Very high net worth individuals have to be concerned about the federal estate tax because it carries a heavy-handed 40 percent top rate. Assets that are held by an irrevocable trust would not be part of your estate, so these trusts are used by people that have this concern.
One of them is the generation-skipping trust. If you establish this type of trust, your grandchildren would be the ultimate beneficiaries. After your passing, your children would be able to accept distributions of the trust’s earnings and use property that is held by the trust.
However, the property would never be transferred to them, so the estate tax would not be levied. After the death of your children, your grandchildren would inherit the assets. The estate tax would be a factor at that time, but there would be just one round of taxation over two generations.
Another commonly used estate tax efficiency trust is the qualified personal residence trust. To implement this strategy, you convey your home into the trust, and you name a beneficiary and a trustee.
You establish a term during which you will continue to live in the home as usual; this is called the retained income period. When you transfer the home into the trust, it is no longer part of your estate for tax purposes.
There is a gift tax that is unified with the estate tax, so the transfer of the home to your beneficiary would be taxable act of gift giving. That’s the bad news, but the good news is that the value of the gift would be far less than the actual value of the home.
The IRS would determine the taxable value in light of the fact that the beneficiary would not assume ownership of the home for a number of years. No one would pay full price for a home under those circumstances, so the taxable value would be lower than the true value.
These are a couple of the irrevocable trusts that are used for tax efficiency purposes, and there are a number of others.
