Protect your Estate

Trusts and estate planning are essential components of financial security, ensuring the preservation and efficient transfer of wealth to future generations. Proper planning minimizes tax liabilities, streamlines asset distribution, and protects the value of your estate. At businessvaluationcpa.com, we specialize in providing tailored strategies to align with your unique financial goals, helping you safeguard your legacy and achieve peace of mind. Whether you're planning for your family's future or navigating complex tax considerations, our expertise in trusts and estates will guide you every step of the way. Visit us today to learn more about securing your financial future.

For estate tax planning, the Spousal Lifetime Annuity Trust (SLAT) is a type of irrevocable trust that allows one spouse to create a trust for the benefit of the other spouse while also providing potential estate tax savings. It is designed to provide income to the surviving spouse while potentially removing assets from the taxable estate of the spouse creating the trust. 

1. For trusts and estates, the spouse who wishes to establish the trust (referred to as the grantor) creates an irrevocable trust and transfers assets into it. The trust document specifies that the trust will provide a lifetime income stream to the other spouse (referred to as the beneficiary spouse).
2. Income Stream: The beneficiary spouse receives regular payments from the trust, typically through an annuity. The income generated from the trust assets is distributed to the beneficiary spouse according to the terms outlined in the trust agreement. The payments can be structured to meet the beneficiary spouse's financial needs and lifestyle.
3. Estate Tax Considerations: By placing the assets in the trust, the grantor removes them from their taxable estate. This can help reduce the potential estate tax liability upon the grantor's death. The trust assets, including any appreciation, are not subject to estate tax upon the grantor's death.
4. Spousal Benefits: The beneficiary spouse receives income from the trust, which can provide financial security and support after the grantor's death. The trust can also include provisions that allow the beneficiary spouse to receive principal distributions under certain circumstances, such as for health or educational expenses.

For estate tax planning: In a Grantor Retained Annuity Trust (GRAT), the assets placed in the trust have the potential to grow free of gift and estate taxes. However, it's important to note that the grantor retains an annuity interest in the trust, meaning they receive regular payments during the specified annuity period.

The key tax advantage of a GRAT lies in the valuation of the assets transferred to the trust for gift tax purposes. When the trust is created, the grantor determines the annuity payments they will receive over the trust's term. The value of this retained annuity interest is subtracted from the total value of the assets contributed to the trust. The remainder, known as the taxable gift, is the amount subject to the gift tax.

If the assets in the GRAT outperform the IRS's assumed interest rate (known as the 7520 rates), the excess earnings can pass to the trust beneficiaries, typically the grantor's family members, free of gift and estate taxes. This potential tax-free growth is one of the primary benefits of a GRAT.

However, if the grantor passes away during the annuity period, the trust assets would typically be included in their estate for estate tax purposes. Therefore, the grantor must outlive the annuity period to take advantage of the tax benefits fully.

When creating a GRAT for estate tax planning, the grantor transfers assets into the trust and retains an annuity interest for a specified term.

The IRS's assumed interest rate, known as the 7520 rate, determines the value of the retained annuity interest. The 7520 rate is a benchmark interest rate set by the IRS and is updated monthly.

If the actual investment returns of the assets in the GRAT exceed the 7520 rates, the excess earnings can pass to the trust beneficiaries (typically the grantor's family members) free of gift and estate taxes. This is where the tax savings potential lies.

However, if the assets in the GRAT do not outperform the 7520 rates or the grantor passes away during the annuity period, the trust assets may not produce tax-free growth.

In summary, the tax benefits of a GRAT arise when the actual investment returns of the trust assets exceed the IRS's assumed interest rate. In such cases, the excess earnings can pass to beneficiaries without incurring gift and estate taxes. 

According to the IRS, your basis in gifted property for trusts and estates is carried over from the donor; while your basis in inherited property is stepped up to fair market value

In estate tax planning the IRS requires a determination of Fair Market Value (FMV) for property received as a gift or inheritance. The FMV can be determined informally, i.e. without an appraisal  but you are advised to substantially conform to the level of expertise provided by an expert appraiser. 

FMV of gift  allowed to be calculated in a less formal manner than an accredited appraisal.

In calculating the donor's basis on the gifted property is important to include improvements to the property and diminution

(+)   Gross Estate

(-)    Deductions, claims, expenses, taxes

(-)    Casualty and theft losses

(-)    Charitable bequests

(-)    Marital deduction

(=)   Taxable Estate

(+)   Taxable gifts made after 1976

(=)   Total Taxable Transfers

(x)   Tax Rate

(=)   Tentative Estate Tax

(-)    Gift taxes paid on post-1976 gifts

(=)   Gross Estate Tax

(-)    Applicable credit amount

(-)    Other Credits

=    ESTATE TAX LIABILITY