A “Profit” No Investment Can Match

Would you be interested in a safe, 40% return in the stock market? If you have a pulse, the answer is yes.

Obviously that kind of return is pure fantasy. But if you consider saving to be the same as earning, then it is absolutely possible to capture this kind of advantage through estate planning.

Consider this: The current estate-tax rate is as high as 40% for assets above the $5,450,000 federal exemption. If you could eliminate that tax, you would effectively “earn” 40% for your heirs in tax savings. And that is exactly what many wealthy families do.

Oddly, you hear a lot more in the media about how to earn a few percentage points in the stock market than you do about how to absolutely clean up by using estate-planning strategies. Chalk it up to estate planning’s p.r. problem: It’s somewhat complex, and, well, it involves death.

But there’s no getting around the fact that shrewd estate planning helps families redirect substantial amounts away from the IRS and toward their loved ones. One of the most basic concepts involves reducing the size of your estate. The goal is to bring the size of your estate beneath the $5,450,000 tax threshold—or at least get much closer to it. And that means removing assets from your estate before you die.

How do you do it? One simple way is to stop hoarding your money: Try spending more of it in ways that are satisfying, fun or both. Another is to give your wealth away. By making gifts while you’re alive, you can reduce or eliminate the estate taxes your heirs will have to pay, while actually enjoying the act of giving. Let’s look at some of the most popular and effective ways to do that.

• Tax-Free Gifts. Individuals can give up to $14,000 each to any number of people per year without triggering gift taxes. Giving can add up quickly: If you give $14,000 to a total of seven children and grandchildren, for instance, you will trim $98,000 out of your estate in a single year. And the number doubles when your spouse does the same.
• Irrevocable Life Insurance Trusts (ILIT). Insurance death benefits count as assets in your estate. But transferring policy ownership to an ILIT, removes the benefits from your taxable estate. The caveat is that you must live at least three years after the transfer.
• Qualified Personal Residence Trust (QPRT). Your home is typically one of your largest assets. Transferring ownership to a QPRT for a period of several years removes your residence from your estate while allowing you to continue occupying it. When the trust expires, typically after 10-15 years, the home reverts to the trust beneficiaries you’ve selected (often your children). If you wish to remain in the home, you can arrange to rent it from its new owner (another way to decrease your estate). Again, the catch is that you must outlive the trust term in order for your home to be excluded from your estate.
• Grantor-retained annuity trust (GRAT). GRATs, and their close cousins, grantor-retained unitrusts (GRUTs), are similar to QPRTs, except that they are meant to house income-producing assets. By transferring assets like stock, real estate or business interests into one of these trusts for a defined number of years, you can continue to receive income without the asset being counted as a part of your estate. Again, if you die before the trust term ends, the assets may be included in your estate.

If you believe that “he who dies with the most wins,” then this sort of estate planning isn’t for you. But if you want to put a lot more money into your loved ones’ hands, both now and after you’re gone, the AdvicePeriod team can show you how.

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