Being creative with trust planning to reduce capital gains tax pain

Nov 8, 2013 @ 12:00 am

Runtime: 4:29

Estate planning attorney Martin M. Shenkman lays out new and creative approaches to trust management that advisers can utilize to reduce clients' capital gains tax bills.

Video Transcript

For the high-end client as a fastening new approach to the annual review meeting that nobody has ever done, and I think that this is something that really has to be on the table and probably in every checklist that every advisor uses, most-- I hope most, but certainly most that I know wealthy clients did extensive planning at the end of 2012 because there's a very big fear that the estate tax as well would have changed dramatically and adversely. And there are proposals on the table that President Obama has made in his Greenbook to greatly restrict many of the benefits that still exist. So those that missed the boat in 2012 probably should jump onboard. One of the cornerstones or foundation stones rematch the planning was to establish dynastic, grantor, irrevocable trusts and I'll translate that to English for those that want. Irrevocable, you can't change, but that's different than it's ever been in the history because there are so many ways to modify, to decant or merge trusts that even in an irrevocable trust is not nearly is irrevocable or carved in stone as it used to be. Grantor Trust is a status for a trust that the trust for income tax purposes is taxed to the person who set it up. Most trust people believe are taxed on their own's individual taxpayers. Grantor trust or tax to the grantor has huge planning implications, which I wanna take a minute and explain. These trusts are typically dynastic and that they go on forever because with asset protection risk, divorce risk, law suits with the changes proposed in the taxes and why they're gonna take something out of the trust if it's not needed, leave it within the protective envelope for the trust. So this gives a very different paradigm for planning for the wealth manager, because more and more wealth probably now is in these types of trust than it's ever been in the history and they need to plan for it. The key advantages of the grantor trust is that the grantor, let's say the parent is paying the income tax on the assets and the trust. So, the trust is growing undiminished by income tax. That is important asset location ramifications that advisors need to think about. Grantor trust status means that you can swap out or pull back an asset out of the trust and bring it into your name. Why might you do that? Because if you're an elderly parent say, before you die if you bring appreciated assets into your estate, they get step-up in basis, the capital gains are washed out. So, every year especially with an elderly client-- older client what advisors wanna do is sit down and review the assets in this trust that it would become so calm in place. And if there's an asset that's highly appreciated swap it back into the client's estate, put cash into the trust, and if the client dies, you eliminated all the capital gains. So creative trust planning is gonna be the way that advisors will eliminate capital gains. It's gonna be the estate plan will be the ultimate tax-free investment market, which is an incredible change in planning. The other piece that advisors need to be very mindful of and monitor as well, and this is just evolving now so really [unk] of it is in a trust, I could give somebody what's called a general power of appointment. I give you the right to appoint the trust assets to anybody. Most people are gonna be uncomfortable, but what you can do is give somebody which called a limited power to appoint it to just let's say your children, but give a trustee or an independent person the right to enlarge that power and to make it for tax purposes as a general power. The most limited way that would have happened is you could appoint it to your creditors. So if I have a mother-in-law who's solvent, but doesn't have a large estate, if I give her that right under a trust, all the assets to that trust are taxed in her estate. But if her estate is a million dollars and there's a five and a quarter million dollar exemption, I can eliminate all of the capital gains on four and a quarter million dollars of assets. Think of what that does to investment planning if every generation or every family members, there could be multiple times in a generation, you can wipe out all the appreciation. So you have the ultimate tax-free bucket. Planning is gonna change dramatically. No advisors should go through a year-end planning meaning with the client and not get their head around what trust the client has, what trust had which types of powers and how they work. So from the advisors' side, it's critical that the advisors really coordinate more than ever before with the estate planning attorney so they can understand these uses of trust because that's the wave of future planning.


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