The New Tax Law – Unique Opportunities in the Face of Pitfalls.

Clear back in January, I wrote an article on the use of spousal access trusts. See the article

Although they’ve been around for awhile under various names, they are again becoming popular as a hedge against the possibility of lowered tax exemptions in two years. Of course, they offer other great benefits, such as creditor protection, asset valuation freeze, access to income and principal, and so on—the same benefits they have always offered to both high and very low net worth folks.

Here’s a somewhat different twist. Recently, my favorite clients, Bill and Carole Nelson (remember, these are imaginary people) came in with Bill’s brother Doug. Bill and Doug inherited a very profitable farm from their grandmother’s trust. The trust provided for the boys’ father during his life, but at his death the entire farm passed outright to Bill and Doug.

Bill and Doug have a manager that does all the work, but they call the shots and realize the net profit. All is well, right?

No one has even considered what will happen when either Bill or Doug passes away or becomes disabled and can’t make decisions. And what about potential taxes? Bill and Carole had recently attended my seminar, the one I called “Build a Fence or Buy an Ambulance,” on the beauty and the pitfalls of the new tax law, and realized they had a great planning opportunity plus a strong need for some tax protection.

“What will be the consequence if the exemptions are substantially reduced in two years and we have this farm sitting here? We need the income we’re used to getting from the farm and we certainly want to maintain control and make the important decisions. So, can we realize these goals and also keep the farm in the family? Can we protect our children and also meet our family needs?”

Consider this: Let’s create two nearly identical irrevocable trusts. Bill creates one for Doug and gifts his half of the farm to it. Doug is the trustee (maintains control) and the lifetime beneficiary (maintains income). Upon Doug’s death, the farm stays in that trust for the benefit of Doug’s wife and children in the manner provided in the trust – (remember, stories will answer this latter part).

At the same time, Doug creates a trust for Bill with essentially the same terms and gifts his half of the farm to it. Bill is the trustee and the beneficiary (control and income) and on Bill’s death, Carole becomes the beneficiary and at her death, the farm stays in that trust for the benefit of Bill’s and Carole’s children in the manner provided in the trust.

The value of the farm is frozen in that any appreciation in value will belong to the trusts and not to Bill and Doug. The farm’s value is totally removed from Bill’s and Doug’s estate. Both Bill and Doug have used a part of their unified credit (estate and gift tax exemption) by making the gifts to the trusts, but they’ve used that gift exemption when it is at a $5 million dollar level, the highest in history, and before it can be reduced by changes in the law.

Just another example of some creative thinking taking advantage of the wonderful opportunities of the new tax law while protecting against the pitfalls of that law.

Couldn’t you also do this with an investment portfolio? With a couple of rental properties? With other assets?