Serving High Net-Worth Clients Throughout Morris & Bergen Counties
Although the tax reform measure that was recently signed into law temporarily doubles the exemption amount, for estate, gift, and generation-skipping taxes from 2018 through 2025, the estates of certain high net-worth individuals could still be subject to estate taxes prior to beneficiaries receiving their inheritance. However, there are a number of strategies that can be utilized to protect an estate from potential tax consequences.
E.A. Goodman Law, LLC, is one of the premier estate planning law firms serving high net-worth individuals, couples, and families throughout the state of New Jersey. We design estate planning strategies and charitable gifting tools that are designed to reduce federal estate taxes, gift taxes and generation-skipping transfer taxes.
Tax-Free Annual Gifting
The Internal Revenue Service (IRS) recently announced that the annual gift tax exclusion is increasing in 2018 to $15,000 for individuals ($30,000 for married couples). This means that annual gifts of this amount can be made to as many individuals as you like each year, up to the exclusion amount, with no tax consequences. In other words, tax-free annual gifting allows you to give loved ones a portion of their inheritance each year while also reducing the taxable value of your estate.
There are a number of charitable trusts that combine gifting with charitable donations, effectively reducing income and estate taxes. In a charitable remainder trust, for example, property is transferred into the trust, with a charity being named as the final beneficiary. A designated individual receives income for a certain period of time and the remainder is then provided to the named charity.
In a charitable lead trust, on the other hand, the estate typically makes tax free donations to charities until all taxes are reduced, and then the estate is transferred to beneficiaries who will ultimately face lower tax consequences. All types of organizations can be made beneficiaries of these arrangements including universities, medical centers and nonprofit organizations. In addition to designing charitable trusts, we also advise clients who are interested in establishing foundations.
Qualified Personal Residence Trusts
Given the fact that a home is typically one of the largest assets in an person’s estate, one way to reduce estate taxes is by creating a Qualified Personal Residence Trust (QPRT). This arrangement allows the title of the home to be transferred into the QPRT for the benefit of family members.
The owner retains the right to live in the home for a specified period of time, and then the property, and any appreciated value since the transfer, passes to the beneficiaries without additional estate or gift tax consequences. If the owner dies before the designated period ends, the full value of the house will be included in his or her estate for tax purposes.
Although the owner is permitted to continue living in the home at the end of the specified time period, he or she must pay rent to the beneficiaries. While a QPRT reduces the value of the owner’s taxable estate, beneficiaries may pay income taxes on the rental income, if the rental income exceeds the expenses of owning the home such as property taxes and insurance.
Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)
Similar to a QPRT, these trusts allow you to transfer any asset, not just a home, out of your taxable estate. By establishing a GRAT or a GRUT, income producing assets such as a family business, stocks or real estate, can be transferred into an irrevocable trust for a set number of years, during which time the trust pays you an income.
The difference between a GRAT and a GRUT, is that in a GRAT, the income is a set dollar amount that does not fluctuate each year. In a GRUT, the income is a percentage of the trust assets which can fluctuate as the value of the assets change each year. At the end of the term, the trust assets, and any appreciated value, are transferred to the beneficiaries, which reduces the value of your estate. Like a QPRT, if you die before the term ends, however, some or all of the assets may be included in your taxable estate.
Irrevocable Life Insurance Trusts
Although life insurance proceeds generally pass outside of an estate, they are included in the total value of the estate. This means that beneficiaries could lose a significant portion of these proceeds to taxes. An Irrevocable Life Insurance Trust (ILIT) can be established to hold the policy which excludes the proceeds from the taxable estate. The trust acts as the policy owner and the beneficiary. Ultimately, proceeds from the policy could be used to pay any estate taxes, debts and final expenses as well as to provide income to a surviving spouse or children.
Generation Skipping Trusts (GST)
Generation skipping trusts, GST, basically involve skipping a generation in your estate. Rather than leaving assets to a surviving spouse and then to the children, a GST provides for assets to be passed directly to grandchildren, great-grandchildren, or other younger descendants, who are referred to as “skip persons.”
Although GSTs are subject to the generation skipping transfer tax (GSTT), the trust can be structured to take advantage of the GSTT exclusion amount to avoid future GSTT tax liability, while future appreciation of trust assets is allocated directly to the beneficiaries.
High Net-Worth Estate Planning Attorneys
Located in Morristown, E.A. Goodman Law, LLC has a well deserved reputation for providing high net-worth clients with sophisticated legal advice. Our guiding principle is to act as a trusted adviser and always put the best interest of our clients first. By working in concert with their financial advisors and accountants, we design estate planning strategies in order to transfer assets to loved ones, leave charitable legacies, minimize estate taxes, and provide for future generations. Given the changes being ushered in with the new tax scheme, you need the advice and guidance that we are uniquely qualified to provide. Get in touch by calling our office or completing the contact form on our website.