A Change in Power Could Mean New Tax Laws
Time is quickly running out for legal and tax advisors to help high net worth families capture the current $11.58 million individual federal estate and gift tax exclusion amount or potentially run the risk of losing it. If there is a change of power in Washington following the upcoming election, the probability the current exclusion amount will be repealed effective 01/01/2021 or allowed to sunset in 2026, increase materially.
How Irrevocable Trusts Protect Family Wealth
To prepare, many wealthy families are choosing to make large gifts to irrevocable trusts to reduce the value of their estates. They are also choosing to create these trusts in states like South Dakota, that have adopted modern and flexible trust laws, so they can feel confident about the outcome of their planning decisions and the ongoing administration of their trust.
If the current $11.58 million exclusion is repealed or sunsets, it will revert to $5 million adjusted for inflation or roughly $6 million – that is barely more than half the current amount. It is also conceivable the political climate will allow deliberation of non-partisan bills to lower the estate and gift tax exclusion even more. Other ideas that have been floated include eliminating the step up in cost basis at death and increases to both the income and capital gains tax rates.
Transferring part or all the current exemption now to an irrevocable trust like a domestic asset protection trust (DAPT) or self-settled asset protection trust, can significantly reduce estate taxes, shelter assets from creditors and provide long lasting benefit to family. These types of trusts provide flexibility in design, when paired with a premier trust situs.
Often, the grantor will remain in control of the underlying asset, pay income taxes on trust earnings (further reducing their estate) and have access to funds if needed. Similarly, spousal lifetime access trusts (SLATs), created with modern trust laws are designed to enable each spouse to be the primary beneficiary of the other’s trust. Wealthy families are also using life insurance to fund irrevocable life insurance trusts (ILITs) to replace wealth lost to estate taxes and maximize annual exclusion gifts. It is also still a good time to consider a grantor retained annuity trust (GRAT) because of the low 7520 rate and ability to transfer low basis stock.
About Our South Dakota Trust Company
Eleven years ago, First Trust Company, LLC (FTC) was chartered in South Dakota because of the opportunity the state’s favorable laws and informed judiciary would provide our clients. As part of that strategy, we decided to rely on our long-standing relationships in the Twin Cities and established the first chartered trust service office in Minnesota by a South Dakota trust company.
Today, our independent trust company is one of the fastest growing trust companies in South Dakota with seasoned professionals staffing offices across the Upper Midwest.
Contact First Trust Company Before December 31, 2020
Between now and year-end, we are committed to helping legal and tax advisors establish or modify trusts for their clients.
And as in 2012 – when faced with the potential for a similar tax law change – we will be ready and available to serve you until midnight on December 31.
Contact us by reaching out to one of our offices listed below. You may also email us at info@firsttrustcompany.com with questions.
South Dakota Principal Office
Phone: 605.791.5133
Minnesota Trust Service Office
Phone: 651.330.5910
Nebraska Trust Service Office
Phone: 402.397.5241