Reasonable ways to minimize estate taxes?

[Dash man]

Your emphasis on "a trust in place" is confusing me. Please explain. How does having a trust in place impact decisions on lowering your estate value via gifting?

It only matters if the trust is a irrevocable trust. It does add a lot more administrative costs, including setup and separate tax returns among others.

 

[RunningBum]

I feel very fortunate as I don't ever see myself or my husband ever being in a position to have to worry about the estate tax!

Try a Firecalc run, and see if some of the lines do put you in estate tax range. Hopefully the exemption number will be inflation adjusted, but I still think more than a few of my lines will go over.

 

[pb4uski]

It only matters if the trust is a irrevocable trust. It does add a lot more administrative costs, including setup and separate tax returns among others.

My experience is different.

For my mom and dad's irrevocable living trusts, other than creating the trust documents and titling assets in the name of the trust, there are no costs until you die since the income from the assets pass through to your personal tax return.

I administer my Dad's irrevocable living trust and the admin costs are negligible since I DIY. The assets are all in an account in the trust's name at Vanguard. I do the annual tax return... its a few pages and I just type in the numbers on 1041 pdf forms, print and mail. Now that dad is passed, the income from the trust passes through to my mother on a K-1 that essentially mirrors the 1099-DIV and 1099-B that the trust receives from Vanguard.

Obviously, YMMV since there are many different types of trusts and we have intentionally designed ours to be simple.

 

[Dash man]

My experience is different.



For my mom and dad's irrevocable living trusts, other than creating the trust documents and titling assets in the name of the trust, there are no costs until you die since the income from the assets pass through to your personal tax return.



I administer my Dad's irrevocable living trust and the admin costs are negligible since I DIY. The assets are all in an account in the trust's name at Vanguard. I do the annual tax return... its a few pages and I just type in the numbers on 1041 pdf forms, print and mail. Now that dad is passed, the income from the trust passes through to my mother on a K-1 that essentially mirrors the 1099-DIV and 1099-B that the trust receives from Vanguard.



Obviously, YMMV since there are many different types of trusts and we have intentionally designed ours to be simple.

The key in your experience is the income passing through immediately. That isn’t true in all trusts depending on the type of assets.

 

[pb4uski]

I agree... like I said YMMV since there are different types of trusts and we have kept ours simple.

 

[SecondCor521]

@pb4uski or @cathy63, my understanding is that a traditional IRA cannot be put into an irrevocable living trust. Is my understanding accurate?

The general problem that my friend is facing can be seen by assuming a $10M traditional IRA (not the case, but demonstrates the issue). I can't see any way to get it out of the estate other than withdrawals and gifting, or Roth conversions, and both of those result in ordinary income tax at a high marginal rate. For example, if my friend decides to wait until 12/31/2025 and make a $4M withdrawal to get the traditional IRA down to $6M, then my friend has $4M of taxable income, most of which would be taxed at ~40% or whatever the top marginal rate will be at that time.

...

By the way, thanks to everyone who has replied. I've been collecting the responses and strategies and am starting to understand the landscape that my friend faces a lot better than I did when I posed the question.

 

[pb4uski]

@pb4uski or @cathy63, my understanding is that a traditional IRA cannot be put into an irrevocable living trust. Is my understanding accurate? ...

Yes, to my knowledge. But with $10m tIRA I would think that he should be able to get some really good advice on some advanced strategies that might help him.

 

[Dash man]

Under the SECURE Act, an inherited IRA would have to be distributed and taxes paid within ten years. There is no way around that except perhaps charitable contributions, or gifting.
The money can be protected if the beneficiaries of the trust are an Accumulation Trust. Taxes are paid, but at least the money is protected from lawsuits and divorce.

 

[chassis]

Your emphasis on "a trust in place" is confusing me. Please explain. How does having a trust in place impact decisions on lowering your estate value via gifting?

@youbet This is precisely my question. Do you have an opinion on it?

 

[SecondCor521]

Yes, to my knowledge. But with $10m tIRA I would think that he should be able to get some really good advice on some advanced strategies that might help him.

As you might have also guessed, 80+ year old people with $10M IRAs are children of the Great Depression who are generally quite frugal. But I take your point, and it's one of the strategies on my list ("Consult a good estate planning practitioner"). Thanks for the reply.

