Written by Robert T. Nickerson
When many people hear the term “estate plan”, they assume that the direction only flows from adult to child; as in once something happens to the parent, when the child (assuming their an adult) will be the beneficiaries to their assets. What most don’t know is that there are situations in which it can go to opposite direction as well. This is called a “reverse estate plan”.
To start, it’s usually not about ensuring that parents can inherit from adult children (though that can also be the case). What it is about is creating some wealth opportunities for the family after taxes.
As time flows and parents retire, it’s common that the adult children will end up in a higher tax bracket as their own income increases. Reverse estate planning ought to be considered especially if mom and dad don’t end up using all their lifetime estate and gift tax exemptions. The goal overall is using the estate plan to transfer assets in a more tax advantage way.
A good example would be that a irrevocable trust is set up. You have adult children that make the transfer (which would be assisted through an estate planning attorney). The parents then have a legal irrevocable trust crafted as a way to pass on those lifetime exemptions to their grandchildren or great-grandchildren. Though this would mean it couldn’t be changed once everything is officially signed, this would create very little federal tax.
What could also happen is using loans to help with assets that appreciate. So instead of taxable money being an asset for beneficiaries, the adult child would make personal loans to their parents. The parents then use that to purchase assets that can appreciate while also paying back that loan. That can be completely tax free! The parents can even make those assets lifetime gifts, by classifying them as lifetime exemptions.
These are just some examples of how these methods can be done from child to parents through estate plans as a way to reduce to tax burden. One of the reasons that I wanted to bring this up is because by 2025, this law could be changed.
The 2017 is set to expire after 2025 in which the lifetime exemptions would be cut in half. Rather then wait, I would suggest thinking about a reverse estate plan tactic to handle assets you’d rather not be taxed on. It can benefit the family, but especially the children you’d want have a beneficiaries. Excess exemptions are only good to use for a limited time.
The Nickerson Law Office can help guide you through potential estate planning that can ensure a lower or even no tax burden, depending on your assets or the kind of trust that needs to be set up. Click on the button below to contact us for more information.
Jeffrey C. Nickerson - Estate Planning Attorney - My Passion is Special Needs Planning!