65-70, with a Mega Ball number of 5)? No? Skip to here. Yes? Lock the deadbolt and read on. Congratulations! So, you’ve done it. Beaten the odds — one in 302,575,350 — and won the largest Mega Millions jackpot in history. And it’s yours alone, so you’re almost certainly about to enjoy an astronomical spike in wealth. Now what? Before you shout from the rooftops or broadcast your excitement on social media, take a deep breath and keep some practical advice in mind. To sign or not to sign the back of the lottery ticket? There are plenty of people who will advise you to sign the back of the lottery ticket right away — including lottery officials in South Carolina, where Tuesday’s winning ticket was sold. After all, what would happen if, heaven forbid, you lost the ticket? Or worse yet, if an unscrupulous person in your life took the unsigned ticket and claimed it as his or hers?”

2018-10-29T15:20:43-07:00November 1st, 2018|Estate Planning, Estate Planning for Singles, Estate Tax, Gifts|

What Happens to Your Points and Miles After You Die?

The Points Guy:  “On Friday, it was revealed that celebrated chef and traveler Anthony Bourdain left his “accumulated frequent flyer miles” to his wife Ottavia Busia. They separated in 2016, but the divorce was not yet finalized upon Bourdain’s death, meaning she will still serve as executor of the estate. Bourdain’s estate was valued at $1.2 million, considerably smaller than you might anticipate given his appearances across current pop culture, though apparently he had additional assets in trust. But his will brings up the question of whether you’re allowed to gift property that technically isn’t yours, which is what airline points and miles are according the vast majority of loyalty program terms and conditions.”

2018-07-09T11:00:12-07:00July 9th, 2018|Estate Planning, Gifts|

96-Year-Old Secretary Quietly Amasses Fortune, Then Donates Majority to Charity

The New York Times:  “Sylvia Bloom worked in the same law firm in Brooklyn for 67 years as a legal secretary. She retired in 2016 at the ripe old age of 96 and passed away shortly afterwards. It was not until her niece and executrix, Jane Lockshin, was settling her account when Ms. Bloom’s big secret was revealed – she was a multi-millionaire. The secretary simply watched the investments the attorneys were making and made similar ones, albeit in smaller amounts. But they added up!”

This Time Is Different: You Really Do Need to Update Your Will and Durable Power of Attorney

Davis Wright Tremaine LLPP: “With the advent of higher exemptions with respect to the Federal Gift, Estate, and Generation-Skipping Transfer Tax passed last December (referred to as the 2017 Tax Act), it really is necessary to review your estate tax planning and it would also be a good time to review your durable power of attorney in light of the recent adoption of the Washington Uniform Power of Attorney Act, effective January 1, 2017.”

2018-01-31T08:08:19-08:00January 31st, 2018|Estate Planning, Estate Tax, Gifts, Powers of Attorney, Trusts, Wills|

Estate Planning Opportunities and Considerations Beginning in 2018

Schulte Roth & Zabel LLP:  “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (“Act”) was enacted in December 2017 and implements a wide range of changes to existing tax laws. The Act temporarily increases (from Jan. 1, 2018 until Dec. 31, 2025) the federal estate, gift and GST tax exemption amounts from $5.6 million to approximately $11.2 million.”

Woman Leaves $50,000 to Her Nail Technician, Hairstylist & Doorman

Daily Mail:  “A wealthy heiress from New York City bequeathed thousands of dollars to her hairdresser, housekeeper, doorman and nail technician after she died of natural causes. Kaaren Parker Gray, 72, died of a heart attack on August 24 in her Upper East Side home, less three weeks after she wrote ten-page handwritten will without a witness. Since then, the people who she employed to help her get through her daily life have received handwritten letters explaining the funds she has bestowed upon them.”

2015-09-26T17:02:30-07:00September 26th, 2015|Gifts, Wills|

The Basics of Charitable Remainder Trusts

National Law Review:  “Planning on making a large gift to charity? Rather than making a gift outright, it might beneficial to consult an attorney and set up a charitable remainder trust, an instrument that allows you to donate to charity while still receiving income from the property, as well as providing tax breaks to the settlor and settlor's heirs. These types of trusts can be a crucial element of an estate or financial plan, especially if you are considering making large charitable gifts.”

2016-12-13T20:33:26-08:00March 6th, 2015|Estate Planning, Gifts, Giving to Charity|

An Estate Planning Checklist to Facilitate Wealth Transfer

Studies have shown that 70% of family wealth is lost by the end of the second generation and 90% by the end of the third.

Help your loved ones avoid becoming one of these statistics. You need to educate and update your heirs about your wealth transfer goals and the plan you have put in place to achieve these goals.

What Must You Communicate to Future Generations to Facilitate Transfer of Your Wealth?

