Tax Loopholes are still abundant when using an irrevocable trust correctly
The most important thing we should all take away from these billionaires is to plan ahead. I say, ‘just get started.' Most people won't.
Boston, MA (PRWEB) January 23, 2014
UltraTrust.com commented on Bloomberg’s recent articles, published on Dec 12, 2013, Dec 17, 2013, and Jan 7, 2014 regarding several CEO’s of major U.S. companies and their estate planning prowess (4,5,6). According to the Bloomberg articles and the Wall Street Journal article, executives of Facebook, Twitter, Goldman Sachs, and Las Vegas Sands have all implemented prudent estate planning and asset protection strategies using irrevocable trust’s in South Dakota (7).
South Dakota, according to the official SD tourist website, is home of Mt. Rushmore, Badlands National Park, and the never-ending trust. (1) While the attractions are great for a family getaway, the never-ending trust is a great getaway from taxes. Just ask U.S. Commerce Secretary, Penny Pritzker, the shareholders of Radisson and TGI Fridays and the top executives of Monster Beverage. (5) According to the Bloomberg article, all have given their assets a vacation for estate taxes in South Dakota. This sudden influx of trust money has gotten other states’ attention.
According to the American Bar Association, several states have followed South Dakota’s lead in one way or another, but most still use a version of the old laws concerning the Rule Against Perpetuities. (2) According to the legal dictionary, the Rule Against Perpetuities basically limits the amount of time one can have assets in a trust and this limit brings nightmares to many law students every year. The Rule Against Perpetuities is defined as, the principle that no interest in property is valid unless it vests not later than twenty-one years, plus the period of gestation, after some life or lives in being which exist at the time of the creation of the interest. (3) Forty-four states use some version of this Rule, while others use it for some property but not others, but South Dakota, much to the delight of law students, threw it out and left no time limits on assets in a trust. (3)
Why is South Dakota important in the estate planning world? First, as the Bloomberg article explains, estate tax or “death tax” is a tax imposed on gifts given after death, such as an inheritance. This, for the super wealthy, can be upwards of 40% for each generation. (4) “I understand the theory behind estate tax, but why should the government eventually get everything a wealth person ever accumulated after they have already paid income and capital gains taxes all of their life,” asks Rocco Beatrice, Managing Director of Estate Street Partners, “a person works hard to make a name for themselves and wants to pass their assets to future generations and South Dakota is allowing that to happen.” The wealthy are responding in droves and here’s why.
When the Rule Against Perpetuities is taken away, assets can be put in a trust, grow forever and many generations can tap into that wealth along the way, according to the Bloomberg article. Of course, the future generations will still have to pay federal income taxes. (5) “Basically if you're rich Grandfather Moneybags puts stocks in a trust in South Dakota with his descendants as beneficiaries, the trust grows state income tax free, because South Dakota has no income tax and the descendants collect the income in perpetuity without any estate tax, and that is very attractive to the ultra-rich,” explains Mr. Beatrice.
“Combine the Walton GRAT with a South Dakota trust, and folks with highly appreciated assets may never have to work a day in their life and never have to pay estate taxes,” states Mr. Beatrice, “A Walton GRAT is simply a trust that pays back the full amount within two years to the person who created the trust: No gift, no gift tax. . . it is zeroed out. Whatever is left is passed on estate tax free.” (4) This means that if a person puts $20 million into a Walton GRAT and over two years that GRAT makes $10 million, the $20 million goes back to the person and the $10 million gets passed on tax free. “The Walton GRAT is an new take on the idea that you put something in a trust not worth a lot and grow it in the trust to pass it on,” explains Mr. Beatrice, “If you were to grow it first and then put it in the trust, a large portion would be subject to the gift tax.” Add that to South Dakota’s lack of an income tax and the beneficiaries get close to everything tax free.
South Dakota trusts are not without some small catches, however, as the Bloomberg article explains. In order to open a South Dakota trust, you must have a South Dakota address. (4) Getting an address is as simple as renting an office there. Enter Pierce H. McDowell III, who not only campaigned for the South Dakota’s trust advantages, but administers trusts worth $14 billion and has his hand in at least another $75 billion. The entire state over the past four years has brought over $121 billion in trust assets. Mr. McDowell set up a trust company that also rents out office space to trusts.
The second catch, according to the Bloomberg article, is that at least one of the trustees of the trust needs to be a resident of South Dakota. (4) When one sets up a trust, they are free to choose any trustee that they wish. Many of the trusts in South Dakota have trustees that are South Dakota banks or companies. Others have individuals serve as trustees to meet this requirement.
The third catch, according to the Bloomberg article, is that real estate is generally governed by the law of its location. “The state of Massachusetts isn’t going to allow the laws of South Dakota rule in a case involving land in Massachusetts,” explains Mr. Beatrice, “A solid and well crafted irrevocable trust, such as the UltraTrust, based in your own state will work well for real estate and for those of us who have a sizable amount of assets, but won’t be funding a dynasty.”
“The most important thing we should all take away from these billionaires is to plan ahead. I say, ‘just get started’,” strongly advises Mr. Beatrice. “Without estate planning, even a family with modest wealth could lose hundreds of thousands of dollars.” Certainly one doesn’t need to be a billionaire to take advantage of estate planning tools. A simple irrevocable trust like the UltraTrust irrevocable trust agreement, even if the gift to the trust is well under the estate tax exemption, will save the assets from potential creditors, the nursing home, a divorce, and your children from having to go to probate court for months after a death.
“Probating a will and estate is not fun and attorney, appraiser, accounting, and court fees aren’t inexpensive either,” exclaims Mr. Beatrice, “More people should be less concerned with what the rich are doing and more concerned with what they need to do to protect, enhance and pass on the assets they have accumulated.”
To learn how to protect assets save on estate taxes and probate costs visit UltraTrust.com, the irrevocable trust experts. Visit MyUltraTrust.com to set up a DIY online irrevocable trust plan.
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Estate Street Partners
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Sources:
1. travelsd.com/Attractions/
2. apps.americanbar.org/rppt/meetings_cle/2007/jointfall/Joint07/JointEstateandGiftTax/50-statecomparisonofspendthrifttrustlaws.pdf
3. legal-dictionary.thefreedictionary.com/Rule+against+Perpetuities
4. bloomberg.com/quicktake/the-estate-tax/ - 1/7/14
5. bloomberg.com/news/2013-12-27/moguls-rent-south-dakota-addresses-to-dodge-taxes-forever.html 12/27/13
6. bloomberg.com/news/2013-12-17/accidental-tax-break-saves-wealthiest-americans-100-billion.html 12/17/13
7. online.wsj.com/article/SB10001424052702304500404579127283687636364.html?mod=wsj_streaming_stream 10/11/13