It is said that the only two certainties in life are death and taxes. We know, as experienced Florida estate planning attorneys, that nowhere is this more true than with large estates. 

If an estate-holder passes away and their property is over the federal estate tax exemption, then the excess could be taxed up to 40 percent. Fifteen states also have an estate tax and six states levy an inheritance tax. This may seem daunting, but an experienced estate planning attorney can help lower your tax liability through creative wealth transfers. Let us share two key trusts for you to consider here in our blog.

First, we want to discuss the Intentionally Defective Grantor Trust. When you put income-producing assets into an Intentionally Defective Grantor Trust, or an IDGT, you, the grantor, pays the income taxes. Normally, when you put assets into a trust and the assets generate income, the trust pays the income taxes. This has the effect of reducing the overall value of the trust as well as the proceeds your beneficiaries could receive. 

When the grantor pays the income taxes as with an IDGT, however, trust assets are able to grow income tax-free and the grantor’s estate is reduced by the amount of the income tax payments he or she makes. Further, the IRS does not consider this form of wealth transfer a taxable gift, so your beneficiaries keep more of their inheritance especially as the IDGT assets appreciate in value.

Second, is the Grantor Retained Annuity Trust. A Grantor Retained Annuity Trust, or GRAT, is an irrevocable trust that allows for the person establishing it, known as the grantor, to pass a significant amount of wealth to family members with little or no gift tax cost. 

Once established, the grantor would transfer estate assets to the GRAT which in turn pays the grantor an annuity for a specified period of time. The annuity payments derive from an IRS interest rate called the 7520 rate. The grantor also retains the right to receive the original value of the assets contributed to the trust upon its expiration. If the assets are initially undervalued, perhaps due to the COVID-19 economic downturn, then appreciate over the life of the GRAT, the gains could go to the grantor’s family members tax-free. 

Like many estate strategies and wealth transfer techniques, IDGTs and GRATs are complicated and depend on a number of factors relevant to individual estates. We know you have questions and want to answer them. Do not wait to contact us to schedule a meeting where we can determine if they are right for you and your Florida estate planning goals.