Can you provide an example of how you've used trusts to address a client's estate tax concerns?

Question

When it comes to navigating the complexities of estate taxes, professionals like an experienced Attorney employ strategic tools such as trusts to provide tailored solutions. Alongside expert advice, we've gathered additional answers that highlight a variety of trust structures used to mitigate tax concerns. From leveraging a Family Partnership for estate tax savings to utilizing an Insurance Trust to exclude payouts from estate taxes, here are six insightful strategies.

David Fritch · Answer

As an estate planning attorney, I often use trusts to minimize taxes for high-net-worth clients. For one client with commercial real estate and investments worth over $50 million, I established a family limited partnership, allowing the client to gift partnership interests to family at a discounted value, saving over $10 million in estate and gift taxes. 
For another client with $20 million in assets, an irrevocable life insurance trust (ILIT) enabled removing over $1 million from the taxable estate over 10 years by gifting the maximum amount each year. The ILIT then purchased a $10 million life insurance policy, the proceeds of which passed to beneficiaries tax-free upon the client’s death, transferring nearly $11 million total and saving $4 million in estate taxes.
A charitable remainder trust for a client with highly appreciated assets like real estate allowed donating to the trust, selling assets tax-free, providing the client income for life, then passing the remainder to charity. This avoided $500,000 in capital gains taxes, provided the client an income stream and tax deduction, and allowed transferring proceeds from a life insurance policy purchased at a lower cost due to tax savings.
The key is finding solutions tailored to each client's needs and objectives. Trusts can provide significant tax savings when customized for a client's unique circumstances.

Answer

Utilizing an irrevocable trust is advantageous for those looking to mitigate estate taxes because it places assets outside of the estate's taxable purview. Once assets are transferred into this type of trust, they are no longer owned by the grantor, which is why they're not considered part of the taxable estate upon the death of the grantor. The control over these assets is handed over to a trustee, who manages them for the benefit of named beneficiaries.
Since the assets can't be reclaimed, they're effectively removed from the estate's value, thus reducing potential estate taxes. If setting up an irrevocable trust seems like a strategy that might benefit your situation, consult a trust attorney to explore your options.

Answer

Creating a lifetime gift trust is a strategic move to decrease the size of an estate before taxes come into play. By transferring property into a trust and designating it as a gift, individuals can take advantage of the annual gift tax exclusion. This practice gradually reduces the value of the estate while avoiding gift taxes within the allowed limits.
Over time, as the estate diminishes in size, the potential estate tax is lessened upon the individual's passing. People who wish to begin the process of estate reduction should consider speaking with an estate planning professional to better understand how a lifetime gift trust could serve their specific needs.

Answer

Establishing a charitable lead trust can serve a dual purpose: reducing the size of a taxable estate and supporting cherished non-profit organizations. Under this arrangement, a portion of the trust's income is regularly donated to a designated charity, which can provide immediate tax benefits. At the same time, the remainder of the trust can be passed on to the beneficiaries with reduced or potentially zero estate tax impact due to the charitable donations made during the trust's term.
This approach not only maximizes the financial legacy left to heirs but also achieves philanthropic goals. For those interested in leaving a lasting legacy while also securing tax advantages, a charitable lead trust might be an avenue worth discussing with an estate planner.

Answer

A dynasty trust is an estate planning tool tailored to protect wealth for multiple generations against estate taxes. By placing assets within a dynasty trust, they may be distributed to grandchildren and beyond without incurring generation-skipping transfer taxes or estate taxes at each generational transfer. This type of trust has the potential to preserve family wealth over a much longer period compared to direct inheritance methods.
It can also set conditions on how the wealth is used by beneficiaries, helping to ensure that it is managed in accordance with the grantor's wishes. Those with a desire to protect their wealth for future generations should seek advice from a legal expert in trust and estate planning to learn about the possibilities offered by dynasty trusts.

Answer

Insurance trusts are an effective means of ensuring that life insurance payouts are not subject to estate taxes. By holding a life insurance policy within such a trust, the death benefit paid out can be free from being counted as part of an individual's taxable estate. This means a larger portion of the assets can be handed down directly to beneficiaries without being diminished by taxes.
It requires designating a trustee to oversee the policy and ensuring policy premium payments are managed within the trust. If you're looking to safeguard your life insurance benefits for your beneficiaries, consider setting up a meeting with a financial advisor to discuss the establishment of an insurance trust.

What Are Examples of Using Trusts to Address Estate Tax Concerns?

What Are Examples of Using Trusts to Address Estate Tax Concerns?

Family Partnership for Estate Tax Savings

Irrevocable Trust Reduces Taxable Estate

Lifetime Gift Trust Lowers Estate Size

Charitable Lead Trust for Legacy and Tax Benefit

Dynasty Trust Shields Generational Wealth

Insurance Trust Excludes Payout from Estate Taxes