Under the new Biden administration, the president has made his intentions clear about the potential to change the tax code.
I believe tax increases are forthcoming; he’s already stated his position on income taxes and capital gains taxes as well as estate tax exemption amounts. These factors should motivate many people to explore their options.
What should you do regarding estate planning?
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There are various types of planning strategies today that make a lot of sense and that people should think about implementing before the tax laws change. Try to do the planning now because the planning opportunities today are very favorable, especially if you have assets you intend to gift in the future.
The question is, where are you going to gift them?
The problem with outright gifts
Estate taxes are due upon the deaths of Mom and Dad when assets are ultimately transferred to the children or grandchildren. In most circumstances, assets are transferred outright, free of trust, which means the assets are distributed free and clear from all oversight and directly to the beneficiary. A check is made payable to the beneficiary or assets are titled in the beneficiary's name, and the beneficiary does as he or she wants with the inheritance.
The problem is if you transfer assets outright, you are exposing those same assets to a second generation of estate taxes. And if you try to transfer assets directly to your grandchildren, you could be exposing those assets to a third set of taxes called generation-skipping transfer tax (GSTT). That is the dilemma. Most people I deal with who want to include their grandchildren in their planning just do not realize those assets could be subject to another tax due.
Today, if you own a Family Limited Partnership (FLP) or Limited Liability Company (LLC), possibly owning real estate or having a large equity portfolio, these assets offer tremendous gifting and wealth transfer opportunities. You do not even have to give up control of these assets, you just must want to provide for your family one day in the future and protect them for always.
If you believe, “As parents, we never stop being parents even after we’re gone,” then this type of planning is for you. The question is, what entity do you gift your assets to that makes sense? My suggestion is you use a dynasty trust. This type of trust was made famous by wealthy families such as the DuPonts, Fords, Carnation and Kennedys, but it is a viable tool for everyone to use.
Enter the dynasty trust
A dynasty trust is created to transfer wealth from generation to generation without being subject to the various gift, estate and/or GSTT taxes for as long as the assets remain in the trust, based on applicable state laws. In addition, a dynasty trust can protect those assets from creditors, divorcing spouses and other issues.
A lot of people use an irrevocable life insurance trust (ILIT), and they transfer the assets free of trust upon death. And most living trusts are transferred the same way, without the benefit of being held within trusts.
Why not transfer assets in trust and protect those assets? You are not taking anything away from your children, and all you are doing is adding a layer of asset protection and protecting them for generations to come.
How a dynasty trust works
A dynasty trust is created in most cases by Mom and Dad. It can include almost any type of asset — life insurance, any type of securities you want to gift, limited partnership interests, etc. — other than qualified retirement plans. The assets are held within the trust, and when the grantor passes away, the trust can automatically subdivide into as many new trusts as you have named beneficiaries in the trust. This is a bloodline trust.
So, if you have three children, it divides into three new trusts, dividing the assets equally among the three. When each child passes away, the trust subdivides again for their children (your grandchildren) in their respective trusts, and again the assets are divided into equal shares.
The trust offers broad powers for health, welfare, maintenance and support. So, the children can use the money as they deem appropriate, investing it or taking income out, etc. The trust is protected, and all assets and the growth thereof held in that trust avoid estate taxes when structured correctly. You must have a trustee or co-trustee, and a qualified estate planning attorney drafting and executing the documents.
Including life insurance in your trust compounds the future liquidity of the policy, and there are different ways to pay for the life insurance in this trust through the various gifting options available.
Let us assume you have a limited liability company that owns real estate, and you want to transfer that real estate to the children one day in the future. Why not gift non-managing member shares of that same LLC to the trust, and allow those shares to generate enough income to buy life insurance within the trust? Think about this: You are taking a tax-favored and leveraged asset — life insurance — and now making it tax-free for generations to come. Life insurance is a very effective vehicle for wealth transfer planning. Additional advantages of this planning: no annual gift tax returns and no Crummey letters required. When you gift assets for life insurance or various outright gifts you use a vehicle called Crummey gifts (named after the subject of a landmark tax case in 1968), otherwise you could be subject to taxation on the gift.
If you want to protect your children, their children, and your great-grandchildren, and provide for them, put a dynasty trust together, buy life insurance, and you are on your way.
Dan Dunkin contributed to this article.
Investment advisory services offered through Laurel Wealth Advisors Inc., a Registered Investment Adviser. Annuities are insurance products that may be subject to restrictions, surrender charges, holding periods, or early withdrawal fees which vary by carrier. Riders are generally optional and have an additional associated cost. Annuities are not bank or FDIC insured. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
Want To Retire at 55? See If You Can Answer These Five QuestionsWho said you can’t retire at 55? If you say yes to these questions, you may be on your way to an early retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your WalletInterest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your InvestmentsDon't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.
