Home Is Where the Tax Exemption Is: Placing Property in Trust Now
More than ever, home is where our hearts are. Home may also be a cornerstone in our wealth transfer planning, allowing families to utilize the still high lifetime estate tax exemption, without sacrificing liquidity.
Let’s back up. The estate tax exemption, as discussed here, is scheduled to sunset in 2025, with talk of cuts to previous levels indexed for inflation or even less from the current $11.7 million per individual. There has also been some discussion about eliminating the step-up in basis at death. Not surprisingly, many families are exploring wealth transfer options now. But tapping liquid assets can mean compromising lifestyle and other considerations, as well as the risk of generating significant taxes. Placing primary and secondary (or other) residences in trust could provide a tidy solution.
Consider two recent residents of New York who are making some big and potentially very tax-efficient changes in their lives. Their Florida vacation home will soon be their main residence, and their home in Long Island, where they raised their children and still have many friends, will become their summer place. (As discussed in Florida Bound: Moving to a Warmer [Tax] Climate by Helena Jonassen (click here), changing domicile can be tricky; we recommend working very closely with advisors.)
In this couple’s case, changing domicile has been well worth the effort; their income tax and estate tax situation is obviously improving (as Florida imposes neither) and they are flexing new muscles at work and play, exploring their new neighborhood by bike and photographing local birdlife. To utilize their exemption, the couple created two trusts: one a Spousal Limited Access Trust, or SLAT, for the lifetime benefit of the other and then on to their children, grandchildren, and future lineal descendants; and the other a Generation-Skipping Tax-Exempt Trust, or GST trust, also for the benefit of their children, grandchildren, and future lineal descendants.
More to our point here, the couple also retitled their New York property to tenants in common from joint name. This allows one partner to use half of the property to fund the SLAT, while the other can fund the GST-exempt trust. Like many of those implementing similar strategies, the couple and their advisors created an LLC structure to own the property before gifting it. This makes transferring the property easier and provides some efficiencies related to its ongoing management. A subsequent valuation took into account a 25% discount for their relative lack of control over the property, minimizing the amount of exemption used in each transaction while funding both trusts.
The two trusts are now paying the insurance, taxes, and maintenance on the New York (and now vacation) property, amounts that are offset by the couple’s payment of a fair market value rent to use the property as they like. (These grantor trusts do not have to pay income taxes on the rental income.) The couple is aware that the fair market value of the rent may be in excess of the cost of carrying the property, but the potential hit to their liquidity is marginal compared with the one they would have incurred had they transferred other assets. There is an additional benefit to rent above expenses in that it serves as another tax-free transfer to heirs and can put a real yield on the property.
It’s worth noting that if the residence gains significantly in value, the couple could swap inclusion in the trust for other assets of equal value but with a higher cost basis. The house would then be included in the estate and the heirs would benefit from the step-up in cost basis (a readjustment of the value of an appreciated asset for tax purposes upon inheritance). This assumes that the step-up remains in effect.
It’s also worth noting that this couple’s entire approach could work at least as well for other types of illiquid assets with appreciation potential. These and other related issues, including family governance, are matters for discussions with family members and advisors, including corporate fiduciaries. (In this case, the couple works with Evercore Trust Company.)
Ironically, this couple remains relatively liquid, thanks to what many of us consider our most illiquid asset – the family home. It sounds like a lot of planning – and it was – but they are pleased to be wrapping it up and are looking forward to the next stage of their lives.
Tom Olchon is a Managing Director and Wealth & Fiduciary Advisor at Evercore Wealth Management. He can be contacted at thomas.olchon@evercore.com.
Evercore Wealth Management, LLC ("EWM") is an investment adviser registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. EWM prepared this material for informational purposes only and should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. It is not our intention to state or imply in any manner that past results are an indication of future performance. Future results cannot be guaranteed and a loss of principal may occur. This material does not constitute financial, investment, accounting, tax or legal advice. It does not constitute an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Specific needs of a client must be reviewed and assessed before determining the proper investment objective and asset allocation which may be adjusted to market circumstances. EWM may make investment decisions for its clients that are different from or inconsistent with the analysis in this report. EWM clients may invest in categories of securities or other instruments not covered in this report. Descriptions provided in this material are not substitutes for disclosure in offering documents for particular investment products. Any specific holdings discussed do not represent all of the securities purchased, sold or recommended by EWM, and the reader should not assume that investments in the companies identified and discussed were or will be profitable. Upon request, we will furnish a list of all securities recommended to clients during the past year. Performance results for individual accounts may vary due to the timing of investments, additions/withdrawals, length of relationship, and size of positions, among other reasons. Prospective investors should perform their own investigation and evaluation of investment options, should ask EWM for additional information if needed, and should consult their own attorney and other advisors. Indices are unmanaged and do not reflect fees or transaction expenses. You cannot invest directly in an index. References to benchmarks or indices are provided for information only. The securities discussed herein were holdings during the quarter. They will not always be the highest performing securities in the portfolio, but rather will have some characteristic of significance relevant to the article (e.g., reported news or event, a new contract, acquisition/divestiture, financing/refinancing, revenue or earnings, changes to management, change in relative valuation, plant strike, product recall, court ruling). EWM obtained this information from multiple sources believed to be reliable as of the date of publication; EWM, however, makes no representations as to the accuracy or completeness of such third party information. Unless otherwise noted, any recommendations, opinions and analysis herein reflect our judgment at the date of this report and are subject to change. EWM has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any such information becomes outdated, inaccurate, or incomplete. EWM’s Privacy Policy is available upon request. EWM is compensated for the investment advisory services it provides, generally based on a percentage of assets under management. In addition to the investment management fees charged, clients may be responsible for additional expenses, such as brokerage fees, custody fees, and fees and expenses charged by third-party mutual funds, pooled investment vehicles, and third-party managers that may be recommended to clients. A complete description of EWM’s advisory fees is available in Part 2A of EWM’s Form ADV. Trust services are provided by Evercore Trust Company, N.A., a national trust bank regulated by the Office of the Comptroller of the Currency and/or Evercore Trust Company of Delaware, a limited purpose trust company regulated by the Delaware State Bank Commissioner, both affiliates of EWM. Custody services are provided by Evercore Trust Company, N.A. The use of any word or phrase contained herein that could be considered superlative is not intended to imply that EWM is the only firm capable of providing adequate advisory services. This material does not purport to be a complete description of our investment services. This document is prepared for the use of EWM clients and prospective clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of EWM. Any unauthorized use or disclosure is prohibited. The Chartered Financial Analyst and CFA trademarks are the property of CFA Institute. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and CFP® in the U.S.
IRS Circular 230 Disclosure:
Pursuant to IRS Regulations, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for (i) the purpose of avoiding IRS imposed penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. This information is provided for information purposes only and does not constitute financial, investment, tax or legal advice.
©2016 Evercore Wealth Management LLC. All rights reserved.
