The term “asset protection” can apply to different types of concerns. There is the matter of legal actions that can be initiated by creditors and other litigants, and this is what most people think about when they hear the term.
This can be relevant from an estate planning perspective, and there is a legal device called a family limited partnership that can provide asset protection for investors and others.
To explain though the use of an example, let’s say that you own multiple rental properties, and you are well aware of the fact that people can get injured on your property. As a response, you can convey each separate building into a family limited partnership.
You would be the general partner, and you would have absolute decision-making authority. Family members that you bring into the partnership would be limited partners.
If someone is injured in one of the buildings, the other properties would be protected, and property that is owned by the partners would be out of the reach of litigants. On the other side of the coin, the properties would be protected if any partner is personally suited.
This is a basic explanation, but these partnerships can be used by people that are in high-risk professions and other types of businesspeople.
The federal estate tax can consume a significant portion of your estate because it carries a 40 percent top rate. This tax presents a challenge for high-net-worth individuals only, because there is a $12.06 million exclusion in 2022.
Any portion of an estate that exceeds this amount is potentially subject to the estate tax. Large gift giving to avoid the estate tax is not the solution, because there is also a federal gift tax.
Since the estate tax and the gift tax are unified, the $12.06 million exclusion is a unified exclusion that encompasses your estate and gifts that you give while you are living. However, there is an additional $16,000 per person annual gift tax exclusion.
You can give this much to an unlimited number of gift recipients during a given calendar year free of taxation. There is no limit to the total amount that you can transfer out of your name tax-free as long as you do not give more than $16,000 to any one individual.
There are a number of different types of irrevocable trusts that can be used to gain estate tax efficiency, and one of them is the grantor retained annuity trust. To implement this strategy, you fund the trust with assets that you expect to appreciate considerably.
You name a beneficiary that would inherit asset that remain in the trust after the term expires. The transfer to the beneficiary would be a taxable gift, so the IRS adds anticipated interest accrual to the taxable value of the trust when it is established and funded.
The IRS Section 7520 rate is used to determine the rate of interest that is added. This is 120 percent of the applicable federal midterm rate, and it is often referred to as the “hurdle rate.”
When you establish the trust, you set the term, and you accept distributions that will eventually equal the entire taxable value of the trust. If the assets perform better than the hurdle rate during the term, there will be a remainder left in the trust after its expiration.
At that time, the beneficiary would assume ownership of the assets that remain in the trust, and there would be no taxation on the transfer. This is one approach that can be taken, and it can be combined with the utilization of other tax efficient transfer methods.
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We would be more than glad to help if you are ready to work with a Cincinnati estate planning lawyer to develop an asset protection strategy. You can call us at 513-721-1513 to schedule a consultation appointment, and there is also a contact form on this site you can use to send us a message.