How Wealthy People Save on Taxes—Can Regular People Do the Same?

Due to tax cuts made in recent years, Americans can give nearly $13 million in assets without paying any federal estate taxes. Only 0.2% of all taxpayers worry about federal estate taxes these days, explains the article “Here are six ways the rich save big on taxes, from putting houses in trusts to guaranteeing inheritance for future generations” from Business Insider. Could some of their tactics work for “regular” people too?

The wealthy save taxes by putting homes and vacation homes in trusts lasting decades, and any appreciation in the property’s value doesn’t count towards their taxable estate. Qualified Personal Residence Trusts, or QPRTs, basically freeze the value of real estate properties for tax purposes. The family places the home in the trust, which retains ownership for however many years desired. When the trust ends, the property transfers out of the taxable estate. The estate only pays the gift tax on the property’s value at the date of the trust’s formation—regardless of the appreciation of the home.

Dynasty trusts allow taxpayers to pass wealth to generations who haven’t been born yet and are only subject to the 40% generation-skipping tax once. Florida and Wyoming enable these trusts to last up to 1,000 years, which spans about 40 generations. Heirs don’t own the trust assets but have lifetime rights to the trust’s income and real estate.

Charitable Remainder Trusts (CRTs) can be funded with various assets, from yachts to closely held businesses. The wealthy save taxes by putting assets in the trust, collect annual payments for as long as they live, and get a partial tax break. Only 10% of what remains in the CRT must be donated to a charity to qualify with the IRS.

Taking loans to pay estate taxes is scrutinized by the IRS and has many hoops to jump through. Asset-rich people use this method but are cash-poor and facing a significant estate tax bill. The estate can make an upfront deduction on the interest of “Graegin” loans, named after a 1988 Tax Court case. Suppose illiquid assets comprise at least 35% of the estate’s value. In that case, families can defer estate tax for as long as 14 years, paying in installments with interest and effectively taking a loan from the government. However, Graegin loans are prime targets for IRS auditors and can lead to legal battles.

Private-placement life insurance, or PPLI, can pass on assets without incurring any estate tax. A family creates a trust to own the life insurance policy, which the family creates offshore. This strategy is only for the very wealthy, as it usually requires $5 million in upfront premiums and a small army of professionals to set up and administer.

A down market has one silver lining for high-net-worth individuals: it’s an excellent time to create new trusts, as people can transfer depressed assets at a lower tax basis. The Grantor-Retained Annuity Trust (GRAT) pays a fixed annuity during the trust term; any appreciation of the asset’s value is not subject to estate tax.

An experienced Austin estate planning attorney will know which strategies might work for your family, along with others used by “regular” people. Book a call today!

Reference: Business Insider (June 12, 2023) “Here are six ways the rich save big on taxes, from putting houses in trusts to guaranteeing inheritance for future generations”