Estate planning for high net worth individuals will involve the implementation of wealth preservation strategies, because the proverbial tax man is standing at the ready prepared to pounce as soon as you pass away.
Some people are under the assumption that you are surrendering personal possession of assets once you place them into a trust of any kind. This would lead you to the belief that assets that you have conveyed into a trust would not be counted by the IRS when your estate tax exposure is being determined.
This is not entirely true. There are different types of trusts. Some are revocable, and some are irrevocable, and this is the key.
Revocable Living Trusts
Revocable living trusts are very popular among a wide range of people because they facilitate quick and efficient asset transfers. The trustee that you choose distributes financial resources to the beneficiaries directly, and the legal process of probate is not a factor.
When you use a last will to facilitate the transfer of your assets the heirs don’t receive their inheritances until the estate has been probated. We would like to emphasize the fact that probate is a legal process that provides protections. It is not something that should be viewed as completely negative.
However, you have the option of avoiding it, and you should be apprised of all of your options when you are planning your estate.
You can dissolve a revocable living trust any time you want to, and the assets that you conveyed into the trust would once again become your direct personal property. The grantor of the trust can also retain control of the funds while the trust is still active by acting as the beneficiary and the trustee at first.
Because of this control and access, assets that have been conveyed into a revocable living trust would be looked upon as part of your taxable estate by the Internal Revenue Service. These trusts are not useful for those who would like to preserve wealth.
Irrevocable Trusts
There are other types of trusts that are irrevocable. You do surrender incidents of ownership when you create and fund this type of trust. Because of the fact that you have relinquished control, generally speaking assets that have been conveyed into an irrevocable trust would not count when the IRS is calculating the value of your estate for tax purposes.
There are a number of different irrevocable trusts that are used to preserve wealth. These would include generation-skipping trusts, grantor retained annuity trusts, charitable lead trusts, and qualified personal residence trusts.
If you would like to learn more about the utilization of trusts to mitigate estate tax exposure, contact our firm to schedule a free consultation.
Mark S. Eghrari, Estate Planning Attorney
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