FA Magazine July/August 2021 - Page 13

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Certain Trusts Take The Sting Out Of Estate Tax Increases

As Washington mulls possible increases to estate taxes , clients still have strategies to consider to help them remove the sting .

One of those strategies is to make gifts to trusts , which can take advantage of high tax exemptions and remove future appreciation of assets from taxable estates . One strategy available to spouses is to make a gift to a trust that allows for a qualified terminable interest property ( QTIP ) election .
Using this kind of trust as the recipient of the gift allows the donor spouse creating the trust to provide for a recipient spouse and wait at least nine months ( potentially as long as 21 ) to decide how the gift should be treated for tax purposes , said Sally Day , a CPA and managing director at Crowe LLP and leader of the firm ’ s Florida private client services group in Tampa . The reason for the extra time : The election can be made on the 2021 gift tax return filed next year .
Spouses are named as the primary beneficiary of the trust , and during their lifetime they must be the only beneficiary of the trust entitled to the income or principal from it . “ The spouse ’ s lifetime interest would provide that they receive all income at least annually ,” said Brandon Baker , a CPA at Friedman LLP and an estate and gift tax practice leader at the firm ’ s Philadelphia office .
“ The real advantage ... is that the QTIP election is made on the 2021 gift tax return , which is filed in 2022 , and the choice can be made at that time on how much of the transfer will be subject to tax ,” said Azriel Baer , counsel in the trust and estates group at the law firm Farrell Fritz in Uniondale , N . Y .
The estate and gift tax exemption , currently $ 11.7 million per person , is slated to sunset in 2025 . The current mood for tax legislation favors curtailing that exemption sooner . “ The uncertainty of when the exemption may be reduced makes flexibility in planning techniques very attractive ,” said
Michael Roberts , president of Arden Trust Company in Atlanta .
“ If an election is made to treat the trust as a QTIP trust , a gift to the trust is eligible for the marital deduction and therefore is not a taxable gift , nor does it use any of the donor ’ s gift tax exclusion ,” said Karen L . Goldberg ,
One strategy available to spouses is to make a gift to a trust that allows for a qualified terminable interest property ( QTIP ) election .
principal-in-charge of the trusts and estates group of EisnerAmper in New York .
“ Many [ clients ] are not aware of the flexibility to make a transfer today and decide later whether it uses any lifetime exemption ,” Day said , adding that because the recipient spouse is required to receive only income , trust principal can be retained for ultimate distribution to other family members or to anyone else . A QTIP can also protect the recipient spouse and the principal from creditors .
There are important conditions — and limitations — with this strategy . If a QTIP election is not made , all net trust income must be distributed to the beneficiary spouse . “ There ’ s no flexibility for trust income to be accumulated or distributed directly to descendants ,” Roberts said .
Baer added that the property over which the QTIP election is made will be included in the estate of the surviving spouse .
The election can be made over the entirety of or only a portion of the property transferred to trust , however . “ We can be tax efficient by making the election to apply to only that portion of the transfer ,” Baker said . “ Additionally , for [ generation-skipping trust ] purposes , an election can be made to use the transferor spouse ’ s GST exemption at the time the QTIP election is made .”
QTIP elections aren ’ t for everybody , but they can keep a good option open while Washington , D . C ., hammers out the immediate future of estate taxes .
— Jeff Stimpson
jULY / AUGUST 2021 | FINANCIAL ADvISOR MAGAzINE | 9