Saturday, July 4, 2020
The art of estate planning is affected by a multitude of variables that change over time. The currently low-interest-rate environment and the imminent return of a lower estate tax exemption are among the factors shaping estate planning today.
According to Jere Doyle, senior VP at BNY Mellon Wealth Management, a sale to an intentionally defective grantor trust is one vehicle which works well to transfer wealth in the current low-interest-rate economy. The effect of an IDGT is to freeze assets for estate tax purposes but not for income purposes.
A typical power retained in an IDGT is the swap power, Doyle observed. "Thats the ability of the grantor to go into the trust and pull out assets, and substitute assets he owns on the outside that are of the same value. That causes income of the trust to be taxed back to the grantor. That’s one of the things that people are using now because the interest rate is so low. You’re lending money to the trust at a low interest rate. The grantor has no interest income to report, there’s no tax on the sale, and when interest income comes back there’s no income tax on that.”
This is particularly favorable for people who own a business to get appreciation out of their estate, Doyle noted.
However, the regular GRAT, or grantor retained annuity trust, might be a better choice for someone with publicly traded stock that they anticipate will appreciate. Further, the spousal lifetime access trust (SLAT) allow the making of sizable gifts to use up part of the gift tax exemption.
There are a few vehicles you can use to take advantage of the lower estate tax exemptions, but you should consider your options and be cautious before making a decision.
See Roger Russel, Inside the intentionally defective grantor trust, Accounting Today, June 30, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.