Tax-Efficient Estate Planning Strategies

Estates valued over $5.49 million in 2017 pay a 40% estate tax rate. In order to maximize estate value while minimizing the tax burden, many wealthy taxpayers use wise estate planning strategies. Consider these tax-efficient wealth transfer opportunities to pass on your financial legacy.

Annual Gift Exclusions

Up to $14,000 per year[1] may be gifted tax-free to as many people as an individual may wish. For married couples, this gift exclusion increased to $28,000 per year. These annual gift exclusions do not count toward an individual’s lifetime exemption unless the gifts exceed tax-free gift regulations.

Irrevocable Life Insurance Trust

Generally, an irrevocable life insurance trust (ILIT) is a trust established to hold a life insurance policy which is payable at the insured’s death. Similar to other types of trusts, an ILIT has a grantor, trustee(s) and beneficiaries. The grantor creates the trust, the trustee purchases an insurance policy, manages the trust and is named the beneficiary of the life insurance policy. The trust itself has beneficiaries who receive distributions based on the terms of the insurance trust.

Qualified Personal Residence Trust

A qualified personal residence trust (QPRT) removes a home (primary or secondary residence) out of the grantor’s taxable estate. QPRTs transfer a home to a trust for a period of time, typically 10-15 years, and then transfer the residence to the beneficiaries at the end of the term. The grantor can continue to live in the residence after the end of the QPRT, but must pay rent to the news owners (beneficiaries). If the grantor dies before the QPRT ends, the residence remains in their taxable estate.

Grantor Retained Annuity Trust or Grantor Retained Unitrust

Grantor retained annuity trusts (GRAT) and grantor retained unitrusts (GRUT) are similar to QPRTs, except a GRAT or a GRUT can be funded with any income producing asset (such as stock or a family business)– not just a home. With either a GRAT or GRUT, distributions are received from the trust for a set number of years. If the distribution is a set dollar amount, the trust is a GRAT and if the distribution fluctuates, the trust is a GRUT. Once the term of the trust ends, the trust’s remaining assets transfer to the beneficiaries and stay out of the grantor’s taxable estate. Depending on the duration of the GRAT or GRUT, if the grantor dies before the trust term ends, some or the entire asset may be subject to estate tax.

Charitable Remainder Trust

A charitable remainder trust (CRT) may be used to convert a highly appreciated asset (such as investment real estate or stock) into income without paying capital gains tax when the asset is sold. Assets are transferred to an irrevocable CRT, which is not included in your taxable estate, with an immediate charitable income tax deduction. The CRT pays income for a set number of years or the remainder of your life and gives the trust assets to a charity of your choice once you die.

Charitable Lead Trust

A charitable lead trust (CLT) does not pay income during the grantor’s lifetime. Instead, a CLT pays income to a charity of the grantor’s choice for a set number of years or until you die. After death, the trust assets go to other beneficiaries as designated by the grantor.

Due to the technical nature of the above vehicles, you should always seek advice from a lawyer that specializes in drafting these types of instruments to see if any of them would work for you.

[1] This reflects the exclusion amount for 2017; however the amount is subject to change so always check with your tax advisor regarding the annual exclusion amount for the year in question.

Fifth Third Bank does not provide tax or legal advice. Please consult your tax adviser or attorney before making any decisions or taking any action based on this information. This information is provided for educational purposes only and does not constitute the rendering of tax or legal advice.

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