ADVANCED ESTATE PLANNING WITH IRREVOCABLE TRUSTS

Individuals with large taxable estates often own assets that rapidly appreciate in value. To save estate taxes, these appreciating assets must be eliminated from the gross taxable estate. Often these assets offer benefits like the ability to live in your home or generate considerable income that the owner cannot or does not want to relinquish. Also, the gift tax consequences of simply giving these assets away may be prohibitive.

The solution to this problem is to convey such appreciating assets to an irrevocable trust that contains special instructions. Those instructions state that at your death the trust’s assets will belong to your designated beneficiaries; therefore the assets will not be a part of your taxable estate when you die. Just as important, the instructions also state that you reserve the right for a specified number of years to still use and benefit from the property transferred to the trust. An advanced estate plan that includes an irrevocable trust can empower you to personally benefit from your property while still removing it from your taxable estate. Additionally, the asset transferred to the trust might be entitled to a valuation discount.

One benefit of advanced planning with irrevocable trusts is that the property transferred to the trust is often entitled to a valuation discount for gift tax purposes. This valuation discount is given because the beneficiaries of the trust will not receive its benefits for many years; thus the assets transferred to the trust are significantly less valuable to the beneficiaries than if the beneficiaries received them immediately.

The value of the assets transferred to the trust (for gift tax purposes) is therefore something less than their present fair market value. The end result of such valuation discounts is that more property can be transferred to the irrevocable trust without exceeding the amount you can transfer free of gift taxes each year.

The calculated value of the discount when assets are transferred to an irrevocable trust is based on several factors. These include how much income or other benefit the Trustmaker will personally receive from the trust, how long the Trustmaker will benefit from the trust’s property, and the current interest rates. The more the Trustmaker personally benefits from the trust, the less value it has to the ultimate beneficiaries and therefore the less its value for gift tax purposes.

There are many creative ways for you to benefit from the assets transferred to an irrevocable trust. One such way to benefit is to reserve for yourself the right to continue living in your home even after it is transferred to the trust. These types of irrevocable trusts are known as Qualified Personal Residence Trusts (QPRTs).