Intentionally Defective Grantor Trust to avoid estate tax limit?

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Boston Barry
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Intentionally Defective Grantor Trust to avoid estate tax limit?

Post by Boston Barry » Fri Oct 13, 2017 12:12 am

I am looking for some advice regarding a potential parental gift. My (fairly elderly) mother met with an estate planner. She then contacted my brother and me and told us she wanted to gift a sizeable amount of money to us in a trust. Her understanding was that it would be a single trust but with assets separated for each of us equally (?). We would have access to the funds, and the reasons she said it would be set up in a trust were (a) to avoid taxes, as it would not count against lifetime allowable tax-free gift money; and (b) it would not be susceptible to creditors or in case of divorce. My brother and I are each just under 50 years old.

This does not seem right and I worry that the estate planner is benefitting from such an arrangement. If setting up a trust allowed avoidance of estate / gift taxes, why would the estate / inheritance laws matter at all? Everyone would just set up a trust and then immediately withdraw the money, no?

Does anyone have any thoughts on this? I am trying to find out more information / speak to this estate planner but it sounds a bit fishy to me and my brother.
Last edited by Boston Barry on Sat Oct 14, 2017 6:16 am, edited 1 time in total.

AlohaJoe
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Re: Trust to avoid estate tax limit?

Post by AlohaJoe » Fri Oct 13, 2017 12:52 am

I typed "how do trusts avoid inheritance taxes" into Google and found quite a few articles explaining how it works.

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FIREchief
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Re: Trust to avoid estate tax limit?

Post by FIREchief » Fri Oct 13, 2017 3:24 am

I will be interested in hearing from the experts.

My understanding is that gifts to an irrevocable trust count against the lifetime exclusion, so that they only avoid estate/gift taxes to the extent that they place growth in tax liability into the trust (at the expense of loss of step up basis). If I am wrong, please clarify!! :beer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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MrGreen
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Re: Trust to avoid estate tax limit?

Post by MrGreen » Fri Oct 13, 2017 5:57 am

Did the OP’s father have a will that set up this trust?

Jack FFR1846
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Re: Trust to avoid estate tax limit?

Post by Jack FFR1846 » Fri Oct 13, 2017 7:47 am

How much is she looking to gift? What is the state limit for inheritance tax free?

This seems to constantly be a topic based on incorrect knowledge. I have been hearing for years from the previous generation in our family how schemes need to be set up or the government is going to take all the money when one passes. We're talking well under $100k net worth estates.

If you're really talking over $11MM, then sure, they might want to structure some trusts. If not, why not do the simple $14k limit gifting each year for the foreseeable future. Are you and your brother married? Kids? Each gifting person (husband and wife) can give each person $14k a year without eating into the lifetime gifting tax free limit. Since I don't know, I'll say that you and your brother each are married, each with 2 kids. We're talking $112k each year, sticking with the $14k limit. If kids are in college, they can also directly pay college costs, not counting as a gift.

Trusts aren't cheap to set up and keep running.
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JW-Retired
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Re: Trust to avoid estate tax limit?

Post by JW-Retired » Fri Oct 13, 2017 8:33 am

Jack FFR1846 wrote:
Fri Oct 13, 2017 7:47 am
Trusts aren't cheap to set up and keep running.
Yes, and IMO the total lack of information on estate size from the OP is a pretty strong hint mom is being sold something she doesn't need.
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LarryAllen
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Re: Trust to avoid estate tax limit?

Post by LarryAllen » Fri Oct 13, 2017 8:45 am

Jack FFR1846 wrote:
Fri Oct 13, 2017 7:47 am
Trusts aren't cheap to set up and keep running.
Should be no costs to keep running. If you need to make changes you would amend it the same as if you have a will but no costs to having a trust. [OT comment removed by admin LadyGeek] Also, trusts are not expensive compared to the money they save people at death or disability. [OT comment removed by admin LadyGeek]

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Re: Trust to avoid estate tax limit?

Post by LarryAllen » Fri Oct 13, 2017 8:48 am

Boston Barry wrote:
Fri Oct 13, 2017 12:12 am
I am looking for some advice regarding a potential parental gift. My (fairly elderly) mother met with an estate planner. She then contacted my brother and me and told us she wanted to gift a sizeable amount of money to us in a trust. Her understanding was that it would be a single trust but with assets separated for each of us equally (?). We would have access to the funds, and the reasons she said it would be set up in a trust were (a) to avoid taxes, as it would not count against lifetime allowable tax-free gift money; and (b) it would not be susceptible to creditors or in case of divorce. My brother and I are each just under 50 years old.

This does not seem right and I worry that the estate planner is benefitting from such an arrangement. If setting up a trust allowed avoidance of estate / gift taxes, why would the estate / inheritance laws matter at all? Everyone would just set up a trust and then immediately withdraw the money, no?

