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A federal law set to expire by year's end has rekindled interest in irrevocable trusts, local money managers and attorneys say. The legal arrangement has various advantages, including considerable tax benefits for wealthy individuals.
Uncertainty surrounding the upcoming election cycle and whether Congress will extend the law has prompted many clients to move ahead with their trust plans sooner rather than later.
Benefits related to irrevocable trusts include the current federal gift tax exclusion, which allows an individual to make a gift or set up a trust between now and Dec. 31 of up to $5.12 million without paying gift tax. The exemption also applies to couples, up to $10.24 million. Given that New York State has not imposed a gift tax for more than a decade, the savings can be enormous.
"The problem is that this exemption is scheduled to sunset ... at the end of this year, and starting in 2013 that exemption is scheduled to be $1 million," says Philip Burke, partner in the family wealth and estate planning department at Rochester-based Woods Oviatt Gilman LLP. "So there is over a $4 million differential in gift taxabilities."
Adds Burke: "Now, most practitioners think Congress is going to do something to extend (it), or there was a proposal to have it drop to $3.5 million. But nobody really knows what's going to happen next year, I think, to a great extent because of the election. No one is sure who's going to control the Senate or the House or the White House.
"So the next three months for people of substance is going to be very interesting, because it may turn out to be a onetime opportunity to make a substantial transfer without any ... transfer tax consequences."
While attorneys are the builders and engineers of irrevocable trusts, money managers are the architects, says James Lieb, senior vice president and trust administration manager at Canandaigua National Bank & Trust's Wealth Strategies Group.
"I suspect there's going to be considerable activity (with the trusts) after the November elections and then through the end of the year," Lieb says.
At its core, an irrevocable trust is a legal arrangement by which the grantor gives a trustee the right to hold title to property or assets for the benefit of one or more beneficiaries. Typically, an irrevocable trust cannot be modified or terminated without the beneficiary's permission, though New York does allow the grantor to give a beneficiary the right to revoke it or distribute all it contains, effectively ending the trust.
Assets held in the trust may include cash, life insurance policies or a business. The arrangement effectively removes the assets from the grantor's taxable estate.
Unlike many other states, New York has a decanting statute on the books that gives a trustee the power to change an irrevocable trust's provisions without court approval or the beneficiary's consent. A trustee may not terminate a trust, shorten its term or add beneficiaries outside of the normal scope of whom the grantor, often called the trustor or settlor, intended to gain from the arrangement.
"For example, if there's ... a grandchild who was born later, who has some disability, and they want to make sure that grandchild is protected, they could 'decant' the trust and create what's called a supplemental needs trusts," Burke says.
An irrevocable trust also offers estate tax benefits because it allows for getting monetary gifts or gifts of life insurance out of an estate. The arrangement also protects funds for beneficiaries who are spendthrifts or too young to handle money. Getting an inheritance at age 18 usually means that four years later the young person will "have a 4-year-old Porsche and no college education," Burke says.
"So parents will set up a trust, whether it's under their wills or something like that, that is technically irrevocable, but you have a trustee-a third party, a bank, an individual or co-trustees-that handles the money and pays it out for education, health support, rent an apartment, buy books for school," Burke says.
Legal fees related to setting up a trust vary widely. A supplemental needs trust may cost $800 to $1,500, while an involved tax-planning trust can cost substantially more.
Fairport-based Manning & Napier Advisors LLC is seeing rising interest in irrevocable trusts, says Megan Henry, managing director for trust services at the firm. Those clients tend to have $15 million to $20 million at their disposal, but someone "under that amount seems to be having more difficulty pulling the trigger," she says.
Adds Henry: "No two trusts are written the same. These aren't necessarily shelf documents that the attorneys are just pulling out of their computers and just changing the names."
Well-crafted irrevocable trusts have clear goals, says Tim Seamus Hamilton, relationship and planning manager at Rochester-based Howe and Rusling Inc. As an investment adviser, not a trustee, his firm must closely follow what the trust and trustee dictate. The trust's time horizon and other particulars help guide which investments make sense for the situation.
In some cases, placing an irrevocable trust outside New York makes sense because of other tax advantages. Florida, for instance, does not have a state income tax, so trusts placed with Canandaigua National Trust Co. of Florida or other trustees located there benefit from those savings.
"This can add significant value to the trust over time through compounding and investment of these dollars that would otherwise be out for state taxes," Lieb says.
Putting irrevocable trusts in Delaware, which also does not have a state income tax, is another option.
Interest in irrevocable trusts will likely remain strong through the end of the year, experts say. Burke recently attended a conference for lawyers working across the Northeast, and the expiring gift tax exemption was the hot topic.
"So it is to some extent a big deal," he says.
Sheila Livadas is a Rochester-area freelance writer.
9/28/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email firstname.lastname@example.org.