 

[cathy63]

@pb4uski or @cathy63, my understanding is that a traditional IRA cannot be put into an irrevocable living trust. Is my understanding accurate?

The general problem that my friend is facing can be seen by assuming a $10M traditional IRA (not the case, but demonstrates the issue). I can't see any way to get it out of the estate other than withdrawals and gifting, or Roth conversions, and both of those result in ordinary income tax at a high marginal rate. For example, if my friend decides to wait until 12/31/2025 and make a $4M withdrawal to get the traditional IRA down to $6M, then my friend has $4M of taxable income, most of which would be taxed at ~40% or whatever the top marginal rate will be at that time.

...

By the way, thanks to everyone who has replied. I've been collecting the responses and strategies and am starting to understand the landscape that my friend faces a lot better than I did when I posed the question.

I agree with you and pb4uski on this. There's no way to get an IRA out of an estate and still keep the money in the family. It's for "tax deferral", not "tax forgiveness", so there aren't a lot of loopholes.

One thing your friend should do though, is use that large IRA for his/her charitable giving (via QCDs) while alive. Also if your friend has any desire to leave money to a charity, then see if naming the charity as one of the IRA beneficiaries would be better for the overall estate tax situation than leaving after-tax funds. I think it would, but I'm not entirely sure. I also think you can also name a DAF as a beneficiary if there's no specific charity in mind and let the heirs make that decision when the time comes.

 

[SecondCor521]

@cathy63, thanks for the reply and confirmation. Even though it's disappointing to hear about the lack of loopholes, it's understandable and helps set expectations. My friend isn't particularly charitable, at least not to the point where QCDs would make an appreciable difference, but it's a good point to include.

...

For those who might be interested, here's a list of estate tax minimization strategies that I have collected so far from replies on this thread and other sources:

Alternative valuation date
Annual gifting
Accelerated gifting
Irrevocable living trust
529s
QCDs / DAFs
Partial disclaimers (helps the next generation)
Consult an estate planning attorney

 

[FANOFJESUS]

In 2016 my sister-in-law passed away, leaving everything she owned to her sister [my wife]. My wife was the executor and she was the sole heir. She went through a year long nightmare in dealing with the probate court, as the judge wanted to contest the will on behalf of that county.

After that experience, we decided to put most of our estate into LLCs with our sons as part owners.

That sounds scary. WOW

 

[FANOFJESUS]

In 2016 my sister-in-law passed away, leaving everything she owned to her sister [my wife]. My wife was the executor and she was the sole heir. She went through a year long nightmare in dealing with the probate court, as the judge wanted to contest the will on behalf of that county.

After that experience, we decided to put most of our estate into LLCs with our sons as part owners.

If you don't mind me asking can you give a ball park of the sum?

 

[Offgrid Organic Farmer]

That sounds scary. WOW

yes.

We had thought that the probate would be easy, with one person being the executor and the sole heir. But the probate judge thought differently.

The process has scared us away from ever allowing our assets to go through a probate court.

 

[Offgrid Organic Farmer]

If you don't mind me asking can you give a ball park of the sum?

$800k.

 

[FANOFJESUS]

$800k.

Thanks it makes me wonder if the amount is above x do they try to grab it then?

 

[imnontrad]

Start giving money to your heirs now including contributing to 529 accounts for grandchildren.

 

[Rambler]

I think DW and I can give up to 60k per year total to each of our kids (incl their spouses). So, part of my plan for this, if it looks like I need to reduce my estate, would be to pay down the kids’ mortgages, fund Roth IRAs for our kids, and perhaps help when they need a car replacement. Further, we could gift to grandkids if we wanted, $30k each per year, and fund 529s. We may want to be careful how those accounts or trusts are set up, so that they receive pieces of it at certain milestones, but it seems it could be done....all without going against the exemption and extra forms to be filed. If we needed quick reduction, then yes, larger gifts and forms would be required. But I don’t think there is a need to put the cart before the horse here. It seems that if some of these new rules do pass, there will be some time to take action before they would take effect.

 

[yclipse]

> How do you plan around such wide potential changes in the law?

I am an estate planning lawyer. My answer to this question: you don't.

You can't set up a plan that will take you through the next 20-30 years without any change. It's foolish to expect that this can be done.