Does anyone have any thoughts on this? I am trying to find out more information / speak to this estate planner but it sounds a bit fishy to me and my brother.
Hard to know with out the facts. It's possible (but not always adviseable for elderly person with appreciated assets) that the thought is to gift $5.5m into trust (tax free) to get the future growth out of mom's estate. Again, being elderly this is not generally a great plan. The $5.5m would be out of her estate but she then has no more money to give at death. The only reason this would be adviseable if the gift were in conjunction with some plan that would maximize the gift such as a family limited partnership. With an FLP one could give $7m or $8m into the trust for you but only use the $5.5m exemption. That's possible. More likely the attorney suggested a continuing trust for you and your brother's benefits, after mom's death, that will not be included in YOUR estate when you die. That's possible. A generation skipping trust by name. Way too hard to know with the info given. I would want to hear from mom's attorney what is actually being proposed as the telephone game might be at play here.

Boston Barry
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Re: Trust to avoid estate tax limit?

Post by Boston Barry » Fri Oct 13, 2017 9:32 am

Thank you for all the weighing in.

Brother not married.

I am married / 2 children.

Grandmother recently died and left money to our mother, who wishes to pass along about $1M / each while not having this count against the lifetime gift tax, if possible.

Our mother, for whatever reason, has always been somewhat enamoured of trusts, maybe to control the situation. Maybe because she has reservations about my spouse (married 22 years) / my brothers girlfriend (together for 10 years).

Both our mother and father still living.

Their estate will be > 11M though I am not exactly sure by how much.

I am trying to find out if indeed she is being given poor advice / costly maneuver or if in fact a trust would be of help. The way she explained it on the phone to me, "all you have to do is ask for some money when you want it" and it would be distributed, and avoid tax. This can't be correct. I read online but very confusing information to this layperson.

Blueskies123
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Re: Trust to avoid estate tax limit?

Post by Blueskies123 » Fri Oct 13, 2017 9:42 am

There are trusts that freeze the estate value as of the trust date. They are expensive to set up and generally on set up for millions. Taxes will have to paid by the trust but based on today’s value not the future value.
FIRE July 2015 The US government spends nearly the ENTIRETY of its tax revenue on Social Security, Medicare, and Interest on the Debt.

pshonore
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Re: Trust to avoid estate tax limit?

Post by pshonore » Fri Oct 13, 2017 9:42 am

LarryAllen wrote:
Fri Oct 13, 2017 8:45 am
Jack FFR1846 wrote:
Fri Oct 13, 2017 7:47 am
Trusts aren't cheap to set up and keep running.
Should be no costs to keep running. If you need to make changes you would amend it the same as if you have a will but no costs to having a trust. [OT comment removed by admin LadyGeek] Also, trusts are not expensive compared to the money they save people at death or disability. [OT comment removed by admin LadyGeek]
Most trusts except for RLTs will require a trust tax return if there is any income. The more complex, the more the return will cost.

JW-Retired
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Re: Trust to avoid estate tax limit?

Post by JW-Retired » Fri Oct 13, 2017 9:46 am

Given the large size of the estate I take my previous comment back. Your Mom might be on the right track.
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NotWhoYouThink
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Re: Trust to avoid estate tax limit?

Post by NotWhoYouThink » Fri Oct 13, 2017 9:53 am

Whose estate? Giving a large ($1M?) gift to you won't take the money out of your mother's estate. It might take future earnings on that money out of her estate. It might keep the $1M out of your estate.

Maybe it's a good idea, maybe not. If she likes control, and not sure whether she trusts the people you and your sibling are involved with, then she will likely leave money to you in trust.

Sometimes lawyers have a "trust me, this is a good thing for you" attitude. And maybe they are right. And asking them to explain it over and over until you get it is expensive, because they charge by the hour. But it's good to think it through before making a decision.

mxs
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Re: Trust to avoid estate tax limit?

Post by mxs » Fri Oct 13, 2017 9:57 am

So 14k/year times somewhere between 2 (you and your brother) and 6 (you, your brother, your spouse, your two children, and your brother's girlfriend) can be given out now.

That is 28k to 84k per year, or 280k to 840k in ten years.

If your father has access to the funds, he can likewise gift money making it 56k to 168k per year, or 560k to 1.6mil in ten years.

That probably isn't enough to make a sizeable dent in the estate (I am assuming more of 14k x 2 instead of 14k x 6, but with father it could be 28k x 2 to 28k x 6), but if it were me I would rather see people enjoy the money while alive than hope they enjoy it while I am gone.

With father dispersing gifts, it could be enough to make a dent in estate.

