The first step in actively using your Model Offshore Trust for estate planning is to move a portion of the Trust out of your taxable estate. To do so, you, as Grantor, would give up your powers (1) to remove members from the Trust’s Beneficiary Class and (2) to direct the Trustee to make charitable contributions — but only with respect to a limited amount of assets.
Renouncing those two powers would turn the assets into a “completed gift.” You’d file a gift tax return, and the assets would be out of your taxable estate. Being a completed gift, the amount would count against the $5.45 million of “taxable” gifts you can make without actual tax.
The portion of the Trust that you remove from your taxable estate is sometimes called the Green Portion. The rest of the Trust, which is still in your taxable estate, is called the Red Portion. Obviously, to the extent you can influence matters, it is better for wealth to show up in the Green Portion than in the Red Portion.
Transactions With Red and Green
Your Model Offshore Trust can undertake transactions that tend to nourish the Green Portion and starve the Red Portion. These are the same kinds of transactions that are used for any aggressive program of estate planning, including:
- Installment sales with valuation discounts
- Grantor retained annuity trusts
- Private annuities
- Bargain loans
Three factors make your Model Offshore Trust the ideal environment for such transactions.
- Because US. income tax rules classify a Model Offshore trust as a grantor trust, any transaction between you and the Trust or between the Green Portion and the Red Portion is free of income tax consequences. The transaction would be treated as an exchange between you and yourself — which, for income tax purposes, is not a transaction at all.
- With a Model Offshore Trust, you can remove assets from your taxable estate and still be eligible, as a discretionary Beneficiary, to have those assets returned to you if you ever need them for your own support.
- A Model Offshore Trust is a permanent solution, since after your lifetime it completely disconnects from the U.S. tax system.
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