The new American Taxpayer Relief Act (ATRA) finally provides some certainty in estate planning. For example, ATRA permanently extends a $5 million federal estate tax exemption, subject to inflation indexing ($5.43 million for 2015), while setting the top estate tax rate at 40%. As a result, you might want to examine your estate plan now to see how it can be revised to reflect the generous provisions in the law.
One possibility is to establish an irrevocable trust. You transfer assets to a trust for designated beneficiaries, such as your children, and the high current exemption amount means you’re unlikely to face dire estate or gift tax ramifications. But “irrevocable” means just that—you can’t get your money back later if you have a squabble with your kids or they make bad lifestyle choices.
Depending on your situation, one of these four alternatives could play a role in your estate plan while helping you take advantage of this year’s generous rules.
1. Self-settled trusts. Here you essentially give assets away now, using the high current exemption, but you retain the right to get at the money if you need it. Self-settled trusts are available in just a handful of states, but non-residents can transfer assets to a trustee in one of those states. The trustee decides whether an eligible beneficiary can receive a requested distribution, and assets are generally off-limits to your creditors. But the laws in this area are still evolving.
2. Trust protectors. You also might establish a trust now but design it to have a third-party protector—such as an experienced relative—who oversees the professional trustee and can remove a beneficiary, veto distributions, amend trust terms, or shift the trust to another state. You also can form committees to make key decisions.
3. Grantor trusts. Make sure that any trust you create is designated as a grantor trust. As grantor, you’ll pay any tax on annual trust income, and those payments won’t be treated as gifts now or in future years. One sophisticated version is the “intentionally defective irrevocable trust” (IDIT), purposely designed to be treated as a grantor trust while freezing the value of assets for estate tax purposes.
4. Spousal beneficiaries. A simpler way to keep access to money while taking advantage of current tax rules is to create a traditional trust and designate your spouse as a “discretionary beneficiary.” The trust can be structured to allow occasional distributions to your spouse, who could establish a separate trust for you. But you’ll have to do this carefully so the trusts won’t be considered reciprocal.
Bear in mind that this is only a brief overview of four gift tax ideas. Obtain more details for your situation.