Wall Street Journal: Can You Trust Your Kid With $5.25 Million?:
Wealthy families got a holiday gift on Jan. 1, when Congress agreed on
permanent estate-tax rules that are much more generous than many
financial planners had expected. Some aren't celebrating, however. Instead, they are grappling with
new questions about how best to set up trusts for their heirs—while
keeping a measure of control over their wealth.Under the new rules, a taxpayer may
shield up to $5.25 million from estate taxes ($10.5 million for
couples), and must pay 40% on amounts over the exemption, up from 35%
last year. Had Congress done nothing, the exemption would have fallen to
$1 million ($2 million for couples), and the rate would have jumped to
55%.On top of that, the estate and gift tax
remain unified, meaning an individual can use his entire exemption to
make gifts while alive.Now that the uncertainty has been lifted, some ultrawealthy families are
wondering whether they want to leave heirs that much tax-free money
after all. Can their children handle a payday of as much as $10.5
million without losing their motivation to work hard and be productive? …There is a solution for such situations: the "quiet," or "silent,"
trust, which keeps the children in the dark about their wealth until
later. …What about families that already have set up their estate plans? There
was a burst of activity late last year in particular, when people rushed
to lock in favorable tax rules before the possible change on Jan. 1. …For families that rushed to capture last year's tax breaks without
thinking through all of the emotional consequences, there is good news: A
few simple techniques can help you get back some control over when your
heirs can collect money and how. … [E]xperts say there are moves that can be made now to address the thorniest estate-planning issues. Here's what you can do.
- Keep it Quiet. … During last year's estate-planning bonanza, demand spiked for quiet
trusts in particular, experts say. While only about 13 states explicitly
allow them, some 19 others have rules implying they are permitted—and
more states are pushing to make them legal, including New Jersey and
Maryland. Even if you live in a state that frowns on quiet trusts, you could open one in a state that allows them. … Quiet trusts are controversial among estate planners, in part because
they make it harder for trustees to do their job of keeping heirs
informed about their investments. - Tweak for Control.
Families can build in ways to revise their estate-planning vehicles down the road. One common tweak to trusts holding big, new gifts: adding spouses as potential beneficiaries, so they can tap into the trust if need be. A similar tool is the "nonreciprocal" spousal lifetime-access trust, in
which the surviving spouse has continued access to the deceased spouse's
trust. The key is to make sure the rights, interests and powers that
each spouse grants to the other aren't identical, or even similar enough
for the IRS to challenge. … Another popular technique is called "decanting," which allows the trustee to move assets among various trusts. … - Liquidate the Trust?
With the estate-tax exemption made permanent, families with less than $10.5 million who had set up trusts to hold annual gifts to kids and grandkids might be tempted to cancel them and distribute the money under the new lifetime gift-tax exemption of $5.25 million ($10.5 million for couples). That way, they wouldn't have to pay the fees involved in maintaining a trust, file separate income-tax returns for it or deal with administrative hassles.
But there are some big caveats to liquidating a trust. If your heir gets divorced, an ex-spouse could get part of the money. And the kids would get the money while you are alive, meaning you might see them spend it in ways you consider financially irresponsible.
