4000 Hollywood Blvd. Suite 485 South Hollywood, FL 33021
CALL US TODAY: (954) 966-2112

News & Resources

HAVING YOUR CAKE AND EATING IT TOO

December 16, 2020 | Category: Asset Protection, Estate Planning and Probate, News

A number of our clients have asked us about making gifts to family members in order to avoid Federal Estate Tax upon the second death.

Currently each spouse can give away either during lifetime or at death, or some combination, $11,580,000 without Gift Tax or Estate Tax. This is known as the Exemption.  The fear is that the Exemption will likely be significantly reduced under the Biden Administration, perhaps to $3,500,000.  In any event, the Exemption is scheduled to be reduced in half under current law on January 1, 2026.

The Federal Estate tax is currently a flat 40%. Biden want to increase the rate, probably to 45%.

An underutilized technique to reduce Estate Tax is the Self-Cancelling Installment Note or “SCIN”.  Here, a couple sell assets to an irrevocable trust for the benefit of their child.  The couple has chosen to sell $900,000 of their assets plus make a gift of $100,000 in cash.  The trust now has $1,000,000 in assets with a $900,000 debt.  The note provides for principal and interest amortization over their joint life expectancy, which is 20 years.  The interest rate can be as low as 0.60% per year to pass IRS muster.  If nothing else, any income earned by the trust above 0.60% inures to the benefit of the child, free of Estate Tax.

However, at death of the second spouse, the unpaid principal and accrued interest of the note is includible for Estate Tax purposes.  The value of the note can be reduced to zero by adding a self-cancelling feature.  This provides that at death of the second spouse, the note is forgiven.  In order for this feature not to be treated as a gift, the note must have an actuarially determined increase in interest rate or an actuarially determined increase in principal. The significance is the value of the note at the second death is zero for Federal Estate Tax purposes as no future payments are due the couple or their estates.

In our example, where a $900,000 sale is made, assume the couple are both age 70.  By increasing the interest rate from 0.60% to 2.399% or by increasing the original principal obligation from $900,000 to $1,074,669, the note is forgiven at the death of the second spouse. The note avoids Estate Tax.  Time to have your cake.

It gets better. The Trust is designed to be a “grantor trust.”  This means the couple is treated as the owner of the trust.  This has two benefits.  One, for Federal Income Tax purposes, you cannot sell assets to yourself.  The effect is that the sale of the $900,000 of assets to the trust is free of Federal Income Tax regardless of the basis of the assets.  Two, the couple and not the trust or the child, will be subject to Federal Income Tax on the taxable income of the trust.  Thus the monies in the trust accumulate tax free for the child and the couple reduces their wealth without using their Estate and Gift Tax exemption.  Time to eat cake.

 

Material presented on the Kramer, Green, Zuckerman, Greene and Buchsbaum, P.A. website is intended for information purposes only. It is not intended as professional advice and should not be construed as such. The material presented on this site is included with the understanding and agreement that Kramer, Green, Zuckerman, Greene and Buchsbaum, P.A.is not engaged in rendering legal or other professional services by posting said material. The services of a competent professional should be sought if legal or other specific expert assistance is required. Any unauthorized use of material contained herein is at the user’s own risk. Transmission of the information and material herein is not intended to create, and receipt does not constitute, an agreement to create an attorney-client relationship with Kramer, Green, Zuckerman, Greene and Buchsbaum, P.A. or any member thereof. This website is not intended to be advertising and Kramer, Green, Zuckerman, Greene and Buchsbaum, P.A. does not wish to represent anyone desiring representation based upon viewing this website in any state or jurisdiction where this website fails to comply with all laws and ethical rules. This website is not intended to constitute legal advice or the provision of legal services. By posting and/or maintaining this website and its contents, Kramer, Green, Zuckerman, Greene and Buchsbaum, P.A. does not intend to solicit legal business from clients located in states or jurisdictions where Kramer, Green, Zuckerman, Greene and Buchsbaum, P.A. or its individual attorneys are not licensed or authorized to practice law. Some links within this website may lead to other sites. Kramer, Green, Zuckerman, Greene and Buchsbaum, P.A. does not necessarily sponsor, endorse or otherwise approve of the materials appearing in such sites.

© Copyright 2015 Kramer, Green, Zuckerman, Greene and Buchsbaum, P.A. All Rights Reserved. Sitemap | Law Firm Essentials by PaperStreet Web Design