Illinois Estate Planning & Elder Law Blog

When a parent prepares a will, keeping distributions even among the children has advantages.

It is impossible to determine what one’s children will be doing in the future and what their incomes will be. The child who is a successful computer analyst today, might be out of work in five years and the actor now bussing tables may get his big break next year.

Gifts can be made as needed to children while you are alive and can afford it. For example, a child with children can be helped with college expenses by contributing to the grandchild’s 529 college savings plan. The IRS allows the equivalent of five years’ worth of gifts to be made all at once. Accordingly, one grandparent can give $65,000 per grandchild. Both grandparents can give $130,000 per grandchild.

On the other hand, a disabled child who is not independent will likely require a bigger share of the parent’s assets. A special needs trust can be utilized to get the maximum advantage from a gift by a parent or grandparent by keeping the gift from affecting eligibility of the disabled child for government programs and payments

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The White House is proposing to limit the ability of families to use partnership structures to minimize the valuation of assets for estate tax purposes.

A family might set up a partnership to introduce younger family members to investing while the parents maintain control over the assets, or a family might set up a partnership to account for the possibility of divorce.

Restrictions often accompany these partnership setups, including a partner’s ability to take a distribution or to transfer an asset without the consent of a general partner. Accordingly, families discount the value of these partnership interests when valuing them for estate tax purposes.

The White House is seeking to curtail these adjusted valuations.

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The White House recently proposed changes to the rules governing Grantor Retained Annuity Trusts. These trusts pay an annuity to the grantor over the life of the trust that equals the initial value of the assets plus an interest rate established by the IRS (currently 2.4 %). The annuity is not taxed since it flows back to the creator of the trust.

If the investment produces a greater return than the IRS established rate, there is a remainder in the trust which can be transferred to the beneficiaries of the trust without any gift tax being assessed.

But if the trust grantor dies during the term of the trust, the assets in the trust revert back to the grantor’s estate and are subject to estate taxes. To minimize the risk of the grantor passing away before the end of the trust term, Grantor Retained Annuity Trusts have been established which have short terms, some as short as two years.

Without the GRAT setup, any gifts by an individual in excess of $1 million over the individual’s lifetime would be subject to the current 45% tax.

The White House has proposed setting a minimum term of 10 years for GRATs. This minimum term might encourage individuals over 75 years of age to reconsider establishing a GRAT.

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