Financial advisors say it bodes well that so many of their wealthy clients are eager to ensure that their heirs are well-adjusted and good stewards of wealth. We asked six advisors to describe specific ways parents can help set their progeny up for success, and while estate-planning strategies play a part, it turns out that there’s no substitute for good parenting.
Set Up an Irrevocable Trust
Mitchell Prosk, senior client advisor, Crescent Grove Advisors
One idea is a basic irrevocable trust. Parents create the trust for a beneficiary and place annual gift-tax-exclusion gifts into the trust. It’s a tax strategy that benefits the parents by reducing their taxable estate and that eventually benefits the beneficiary due to less estate tax paid on any inheritance. Often, this type of trust is a vehicle where parents put money for a beneficiary to be used later in life for buying a home or investing in a business.
Another technique that has been very successful for families subject to the estate tax, and which isn’t overly complicated, is using a grantor-retained annuity trust, or GRAT. Generally speaking, parents place assets into the trust for a set term. At the end of the term, if the appreciation of the assets was above the set interest rate, the GRAT is successful, and there is a remainder. The remainder passes out of the parent’s taxable estate to the beneficiary. When successful, it’s a really nice and powerful wealth transfer technique.
If a GRAT isn’t successful, the cost is just setting up the trust with the attorney. There is the potential for the basic irrevocable trust and the GRAT strategies to dovetail at the end of the GRAT term. If the GRAT is successful, the remainder can go into the irrevocable trust that was already created for a beneficiary and that can continue to catch annual-exclusion gifts.
Read the full article from Barron’s Advisor here.