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Financial Planning > Trusts and Estates > Trust Planning

The $5.25 million question

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Your high-net worth clients can breathe easier in 2013 because of the now-permanent $5 million exemption for estate, gift, and generation skipping transfer (GST) taxes. Despite this, many of these clients need guidance on how to transfer wealth to the next generation within their values. Because of the uncertainties involved in allowing their children to manage large sums, parents may be conflicted with how to structure such large lifetime gifts. As a result, it is more important than ever for advisors to be aware of current asset transfer vehicles, such as quiet trusts or spousal lifetime access trusts, which can allow clients to transfer assets during life without relinquishing total control to adult children.

Lifetime giving versus transfers at death

Now that the $5 million lifetime exemption ($5.25 million in 2013) permanently applies to estate, gift, and GST taxes, there are many reasons why wealthy clients might prefer to make large lifetime gifts rather than simply passing the wealth to the next generation upon death. Importantly, a client can make gifts of appreciating assets valued at $5.25 million ($10.5 million per couple) and freeze the value transferred at the date of the gift — any future appreciation is not taxed. If the same $5.25 million asset is transferred at death, all of the appreciation could be subject to estate tax.

While a client might realize this, he may hesitate to pass large sums to children who may not yet have the financial acumen to manage the gift. Further, it is common for parents to worry that giving children control over wealth at too young an age can remove all incentive for those children to strive to achieve financial success and independence.

Though there is not much novelty in the idea of making large lifetime gifts to children in trust, clients should know that there are ways to reconcile the desire to pass wealth to their children with the fear that those children will rely on inherited wealth rather than learning to stand for themselves.

The “quiet” trust

In most cases, once a trust is established for the benefit of a client’s children, the trustee’s disclosure obligations require that the beneficiaries be informed as to the trust’s value at regular intervals. A quiet trust removes this obligation so that the trust creator can determine when the beneficiaries become aware of the trust, and when and how information is disclosed. For example, the creator can set up a trust where the child-beneficiary does not learn of its existence until he reaches a certain age.

These trusts are not available in all states, but if a client wishes to use this option, he can set up the trust in a state that does allow them. The law can vary significantly by state; for example, New York has no specific statute dealing with quiet trusts, but general New York trust law may require that information be furnished to trust beneficiaries if the beneficiary specifically requests the information. New Hampshire and Alaska expressly permit quiet trusts.

Although a quiet trust can be beneficial, the downside is that the beneficiary has no input concerning the trustee’s investment decisions. Because of this, the trust creator may wish to require that the trustee make disclosures to, and obtain feedback from, an advisor who will consider the beneficiary’s position and make appropriate recommendations.

Spousal access to trusts

Another technique for passing lifetime gifts without surrendering complete control to children is a spousal lifetime access trust (SLAT), which permits a spouse to access the trust even if the first spouse dies leaving the trust to beneficiary-children. This can allow the parents to create the trust now, but to determine how and when their children gain access to funds later, when they may have more information about a child’s financial abilities.

Funding these types of trusts with life insurance can defer a child’s ability to access the cash until the death of one or both parents, with the associated tax benefits enjoyed by life insurance — meaning the proceeds will be income tax-free, but also will avoid the 3.8 percent investment income tax imposed under the new healthcare act.


Though there is no one-size-fits-all approach for determining how a family should pass wealth to the next generation, the permanent $5 million exemption for estate, gift, and GST taxes allows families flexibility in planning for their specific goals. Ensuring that your clients are informed about their options for passing wealth, therefore, is more important than ever today.

For previous coverage of lifetime giving options that provide flexibility for the donor in Advisor’s Journal, see To Gift or Not to Gift: Reinstatement of the Pease Limitation on Charitable Deductions.

For in-depth analysis of lifetime giving techniques, see Advisor’s Main Library: F—Planned Giving Techniques.

Your questions and comments are always welcome. Please contact the Panel of Experts.