The elements necessary to establish good estate planning practices can change over time due to the variables that affect financial markets. Low interest rates and an expected decrease in the estate tax exemption are two major factors influencing the job of Texas estate planners.
A senior manager at one wealth management company advises that selling to an intentionally defective grantor trust is one estate planning technique that allows planners to take advantage of a financial environment with low interest rates. An IDGT is especially useful to individuals with a business that they believe will appreciate substantially over time because the investment vehicle will effectively freeze the tax liability of the asset for estate planning purposes without affecting income taxes.
Once the business or stock from the company is sold to the trust, the owner will receive a promissory note. Both the current value of the asset as well as subsequent appreciation are not part of the owner’s estate. The owner is responsible for income tax on the asset. However, the assessed value of the assets at the time of death will become the amount of the original promissory note that was issued.
The grantor of an IDGT will also benefit from what is commonly referred to as “swap power.” This power allows the grantor to pull assets out of the trust and substitute assets with the same value. This practice allows the grantor to take advantage of low interest rates by providing what is in effect a low-interest loan to the trust. The result is no interest income to report and no sales tax. There will also be no income tax assessed if interest rates increase at a later date.
Proper estate planning is a complex process that, if done correctly, can allow heirs to fully benefit from the life’s work of a benefactor. Individuals with concerns regarding the transfer of assets to heirs may find help in consulting with an estate planning attorney.
