When you are planning your estate, you may have some specific objectives and concerns that are somewhat outside of the norm. Unfortunately, there are many tools in the estate planning toolkit, and there are different trust that can be utilized to accomplish various objectives.
With this in mind, we will look at two of them: charitable trusts with an emphasis on the charitable remainder trust, and grantor retained annuity trusts.
When you create a charitable remainder trust, you are the grantor of the trust. The grantor will typically act as the non-charitable beneficiary. The non-charitable beneficiary receives annuity payments throughout the duration of the trust term. You set the length of the term when you create the trust, and the term could be for the duration of your life.
You also name a charitable beneficiary. The charitable beneficiary must receive at least 10 percent of the value of the trust after the expiration of its term.
With the charitable remainder trust called a charitable remainder unitrust, you receive a fixed percentage of the total value of the trust each year. The percentage must be at least five percent and no more than 50 percent of the trust’s value.
In addition to the unitrust, there is also a charitable remainder annuity trust. You would receive an annual fixed annuity payment rather than a percentage if you create a charitable remainder annuity trust.
There is also the charitable lead trust, and this one works in the opposite manner. The charitable beneficiary receives the annuity payments, and the remainder at the conclusion of the trust term will belong to the non-charitable beneficiary.
There are a number of different tax benefits that can be gained when you create a charitable remainder trust. For one, you get a charitable deduction, because you are ultimately going to be donating money to charity.
People who are transferring more than $12.92 million (this is the 2023 exclusion) are potentially exposed to the federal estate tax. Here in New York, we have a state-level estate tax with a $6.58 million exclusion.
If you have estate tax concerns, assets that you convey into the trust would no longer be part of your taxable estate.
A charitable remainder trust can also be useful if you want to mitigate your capital gains tax exposure. If you are in possession of appreciated assets, you could convey the assets into the trust, and the trust could sell the assets. As a result, the capital gains responsibility would be spread out over the length of the trust term.
Unlimited Marital Deduction
As we have touched upon above, transfer tax efficiency can be a concern when you are planning your estate as a high-net-worth individual. The federal estate tax carries a 40 percent maximum rate. This tax is unified with the gift tax, and it carries the same rate, so you cannot give away assets while you are living to avoid taxation.
There is an unlimited marital estate tax deduction. Because of this deduction, you do not have to use any of your exclusion to transfer assets to your spouse in a tax-free manner. You can use the unlimited marital deduction to transfer unlimited assets to your spouse tax-free, either while you are living or after you pass away.
However, to use the unlimited marital transfer tax deduction, your spouse must be a citizen of the United States.
Why would this stipulation be in place? The tax man is not left out in the cold if you leave everything to your spouse tax-free. If you did this, he or she would be in possession of an estate that would be subject to taxation in the United States.
On the other hand, if the unlimited marital deduction was afforded to a spouse who is a citizen of another country, the surviving spouse could return to that country. If the surviving spouse never returned to the United States, the estate tax would never be collected.
Commonly Embraced Solution
Now that we have provided the necessary background information, we can look at the value of QDOT trusts. The acronym stands for a qualified domestic trust.
With this type of trust, you would make your non-citizen spouse the initial beneficiary, and most people would name their children (or anyone else you choose) as the secondary beneficiaries.
If you predecease your spouse, the trustee could distribute earnings from the trust to your spouse throughout the rest of his or her life. These distributions would not be subject to the estate tax, as long as they were not being drawn from the principal.
After your spouse passes away, the successor beneficiaries would assume ownership of anything that remains in the trust, and the estate tax would be applicable at that time.
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