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Example: You have a highly appreciated stock portfolio worth $6M.
Few plans will have much chance of success without periodic professional involvement.That might mean that proper planning should work just fine.Also, the number of states that permit self-settled trusts has grown over the years and is now 15.If you borrow $3 million using the highly appreciated stock as collateral, you can gift the $3M to a grantor trust.You will grow the value of those assets outside your estate, you’ll pay the income tax on trust income reducing your estate, and your estate will be reduced by interest charges. What if the securities the trust invests in with the fund borrowed plummet in value?There are also a host of modifications or precautions you can consider: defer your right to receive any distributions for 10 years (the bankruptcy laws permit a trustee in bankruptcy to set aside transfers to self-settled trusts with 10 years); instead of having yourself listed as a beneficiary let a trusted person acting in a non-fiduciary capacity (i.e., not a trustee or trust protector) have the power to appoint descendants of your grandparents.
Thus, you are not a beneficiary when the trust is created, so arguably the trust is not a self-settled trust.
But now, most wealthy people’s estates are below the $5,430,000 (2015) estate tax exemption amount. Absent the IRS regulatory change the IRS could argue that the FLP/LLC interest must be discounted so that the assets in your estate will not receive the same quantum of basis step up.
With a regulation prohibiting discounts your estate might get a bigger basis step up (less capital gains to heirs) at no estate tax cost. ■ Administration: You have to meet regularly with all of your advisers after completing a complex/large transaction in order to properly administer that plan. A few of the myriad of vital steps folks so often get wrong include: missing note payments, missing GRAT or CRT annuity payments, paying fees from the wrong entities/trusts, monitoring defined value mechanisms, not issuing Crummey notices, not monitoring trust termination dates, and more.
Should years in the future you need access to trust funds the trusted person might add you as a beneficiary. This creates interesting planning opportunities, but it might also create a new risk for trustees.
If you’re a trustee of an irrevocable trust, and the trust agreement is not optimal, in the past it might have been presumed that “it is what it is.” But now, do you have an obligation to use decanting to improve the provisions of the trust?
The latest salvo will be regulations negating discounts on FLPs/LLCs (perhaps only on those not operating an active business) what should you be doing? If discounts are nixed and your estate is under the federal exemption amount, you might do a happy jig! Because the IRS will have done most wealthy, but not ultra-wealthy, taxpayers a favor.