Tax Reform can be uneasy, especially in this era. Many people are expecting President Trump to restructure taxes, and possibly change gift and estate tax rules. However, nothing is set in stone, which is creating anxiety for many citizens, especially those who are nearing retirement or are currently retired. The uncertainty about the Republican tax proposal, including a replacement tax on the wealthy, places a high importance of flexibility in preparing an estate plan and taking advantage of wealth transfer techniques suited to the current economic, and political, environment. In the event of tax legislation passing, the rules will likely continue to change, making it critical to keep up with tools available to protect your wealth. Currently, there are many preemptive measures to protect your wealth that one can take to prepare for such actions.
Gifting is a powerful way to minimize income taxes, due to the annual gift exclusion, as well as the lifetime exemption gift. Currently, the maximum annual gift exclusion is $14,000 per recipient. Taking advantage of this opportunity in early 2017 will maximize the potential appreciation on this year’s gift before 2018 gifts can be made. Additionally, considering gifting to trusts is beneficial, as it will protect your cash and investments that were gifted from lawsuits and other unexpected events. This allows the donor flexibility to control and access the funds held in trust.
For the same reason, the lifetime gift is a valuable tool. Currently, the lifetime gift exemption is set at $5.49 million. Larger gifts can provide greater potential for transferring wealth due to more assets available for investment, which then consequently compound in value. Using an irrevocable trust as a funding vehicle is one of the most powerful means of ensuring a legacy of wealth for your family’s future generations.
A Family Limited Partnership (FLP) is a very practical tax minimization strategy. This approach creates a vehicle for centralizing family investments while providing asset protection. The benefit of establishing a partnership and funding it with assets is that the strategy affords the opportunity for discounts on wealth transfers to family members. The structure of the partnership segregates ownership between general partners who control all management of the partnership and limited partners who only have a right to receive its profit, but little other rights in operating the partnership. This allows the underlying assets to be shifted without depleting nearly as much of your lifetime gift exemption, resulting in immediate estate tax savings upon the completion of the gift, and preserving the exemption for future wealth transfers.
Many people choose to gift to charity for multiple reasons. One way to do this is to create a Charitable Remainder Trust, or CRT. By creating a CRT, the creator will retain the right to receive a fixed amount of the trust’s assets each year. After the term of years of the CRT, (or creator’s life), the balance of the CRT assets passes to said charity. Since the Charitable Remainder Trust is tax exempt, the sale of the assets within the CRT do not realize capital gains. Many times, those who create CRTs pair this with life insurance so that the proceeds of the insurance coverage replace the wealth passing to the charities, which would have otherwise been distributed to the family members.