Page 102 - Forbes - USA (February 2018)

THE INVESTMENT GUIDE

REENGINEER YOUR RETIREMENT | TAXES

heirs or state estate taxes to worry about— ing new techniques that avoid capital gains clients is starting a marketing business and

the best fix will be to do away with trusts tax but require—you guessed it—trusts. figures to earn about $1.6 million a year

altogether. That’s because of the “portabil- Consider the “mother-in-law trust”: You from it. Oshins suggested he set up eight

ity” of exemptions between spouses in- give your mother-in-law or other older separate nongrantor trusts for his three

troduced in 2011. Before that change, the relative a general power of appointment (a kids and five grandkids and give each trust

wills of affluent couples typically created form of control) over an irrevocable trust 10% of the new business. After the entre-

what’s known as a “credit shelter” or “by- for your spouse and descendants and fund preneur takes a reasonable salary for him-
pass” trust. When the first spouse (assume that trust with low-basis assets. When self (crucial to keep the IRS off your back),

it’s the husband) each trust should
died, an amount STATE DEATH TAXES, CIRCA 2018 be left with about

equal to his estate- TWELVE STATES AND D.C. LEVY ESTATE TAXES ON WEALTH ABOVE THE AMOUNT SHOWN. $150,000 a year in
tax exemption SIX HAVE AN INHERITANCE TAX, WITH THE TAX BASED ON WHO GETS THE MONEY. passthrough profi t.
went into a trust (UPDATES AT WWW.FORBES.COM/STATE-ESTATE-TAX) Each of the eight
for his wife and trusts can shield
kids. She would WA MN VT ME 20% of that—or
NE
Estate tax
Estate tax
Estate tax
have access to trust $2.19 million Inheritance tax $2.4 million NY $2.75 million $11.2 million $30,000—from
Estate tax
Estate tax
income and, if Iowa $5.25 million federal income tax,
Inheritance tax MA
need be, principal. OR PA Estate tax avoiding tax on a
$1 million
But his exemp- Estate tax Inheritance RI total of $240,000.
tax
$1 million
Estate tax
tion wouldn’t go to $1.54 million Note that the
waste. And when CT businessman likely
she later died, Estate tax wouldn’t be able to
IL IL $2.6 million
the trust assets Es tat e tax shelter any income
Estate tax
$4 million MD NJ
$4 million
MD
wouldn’t be part KY Es tat e tax D.C. Inheritance if he reported it
KY
Estate tax
tax
$4 million
$4 million
Inheritanc
e tax
of her estate. Now, Inheritance tax Inheritance taxe tax $11.2 million all on his own tax
Estate tax
Inheritanc
with portabil- return, since above
Hawaii
ity, any unused Estate tax the income cutoff ,
portion of the $11.2 million certain service
Estate tax exemption matches federal exemption
husband’s exemp- Estate/Inheritance tax below federal exemption professionals—ac-
tion passes to his No Estate/Inheritance tax countants, lawyers,
widow, so long as brokers, marketing
the executor of the husband’s estate fi les a your mother-in-law dies, the assets in the gurus—can’t claim the QBI break at all.
tax return electing portability. trust get a step-up. True, the trust is now Expected federal income tax savings from
Why not create a trust anyway? One includable in your mother-in-law’s estate. this Rube Goldberg contraption? Nearly
big reason: avoiding capital gains tax. But since she wasn’t rich enough to use $89,000 a year.
When someone dies, the assets in his or her whole $11 million exemption, you’ve And then there are the machina-
her estate (including real estate, collect- expropriated the excess for a good cause: tions of legendary trust lawyer Jonathan
ibles and stocks and mutual funds that avoiding capital gains tax. Blattmachr, now at Peak Trust Co., which
aren’t held in a retirement account) get But why stop with capital gains? Trust sets up Nevada and Alaska trusts for asset
a step-up in basis to their current value, lawyers are now busy concocting ways to protection and tax purposes. He’s schem-
meaning heirs can sell immediately exploit the law’s new tax break for “quali- ing to use trusts to get around the new
without owing capital gains tax. If the fied business income” (QBI). While there law’s $10,000 cap on deductions for state

husband’s assets are left directly to his are various restrictions on claiming the and local taxes (which, like the doubled

wife, they get one step-up at his death break at higher income levels, the provi- estate exemption, technically expires at
and another at hers. By contrast, assets in sion allows singles with total income of the end of 2025). Blattmachr fi gures that
a traditional credit shelter trust won’t get less than $157,500 (and couples below by putting his $1.8 million Garden City,
that second step-up at her death. (If you $315,000) to avoid income taxes on 20% New York, home into an LLC, and then
already have one of these trusts, there’s of their profits from a sole proprietorship putting the LLC shares plus an additional

a possible workaround: Assets that have (reported on Schedule C), from farming, $130,000 of marketable securities into four
appreciated since the husband’s death can or from a passthrough, such as a partner- nongrantor Alaska trusts, he can eff ec-
be distributed—in lieu of cash—to the ship or S corporation. At the last minute, tively get a full deduction for the $40,000
widow. If she holds them until her own tax writers gave the 20% exclusion to trusts in annual property taxes on his home. PETER AND MARIA HOEY FOR FORBES
death, they’ll get another step-up.) with income of less than $157,500 too. “Congress can’t contemplate what creative
But with a bigger $11 million exemp- Here’s the ploy cooked up by Las Vegas estate planners will come up with,” says a
tion to play with, the lawyers are concoct- estate lawyer Steve Oshins. One of his delighted Oshins. F
100 | FORBES FEBRUARY 28, 2018