Trusts for Tax Savings and Estate Planning
TrustCounsel’s North Carolina, New York, Florida and Tennessee estate planning lawyers help form and administer trusts so that individuals can save taxes and protect their assets. Tax-saving trusts are important tools in estate planning that grant unique advantages to protect assets. Our estate planning lawyers provide a brief outline of a couple of types of trusts and the tax savings they offer below:
Irrevocable Life Insurance Trust
Life insurance is a special asset in that it serves diverse functions in a tax-favored environment. Life insurance proceeds are received income tax-free and, if properly owned by an Irrevocable Life Insurance Trust (ILIT), life insurance proceeds can also be received free of estate tax.
An Irrevocable Life Insurance Trust is one of the most popular wealth planning devices. It is a trust designed to own life insurance policies. You gift funds to the trust periodically and the trustee uses the funds to pay premiums on the life insurance policy. Additional benefits of ILITs:
- Make current gifts to family
- Accumulate assets outside the client's taxable estate
- Protect assets from creditor claims
- Avoid income tax on the accumulation of funds
- Avoid estate tax upon the distribution of funds to the family
- Create a source of liquidity to cover estate taxes or expenses
Replace assets that may have been given to charity
Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust ('GRAT') is a type of trust specifically authorized by regulations interpreting the Internal Revenue Code. This type of irrevocable trust permits you to make a lifetime gift of assets to an irrevocable trust in exchange for a fixed payment stream for a specified term of years.
At the end of the term of years, the balance of the trust property (the 'remainder interest') is transferred to the beneficiaries of your choice, typically children or grandchildren. The Grantor Retained Annuity Trust reduces estate taxes by removing assets from those that are counted in your estate for estate tax purposes.
The gift for federal gift tax purposes is based upon IRS published interest rates at the time of the transfer. This rate does not take into consideration any future appreciation in the value of the property and therefore you can reduce the value of the gift to as low as zero. The Grantor Retained Annuity Trust is particularly suited for assets that are expected to grow rapidly in value and property subject to discounts, such as interests in closely held businesses or limited liability companies.
During the term of years of the trust you must be paid a fixed amount annually or more frequently (for example, quarterly). The term of years and the amount of the payment are fixed at the time you create the trust (determined by you with the assistance of your legal and financial advisors).
During the term of years of the trust you can be the sole trustee or a co-trustee of the trust with complete control over all decisions of the trust and the assets in the trust.
Because the Grantor Retained Annuity Trust is a 'grantor trust' under the income tax laws, during the initial term of years you are treated as the owner of the property for income tax purposes. Therefore, all items of income, gain, loss and deduction with respect to the Grantor Retained Annuity Trust are treated on your personal income tax return.
If the grantor passes away during the term of years, the property in Grantor Retained Annuity Trust will be counted in their estate for estate tax purposes, but they will be no worse off than had they not created the trust.