Trusting Up

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
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Goodman60
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Trusting Up

Post by Goodman60 »

Currently one can gift/estate transfer almost $11.4M per person. That is scheduled to rise with inflation but be cut in half after 2025. It might even happen that the tax-free amount can be legislated higher or lower.

I am wondering about "trusting up" ahead of then. Is there some sort of trust where you can gift the tree but continue to enjoy the fruit? You don't have to have $11million for this to be an issue. Even if you have "just" a few million, there is the chance that things could get changed to 1999 era levels. Those with $3million might want to gift $2M. But they also might need the income from the whole $3M. I suspect as we get closer to 2025, more will start focusing on this issue. I posted something similar to this about this a while back, but there wasn't much that came from it. Perhaps more are thinking about it now.
afan
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Re: Trusting Up

Post by afan »

You can certainly gift money to an irrevocable trust now and have it be safe from estate and gift taxes later. At least under current law, including the planned reduction in the limits in the future. Of course, the laws could change. But as it stands now this would work.

But the effective way to do this is to really, truly, no wink or nod, give the money away. You cannot then use it for yourself.

If you want to give it away for tax purposes but still have access to it then you are trading on much thinner ice. The closer you are to being able to use it for yourself, the less likely it is to avoid the taxes you are trying to get around. If you ACTUALLY use it on yourself, as opposed to merely retaining some hypothetical ability to do so that you never use, then you would have a hard time claiming that you had given it away.

People try this for asset protection purposes. They create a trust in an asset protection state or offshore and try to simultaneously claim it is not their money, while still controlling and using it. That typically works poorly for civil suits and even worse for avoiding taxes.

For civil suits part of the idea is to make it so difficult, time consuming and expensive to pursue them that the creditor is willing to settle for a lesser amount. States and the federal government have full time employees who chase tax debtors, so they have less reason to give up and settle cheap.

There are estates and trusts experts who comment on here who may have a more hopeful view.

If you have a large amount of money that you intend to give to heirs and you KNOW you will never need, then creating a trust and giving that money away now could be a good move. But you will no longer be able to spend it on yourself.
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Topic Author
Goodman60
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Joined: Mon Jun 03, 2013 8:53 pm

Re: Trusting Up

Post by Goodman60 »

Thank you for the reply. To clarify. I’m willing to give up any and all access to the trust principal forever. But I want to retain the income for life.
Last edited by Goodman60 on Mon Jan 07, 2019 5:40 pm, edited 1 time in total.
EddyB
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Re: Trusting Up

Post by EddyB »

Goodman60 wrote: Mon Jan 07, 2019 5:05 pm Thank you fir the reply. To clarify. I’m willing to give up any and all access to the trust principal forever. But I want to retain the income for life.
For an ultimately charitable purpose, that's broadly a charitable remainder trust. I don't know how the same structure is treated for a non-charitable remainderman.
bsteiner
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Re: Trusting Up

Post by bsteiner »

It will probably be a completed gift.

It will be included in your estate.

It won’t be an adjusted taxable gift so you won’t be taxed on it twice.
curmudgeon
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Re: Trusting Up

Post by curmudgeon »

Goodman60 wrote: Mon Jan 07, 2019 5:05 pm Thank you fir the reply. To clarify. I’m willing to give up any and all access to the trust principal forever. But I want to retain the income for life.
There are charitable trust options for this, but the remainder has to go to charity, not specific people. A common term is "charitable remainder trust", also sometimes referred to as CRATs or CRUTs. I looked into this at one time as a possible way of getting value out of a property with large embedded capital gains, but I didn't go down that path. These can be structured in a number of ways, but they do create some ongoing complications.
Topic Author
Goodman60
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Joined: Mon Jun 03, 2013 8:53 pm

Re: Trusting Up

Post by Goodman60 »

curmudgeon wrote: Mon Jan 07, 2019 5:27 pm
Goodman60 wrote: Mon Jan 07, 2019 5:05 pm Thank you fir the reply. To clarify. I’m willing to give up any and all access to the trust principal forever. But I want to retain the income for life.
There are charitable trust options for this, but the remainder has to go to charity, not specific people. A common term is "charitable remainder trust", also sometimes referred to as CRATs or CRUTs. I looked into this at one time as a possible way of getting value out of a property with large embedded capital gains, but I didn't go down that path. These can be structured in a number of ways, but they do create some ongoing complications.
This defeats my purpose. I don’t want it to go to charity.
smackboy1
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Re: Trusting Up

Post by smackboy1 »

Goodman60 wrote: Mon Jan 07, 2019 5:05 pmTo clarify. I’m willing to give up any and all access to the trust principal forever. But I want to retain the income for life.
You might not be able to give away your cake and eat it too, but maybe something close enough with acceptable compromises. Google the following: "grantor retained income trust" (GRIT), "grantor retained annuity trust" (GRAT), and "grantor retained unitrust" (GRUT). If you're not completely put off by the downsides, your estates & trusts lawyer can help determine if they will work for your intended purpose.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.
Iridium
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Re: Trusting Up

Post by Iridium »

As Smackboy mentioned, GRAT is similar to what you are trying to accomplish: you gift the asset, with the provision that some amount of the asset go back to you over a set number of years. After those years, the residual goes to the beneficiary. They are extremely useful for those with giant estates, as they can pass large sums while looking like they pass small sums (the government assumes a relatively modest return when computing the value of the residual, any return in excess of the assumption accrues to the beneficiary gift tax free). If you have any ongoing charitable contributions, you can replace those with a charitable lead annuity trust, which gives money to charity for some period of time before giving the residual to the beneficiary.

The problem with pretty much every trust based estate tax avoidance plan though is that while they can be extremely gift tax efficient they are income/capital gains tax inefficient. At minimum, none of these will let your assets step up in basis, in many cases, capital gains get taxed at income rates and/or charitable donations cannot be used for deductions.

As you seem to only want to shield asset growth, not the original gift, you might want to see if a family LLC would work (I am not as familiar with them; I know that LLCs can distribute in a manner inconsistent with ownership percentages, but I am not certain if it would be valid to grant 95% of the LLC to your beneficiary, collect 99% of the income, and then pretend that you only gave 5% of the value of the LLC when you pass). For any real estate, you could set up a life estate. As best I can tell, the gift is considered completed immediately at that point, even though you would retain full right to live in or rent out the property.

While some of these might be advisable if you are unmarried and expecting to have an estate larger than 5.9M real (or married and expecting double that amount), I would advise against taking action based on the possibility of the law changing in the future. As LadyGeek advises every time she closes such a thread, it is almost never a good idea as the law, even if enacted, is frequently different from what people speculate; the right move for what you speculate might be the exact wrong move for what is enacted.
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