You set up a plan to address what will probably happen in the next few years based on current law, and you then plan to update your planning every few years, so that your needs can be updated in light of any changes in the law that have occurred recently, and in light of your own changing personal situation.

 

[SecondCor521]

> How do you plan around such wide potential changes in the law?

I am an estate planning lawyer. My answer to this question: you don't.

You can't set up a plan that will take you through the next 20-30 years without any change. It's foolish to expect that this can be done.

You set up a plan to address what will probably happen in the next few years based on current law, and you then plan to update your planning every few years, so that your needs can be updated in light of any changes in the law that have occurred recently, and in light of your own changing personal situation.

Right. I think my concern would be what the previous poster alluded to in their last sentence: Does one need to plan ahead enough so that wide potential changes in the law don't get you in trouble? In other words, it's not so much the durability of the plan as it is the ability of the plan to be changed rapidly enough to respond to big changes.

For example, a situation I'm imagining is someone with a $10M estate now who does some gifting now in anticipation of the $6M exemption in 2026, but then the government reduces the exemption to $1M in 2024 instead, and that person who was doing some gifting should have been doing aggressive gifting instead - they were giving away $4M but needed to give away $9M instead.

It would be lovely if the laws changed slowly enough to where this kind of retrospective regret didn't happen, but I don't know how often that happens vs. getting caught with rapid changes that can't be responded to in a tax efficient way.

(I think I'm circling back to what @cathy63 hinted at before, which is that sometimes paying more taxes than ideal is simply unavoidable. My Mom really didn't like paying taxes and went through a great deal of effort to avoid it. I think I inherited my quixotic tax avoidance nature from her genes and her example and her Scottish heritage. I'm not sure if I'll be able to change or even if I want to.)

 

[DawgMan]

> How do you plan around such wide potential changes in the law?

I am an estate planning lawyer. My answer to this question: you don't.

You can't set up a plan that will take you through the next 20-30 years without any change. It's foolish to expect that this can be done.

You set up a plan to address what will probably happen in the next few years based on current law, and you then plan to update your planning every few years, so that your needs can be updated in light of any changes in the law that have occurred recently, and in light of your own changing personal situation.

You are qualified!

Can you dumb it down for me. If I am married and know today my estate (NW) is over the 2026 $11M threshold, but not over the combined $22M+ limit today, can I not wait until I know for sure what the estate tax law will be, and prior to that date, set up the appropriate trusts to avoid the estate tax? Or, are there specific strategies prior to 2026 I really should take now (i.e. gifting now, Roth conversions)? Are there certain assets that fall outside of/not counted toward the estate value as it relates to the estate tax?

 

[audreyh1]

For example, a situation I'm imagining is someone with a $10M estate now who does some gifting now in anticipation of the $6M exemption in 2026, but then the government reduces the exemption to $1M in 2024 instead, and that person who was doing some gifting should have been doing aggressive gifting instead - they were giving away $4M but needed to give away $9M instead.

More aggressive gifting? Someone with a $10M estate taking it down to $1M in 4 years? How old is this person? What are they supposed to live on? What about their long term care needs? Honestly, I can’t see someone gifting away 90% of their net worth in such a short period unless the remainder was still substantial.

 

[Dash man]

But I don’t think there is a need to put the cart before the horse here. It seems that if some of these new rules do pass, there will be some time to take action before they would take effect.

My Estate Attorney did express concern they any changes could be made retroactive to Jan 1, 2021. However, that was if the Senate flipped.

 

[calmloki]

We've (unmarried couple) made a point of owning all our real estate jointly, not as tenants in common. Our understanding is that at the death of the first owner it is as if they never had an ownership in the property estate-wise. Bank account and some stocks we either own jointly or have beneficiaries named, thus setting up an informal trust. We each have some stocks individually owned and with our individual blood relatives named as beneficiaries so those relatives get a chunk at the death of the first of us to go. Surviving partner gets the bulk of the estate and is thus provided for till the end of the their days and gets to figure out how they want to deal with the estate.
I'm an Oregon resident - Oregon has a tax that kicks in at the 1M mark. She is a California resident - California's estate tax mirrors the Federal ~$11M initial tax amount. Current estate is less that $11M and way more than $1M. My expectation is that I will pre-decease her. Such is our plan, which we believe to be simplest and maybe best for us.