Combined with income taxes and even low inflation, estate tax is a chronic and debilitating burden for large estates and a handicap for any generation trying to conserve assets for its descendants.
Assuming that a pool of family wealth passes from one generation to the next every 25 years, a 40% estate tax corresponds to a drain on family wealth of 2.0% per year, year after year.
For example, if a pool of family wealth earns 8% per year (or, say, 5% after income tax), the first 2% would have to be set aside each year to accumulate enough over a 25-year period to pay estate tax — leaving a net return of only 3% per year for the family to enjoy. And that would allow nothing to offset the loss of purchasing power to inflation. If the inflation rate exceeded 3%, the family would be losing ground — even if it spent nothing at all from its investments.
Fortunately, some fairly broad opportunities are available for reducing or avoiding gift and estate tax.
Gifts to the next generation under the $5.45 million threshold are the starting point. In addition, gifts up to $14,000 per year per recipient generally are exempt from gift tax (and don’t count against the $5.45 million). A long-term program of annual giving can use those allowances to transfer large amounts without tax. And properly structured investment transactions between generations can further reduce the burden of gift and estate tax.
Similar opportunities are available for reducing or eliminating generation-skipping tax, so that more of what you leave is used for the welfare and happiness of your descendants.
A Model Offshore Trust is an ideal vehicle for getting the most from such opportunities. Not only is estate tax reduced or eliminated, but the money or other property transferred to the Trust is protected from lawsuits and other claims that might be directed at you or your heirs.
But the greatest advantage of a Model Offshore Trust, as compared with most other estate-planning vehicles, is the permanence of the solution it provides: the transferred property eventually leaves your taxable estate, but it need never enter the taxable estates of your heirs. That is the power of offshore estate planning.
Estate planning isn’t a simple topic , but its complexity needn’t stand in the way of establishing a Trust now. If you do nothing to incorporate the Trust into your estate plan, it will be essentially estate-tax neutral. It will not trigger gift tax, nor will it affect your potential liability for estate tax. And if at any time you want to remove all or a portion of the Trust from your taxable estate, the flexible nature of the Trust will allow you to do so.
Unless a family is protected by an offshore trust, family wealth must pass through the estate tax “toll booth” again and again, generation after generation. Each time family wealth passes through the toll booth, as much as 40% may be lost to tax. The greatest estate-planning advantage of a Model Offshore Trust is to remove family wealth from this sad process of perpetual loss. Offshore estate planning solves the problem.
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