Transfers to Trust: Minimize Your Tax Exposure and Provide Comfort to Your Loved Ones


The estate tax environment is one of volatility, particularly for high net worth individuals. Apart from the issues that stem from general income tax alone, the estate tax presents an independent set of issues that must be diligently addressed before it is too late.  Trusts can be helpful for both tax and non-tax reasons including:

  • The current (and often changing) estate tax rates.
  • Trustees that are suitable and equipped to manage your assets at the time of death
  • Situations such as second marriages and blended family members that may pose additional challenges

So What?

You’ve worked hard to accumulate success and wealth.  It is important for you to plan accordingly so that your achievements remain in good hands from generation to generation without taking a financial blow from significant estate taxation.

All too often, individuals leave behind a poorly structured estate plan, uninformed of where much of their assets will go. With the current 40% tax rate, high net worth individuals run the risk of losing a large portion of their estate upon passing. To give you an example, if you were to leave behind $15 million of gross taxable estate, you may expect $5.34 million to be exempt from taxation, leaving approximately $9.7 million exposed to the current estate tax rate. This means you have the potential to lose about $3.9 million to taxes. Married taxpayers face other questions.   Will I be able to use my spouse’s exemption?   Will they honor my wishes?

Though planning for the future may be difficult to face, it is critical to proactively educate yourself on the complexities and possibilities of how you may effectively structure your estate plan. With the right tools, you can arrange your plan in a manner that allows you to control where your assets go, who they go to and how they may be allocated to cause the least amount of tax and confusion for your heirs.

Transfer to Trust

When planning the future of your estate, keep in mind the strategies that exist to allocate your assets in a way that will make your passing less difficult for your heirs. When laying out the blueprint to where all your “stuff” goes, these strategies should indeed be taken into careful consideration.

A favored strategy comes in the form of transferring life insurance into a trust. A revocable trust can be a component of a will and can be modified if you would like to change the terms. An irrevocable trust is a vehicle for holding assets for the benefit of your beneficiaries and cannot be modified. Gifting into an irrevocable trust can be a better approach than outright gifting from a tax, liability and control perspective. For example, if you were to gift your hypothetical $8 million life insurance policy more than three years before passing (with no cash surrender value) into an irrevocable trust, it would not be taxed by applicable estate taxes upon death. However, if you retain ownership of the policy until your death, it could cost your heirs around $3.2 million in estate tax, depending on the tax rate at the time of death. Additionally, estate taxes would apply if the policy was gifted within three years of the decedent’s death under IRC sections 2035(a) and 2042.

Equally as important, the trust can provide a “shield of protection” and allow for some control even after you have passed away. The trust document can be structured by you and you decide who will control it by naming a reliable trustee to preserve assets. Additionally, you can help protect your heirs from mistakes, creditors and remarriages.

The Perks

It is important to note that though you may not modify the terms of an irrevocable trust once they have been established, you may still structure it in an advantageous and tactful way that both allows you to allocate assets to whoever you would like and prevent the beneficiaries from full monetary control until you deem them responsible.

While insurance policies tend to be the most commonly gifted assets, other types of property may be gifted into an irrevocable trust. There are many benefits to transferring assets into irrevocable trusts, these include:

  • Assets held in an irrevocable trust can be structured to be excluded from a taxpayer’s estate, thus, avoiding estate tax
  • Assets can be protected from creditors
  • Potential income tax minimization on assets that earn income
  • The ability to protect your heirs from themselves by restricting when they may control the assets within the trust
  • Potential to establish a Dynasty trust, which crosses multiple generations and, therefore, avoids multiple layers of estate taxes

Act now

It is key to be proactive when estate planning. Here are some basic steps you will need to take when considering estate and trust planning:

  1. Review your estate tax exposure and current documentation for accuracy.
  2. Review your asset base to determine allocation into revocable or irrevocable trusts.
  3. Transfer specific assets pursuant to your plan.
  4. Assess your trustee(s) capacity to manage the trust(s) and determine an appropriate time to relinquish control or partial control over the trust(s).
  5. Facilitate required structures for your trust(s).
  6. Develop rapport with your trustee(s) so that all parties are aware of and understand the unique issues that your heirs’ future may hold.

It is not uncommon for individuals interested in creating a tax effective estate or trust plan to feel overwhelmed or frozen in the process.  If this is the case, seek the assistance of a trusted advisor who has experience with helping high wealth families of all complexities plan well for their futures. Proceed with caution, however, and beware of advisors that may implement a one-size-fits-all approach.  Each person and family is unique and therefore requires an estate planning approach that is tailored to their specific situation.

Don’t wait for the “right time” to plan the future of the wealth you worked so hard to generate. There is never a better time than now to structure a plan that will minimize future taxes, ensure that you know exactly where all your assets will go and provide your family and loved ones with a sense of comfort and clarity.