A family wealth trust is a type of trust that would be used to preserve resources that you are passing along to your loved ones. Wealth preservation strategies can be important to high net worth individuals because of the potential impact of the death taxes.
We have a federal estate tax in the United States that can be applied on large asset transfers. Unlimited assets can be transferred between spouses free of the death tax, but transfers to anyone else are potentially taxable.
The federal estate tax credit or exclusion is $5.43 million during the 2015 calendar year. This is the amount that you can transfer before the estate tax would be applied. It would potentially be levied on the portion of your estate that exceeds this amount.
We should point out the fact that there is also a federal gift tax in place, so you cannot give gifts while you are living to avoid the estate tax.
Most states in the union do not have state-level estate taxes, but there are a number of states that do impose their own death taxes. We practice law in the state of New York, and there is a New York state estate tax. For the rest of 2015, the state-level estate tax exclusion is $3.125 million.
There are family wealth trusts that can be used to reduce your exposure if your estate is going to be subject to one or both of these taxes. Let’s take a brief look at a few of them.
Qualified Personal Residence Trusts
Your home is considered to be part of your taxable estate, so you could use a qualified personal residence trust to facilitate a transfer at a tax discount.
After transferring the home into the trust, you can live in the home as usual for as long as you want to. In the trust declaration, you name a beneficiary who will assume ownership of the home after the term expires.
This transfer would be subject to the gift tax, but the value of the home for tax purposes will be much less than its actual value on the open market. This is because of the fact that you are retaining interest in the home for a number of years after you convey it into the trust.
When the transfer takes place, the taxable value of the home will be far less than its true fair market value, so the tax consequences will be mitigated.
Charitable Trusts
There are charitable trusts that can be used to provide for charitable causes as you simultaneously facilitate tax efficient asset transfers. These would include charitable lead trusts and charitable remainder trusts.
Generations Skipping Trusts
When a generation-skipping trust is established, two generations can benefit from the assets in the trust. However, there would be just one round of taxation.
Tax Efficiency Consultation
There are other family wealth trusts that can be used in addition to these three possible solutions. To explore your options, contact us through this page to set up a free consultation: Rochester NY Estate Planning Attorneys.
Michael Robinson, Estate Planning Attorney
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