You must communicate the following information to your family to ensure that they will have the information they need during a difficult time:

  • Net worth statement, or at the very minimum a broad overview of your wealth
  • Final wishes – burial or cremation, memorial services
  • Estate planning documents that have been created and what purpose they serve:
    • Durable Power of Attorney, Health Care Directive, Living Will – property management; avoiding guardianship; clarifying wishes regarding life-sustaining procedures
    • Revocable Living Trust – avoiding guardianship; keeping final wishes private; avoiding probate; minimizing delays, costs and bureaucracy
    • Last Will and Testament – a catch-all for assets not transferred into your Revocable Living Trust prior to death, or the primary means to transfer your wealth if you are not using a Revocable Living Trust
    • Irrevocable Life Insurance Trust – removing life insurance from your taxable estate; providing immediate access to cash
    • Advanced Estate Planning – protecting assets from creditors, predators, outside influences, and ex-spouses; charitable giving; minimizing taxes; creating dynasty trusts
  • Who will be in charge if you become incapacitated or die – agent named in your Durable Power of Attorney and Health Care Directive; successor trustee of your Revocable Living Trust and other trusts you’ve created; personal representative named in your will
    2016-12-13T20:33:27-08:00November 18th, 2014|Beneficiaries, Estate Planning, Gifts, Probate, Trusts, Wills|

    Reduce Your Estate By Giving To Charity

    The Street: “Individuals looking for a simple and effective way to reduce their future taxable estate should consider the annual gift exclusion.

    What is the annual gift exclusion and how does it work?

    Every U.S. citizen is allowed to give anyone $13,000 (2012 level) a year without incurring either a gift tax liability or gift tax reporting. Married couples are allowed a further benefit which allows them to split their gifts. In essence, a married couple can give any individual up to $26,000 per year. Married couples who make split gifts do have a reporting requirement. They must file IRS Form 709 on which they report their split gift.

    The humble annual gift exclusion can be an effective way to transfer wealth without using any of an individual's lifetime gift exclusion or estate exemption (both currently $5.12 million in 2012).”

    2012-07-09T15:25:23-07:00July 9th, 2012|Estate Planning, Gifts, Giving to Charity|

    Be Ready For Tax Cuts To End “The end is near. The end of the Bush tax cuts that is. Are you ready?

    The current tax code allows an estate to pass $5 million per person, $10 million per married couple, tax free. Over that the tax rate is 35 percent. The last time the tax rate was this low was 1931, and moved to 45 percent the next year as a means of coping with the Great Depression, and was as high as 77 percent from 1942 until 1976. But on Dec. 31, 2012, the Bush tax cuts automatically revert back to 2001 levels of $1 million exemption and 55 percent for anything above that.

    Yes, the government can change this law. And it may seem more likely with a Republican in office. But House Republican Scott Rigell is actually looking to increase total tax revenues from 16.9 percent to 20 percent of GDP if coupled with a spending reduction from 24 percent to 20 percent, according to Joel Klein at Time Magazine. With the current U.S. debt-to-GDP ratio at 93.2 percent, higher than it has been since World War II when an extraordinary amount of money was being spent, and also on the rise, do you think the exemption will remain so generous and the tax rates so low? Are you willing to bet the gridlock in Washington will end? Are you willing to bet your family business?”

    2017-10-07T11:15:26-07:00July 9th, 2012|Estate Tax, Gifts|

    Wealthy Americans Must Act Now To Take Advantage Of Gift Tax Exemption

    CNBC:  “If you're a wealthy American who's planning to hire an estate or trust attorney later this year, here's a thought: Good luck. You're going to need it.

    That's because the transit of Venus of estate planning is passing through, and by the New Year it is likely to be gone.

    It's the lifetime gift-tax exemption of $5.12 million, paired with a similar estate-tax exemption. And it means that through the rest of this year, parents can pass along assets valued up to that amount to their heirs – maybe a house, maybe a stock portfolio, maybe part of the family business – without paying a single penny to Uncle Sam.”

    2017-10-07T11:14:47-07:00June 13th, 2012|Estate Planning, Estate Tax, Gifts, Tax Planning|

    Gifting Ideas for Grandparents

    Wicked Local Dedham:  “Graduation season is as proud a time for grandparents as it is for parents.

    Grandparents, especially this year, can take special pride by helping their grandchildren pay for college. And by “gifting” grandchildren money for college, they can get a gift in return. In addition to the satisfaction of helping their children and grandchildren, they can also qualify for a significant tax break.

    Helping your grandchildren pay for their college education may be the best gift you can give them. As the price of college continues to increase, more students and parents are borrowing to pay the cost. They’ll do what it takes to pay for college, as a college education is required for practically any well-paying job today.

    But the higher salary college grads earn is often offset by the need to pay off student loans. With U.S. student loans totaling more than $1 trillion today, many college graduates begin their careers heavily in debt and find it difficult to pay it off. Those who graduate from college debt-free begin their careers with a huge financial advantage.

    So what better gift can grandparents provide to their grandchildren than to help fund their college education?”

    2012-05-30T11:27:31-07:00May 30th, 2012|Estate Planning, Gifts|
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