In any circumstance, I would do the above before anything else.

As for avoiding estate taxes, I don't know.

*Edited above to include possibility of father also dispersing funds.*

Boston Barry
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Re: Trust to avoid estate tax limit?

Post by Boston Barry » Fri Oct 13, 2017 11:29 am

This is the OP again, the type of trust being proposed is in "intentionally defective grantor trust". Is anyone on this board have any knowledge or experience with such an entity? Thanks again

mxs
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Re: Trust to avoid estate tax limit?

Post by mxs » Fri Oct 13, 2017 2:55 pm

http://www.investopedia.com/terms/i/igdt.asp

Sounds good in theory, no idea of how well they work in practice.

Fees and expenses, along with what the money is invested in for the mean time, will be a very big consideration.

NotWhoYouThink
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Re: Trust to avoid estate tax limit?

Post by NotWhoYouThink » Fri Oct 13, 2017 3:37 pm

You can enter "IDGT" or "defective trust" in the search bar on this forum to get a start on what the experts here have to say about that.

edited to add:

Here's one from Gill from 2015. Sounds like taking the money out of the estate can have some interesting tax consequences. Whether that is a good thing for you and your mother I couldn't say. Maybe bond funds are good to put in there because they don't have large capital gains, and the grantor will be paying the taxes along the way. Growth stocks might not be such good choices. Or maybe there is some other way to look at it.
If it is a grantor trust for estate tax purposes you receive a new basis at the death of the grantor. If it's not included in the grantor's estate no step up is available.
Gill

LarryAllen
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Re: Trust to avoid estate tax limit?

Post by LarryAllen » Fri Oct 13, 2017 6:29 pm

pshonore wrote:
Fri Oct 13, 2017 9:42 am
LarryAllen wrote:
Fri Oct 13, 2017 8:45 am
Jack FFR1846 wrote:
Fri Oct 13, 2017 7:47 am
Trusts aren't cheap to set up and keep running.
Should be no costs to keep running. If you need to make changes you would amend it the same as if you have a will but no costs to having a trust. [OT comment removed by admin LadyGeek] Also, trusts are not expensive compared to the money they save people at death or disability. [OT comment removed by admin LadyGeek]
Most trusts except for RLTs will require a trust tax return if there is any income. The more complex, the more the return will cost.
You are talking about after death or if the income is retained. Any trust that retains the income is probably either a large estate and/or the beneficiary is irresponsible. Thus the cost of a tax return is irrelevant. Don't let that penny on the ground kick you in the butt. Look at the big picture!

afan
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Re: Trust to avoid estate tax limit?

Post by afan » Fri Oct 13, 2017 7:31 pm

There is no reason a trust need have complicated investments. It could have a simple portfolio of 2-4 funds, with one brokerage statement covering the entire trust. You could easily do the tax return yourself. If you hired someone to do it for you it should not be expensive.

Whether to distribute the income or keep it in trust would depend on the tax rates for the trust and the beneficiary and on the importance of making the trust assets as large as possible. Sometimes it might make more sense to keep most or all of the money in the trust even if that pushes up the income taxes. Depends on the goals and circumstances of the beneficiary.
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Gill
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Re: Trust to avoid estate tax limit?

Post by Gill » Fri Oct 13, 2017 7:33 pm

Bsteiner has frequently discussed intentionally defective grantor trusts on this forum. Basically it is an irrevocable trust for estate tax purposes but is treated as a grantor trust for income tax purposes. The effect of this is that, even though the grantor has moved the assets from his estate, they are paying tax on the income, thereby in effect making additional gifts to the trust beneficiaries without the payments being treated as taxable gifts. Whether such a trust is appropriate here, there aren’t enough facts to express an opinion.
Gill

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FIREchief
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Re: Trust to avoid estate tax limit?

Post by FIREchief » Fri Oct 13, 2017 10:50 pm

Gill wrote:
Fri Oct 13, 2017 7:33 pm
Bsteiner has frequently discussed intentionally defective grantor trusts on this forum. Basically it is an irrevocable trust for estate tax purposes but is treated as a grantor trust for income tax purposes. The effect of this is that, even though the grantor has moved the assets from his estate, they are paying tax on the income, thereby in effect making additional gifts to the trust beneficiaries without the payments being treated as taxable gifts. Whether such a trust is appropriate here, there aren’t enough facts to express an opinion.
Gill
I believe there is also an option to work around the loss of step up basis. The IDGT can allow the Grantor to exchange assets of equal value between his individual holdings and the trust's assets. IOW, ten years into the trust, the Grantor could exchange recent investments, with low capital gains, for highly appreciated assets within the trust. The new trust assets will still lose step up upon death, but it is a much smaller loss. (see my signature)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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