CAN A TRUST PROTECT FAMILY WEALTH FROM ESTATE TAXES?

Estate taxes can significantly erode the wealth that you have accumulated throughout your life. One imposition of the estate tax can play havoc with your financial legacy, but it can actually be levied over multiple generations.

The maximum rate of the federal estate tax is 40 percent at the present time. The amount of the credit or exclusion in 2014 is $5.34 million. If your assets exceed this amount, you should be implementing wealth preservation strategies.

If you can position assets outside of your taxable estate you will be protecting your wealth for the benefit of your family. This can be done through the creation of certain types of trusts.

Revocable vs. Irrevocable

A revocable trust allows the grantor (the person creating the trust) to retain incidents of ownership. If you are the grantor of a revocable trust, you can change the terms at will and even revoke the trust if you want to go this route. The assets that you have conveyed into the trust would then become your personal property once again.

Things are different with irrevocable trusts. You cannot revoke them, and you do surrender incidents of ownership. As a result, generally speaking, assets that have been conveyed into an irrevocable trust would not be part of your taxable estate.

Generation-Skipping Trusts

One type of irrevocable trust that can be useful for those who want to protect family wealth would be the generation-skipping trust. As the name implies, you would make your grandchildren the beneficiaries of a generation-skipping trust rather than your children.

Your children could however benefit from the assets that have been conveyed into the trust. They could receive distributions of income earned by the trust and utilize property held in the trust. Under a special power of appointment they may even be able to make decisions with regard to the actions of the trust.

However, they never technically own the assets that have been placed into the trust. Therefore, their access does not result in estate tax liability.

After the death of the children, the grandchildren inherit the trust. Two generations would have benefited from the trust, but there would be just one round of taxation.

Wealth Preservation Strategies

The generation-skipping trust is just one type of trust the can be used if you want to preserve wealth for the benefit of your loved ones. There are other types of trusts (and other legal devices) that can be useful as well.

If you would like to discuss wealth preservation strategies with a licensed estate planning attorney we invite you to contact our firm to schedule your assessment. We will gain an understanding of your financial position, become apprised of your objectives, and explain your options to you.