Someday your estate could be taxed at a rate as high as… whatever Congress wants the rate to be at the time.
The rules keep changing, but today the rate is 40% on amounts above $5.4 million, with another 40% haircut for anything you leave for your grandchildren. Your heirs might receive less than half of what you’ve built up, and future changes to the rules could make matters even worse.
If that’s an unwelcome thought, you may have already visited an estate planner or at least have told yourself that you should. Putting together an efficient estate plan is a chore, so if you’ve already done it, you may be loath to reopen the topic.
You don’t have to tear up your estate plan to get the asset protection and other advantages available with an international trust. You simply need to relocate the estate plan to a friendlier jurisdiction. Everything you may have heard about from an estate-planning attorney can easily be replicated inside an international trust, including…
- Protecting your lifetime credit amount ($5.4 million) from gift and estate taxes
- Using annual gift tax exemptions ($14,000 per recipient per year)
- Crummey trusts (another way to use annual exemptions)
- Marital exemption (for gifts to your spouse)
- Marital deduction (for bequests to your spouse)
- QTIP trusts (to capture the marital deduction for money left in a trust)
- Life insurance trusts (to avoid estate tax on life insurance proceeds)
- Grantor Retained Annuity Trusts (GRATs, to efficiently remove an unlimited amount of wealth from your taxable estate)
- Installment sales to a grantor trust (another efficient way to remove wealth from your taxable estate)
- Using a properly structured limited liability company (LLC) to reduce gift and estate taxes
These are the standard tools of estate planning, the techniques designed to reduce the eventual tax bill on your estate—or even eliminate it. You readily can apply any or all to make estate planning easier. But an international trust lets you do even more.
Your trust makes estate planning easier. With an international trust, you can remove assets from your taxable estate and still keep them available for your own support, in case you need them later. This frees you to do a thorough, energetic job of estate planning without fear of planning yourself into the poorhouse by letting go of too much too soon. You can’t do this with stay-at-home estate planning.
A thorough estate plan may call for transactions between you and other family members. You can simplify those transactions by wrapping them in your international trust. Recall that for income tax purposes you are deemed to still own the assets you’ve transferred to your international trust, so no transaction between you and the trust will have any income tax effect. Thus the trust lets you pursue powerful transactions for estate planning without entangling yourself in unwanted income tax complications.
And an international trust is the grand slam of estate planning: It eventually eliminates the need for estate planning. Because the trust is discretionary, it won’t be included in the estate of anyone in a later generation. In other words, your trust leaves the estate tax system forever.
And again because the trust is discretionary, it also leaves the US income tax system. Beneficiaries will still need to report distributions they receive from the trust after your lifetime, and a portion of those distributions will be taxable to them. But no Beneficiary will have a duty to file reports on the trust itself or to pay tax on investment returns that are accumulating inside it.
The estate-planning power of a properly structured international trust isn’t limited to putting an end to estate tax. The trust should give you as Protector a power to appoint one or more successor Protectors. You also can have a power to divide the trust into separate parts and name a different Protector for each portion. For example, suppose that you have three children. As Protector you can provide that after your lifetime the trust will be split into three parts, and each of your children will be the Protector of one of those parts.