New York Estate Planning & Elder Law Blog
The final step in a three (3) part series, advanced wealth and estate transfer planning allows an estate owner to shelter assets from estate tax. Strategies to reduce taxation and other penalties that may otherwise be assigned to distributions after an estate holder’s death are a core element of any professional estate planning strategy. Sales to Intentionally Defective Grantor Trusts (IDIT Sale) and Grantor Retained Annuity Trusts (GRATs) and are two common estate planning techniques used for financial control estate assets designated for transfer.
Tax Sheltering Assets Before and After Death
Most asset transfers from an estate while an estate holder is still alive fall under federal Internal Revenue Service (“IRS”) gift tax rules. The IRS applies the same rates of taxation to both gift and estate reporting of assets. If the value of gifted property will likely increase between date of the gift and date of a decedent’s death, “discounting” (i.e. freezing) the value of an asset so that it does not appreciate will enable a beneficiary to avoid transfer taxation.
Restrictions of marketability of an asset is a common rationale for discounting an asset prior to estate transfer. If shares from an owner’s stake in a business are valued less than the entity value of the business, an estate holder can instruct a predetermined price under market to avoid capital gains. Sales to Intentionally Defective Grantor Trusts (IDIT Sale) and Grantor Retained Annuity Trusts (GRATs) and are two methods of control tax exposure of estate assets.
GRATs and IDIT Sale
GRATs and IDIT Sale strategies enable an individual to control taxation of business assets and other key estate assets designated for heirs and beneficiaries. GRATs allow transfer of assets to trust, while retaining rights to a scheduled annual payment for a term period.
Ownership of GRATs proceeds passes to heirs or other trust beneficiaries to the value of contribution, minus scheduled payments made to the owner or estate during the term of the annuity. Properly structured GRATs will result in a retained annuity interest equal to the value of contribution held within the trust, making gift tax owed zero or nearly zero.
IDIT Sale transfers are structured like GRATs, in that individual transfers assets to a trust result in income appreciation structured to exceed the rate of return required for service of payments to the investor. An IDIT Sale trust can be formed as a Dynasty Trust to eliminate any estate and gift tax, making it a better vehicle for generation skipping estate planners.
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