The Tax Cuts and Jobs Act just passed by Congress increases the federal gift and estate tax exemption to approximately $11,000,000 per person or $22,000,000 for a married couple. The increase automatically applies to the generation-skipping transfer tax exemption.

In addition, the federal annual gift tax exclusion will increase to $15,000 per individual in 2018.

This presents a great opportunity for grandparents to make combined annual tax-free gifts of $30,000 into generation-skipping trusts for each of their grandchildren.

Tax-Free Income for Trust Beneficiaries

Generation-skipping trusts are taxed as grantor trusts, where the trust income is taxed to the grantor, thereby indirectly making additional tax-free gifts to beneficiaries while effectively reducing the grantors taxable estate.

However, once a grantor passes away, GST trusts automatically become non-grantor trusts, and will be subject income taxes. In addition, non-grantor trusts do not receive the benefits of graduated income tax rates. As an example, unearned income from bond portfolios (interest) greater than $12,600 in 2018 will be taxed at the maximum rate of 43.4%, excluding state income taxes.

With a national debt approaching $20 Trillion and unfunded obligations of the US Government, including Social Security and Medicare, estimated to be more than $70 Trillion (WSJ 4/22/17), future top income tax rates are very unlikely to be lower and may actually be significantly higher.

Wealth Transfer Strategy: Grandparents to Grandchildren

This strategy creates a wealth transfer opportunity for grandparents to use annual gift tax exclusions ($15,000 in 2018) to fund GST trusts for their grandchildren. The GST trust purchases 10 pay whole life contracts on each grandchild, designed with the maximum amount of cash and the minimum amount of death benefit, allowed by law. Contractually guaranteed to be “paid-up” in 10 years, there are no additional mortality charges, expenses, administration fees, surrender charges or compensation, essentially “turbo-charging” the future dividend performance.

This provides the grandchildren, beneficiaries of the trust, with a future stream of tax-free income, indexed for inflation/interest rates. Since 10 pay whole life is guaranteed, except dividends, it will provide both tax and investment diversification with treasury-like risk and after-tax equity returns. The net death benefit is income, gift and GST tax-free to great grandchildren.

Features, Advantages & Benefits of 10 Pay Whole Life; the most tax-advantaged vehicle in the Internal Revenue Code (IRC)

1. Tax-Free Income – DEFRA, TAMRA, Sec 7702, Sec 7702A
2. Indexed for Inflation / Interest Rates – historical correlation of dividends
3. Contractually Guaranteed “paid-up” in 10 years – guaranteed cash value
4. No Income, Contribution or Withdrawal Limits – no 59 ½ - 70 ½ RMDs
5. Maximum cash value, minimum death benefit, allowed by law (Non-MEC)
6. Asset Protection – cash value is protected from creditors in 43 states

Case Study:

Granddaughter, Age 10 - $2,471,170 10 Pay Whole Life*

• $30,000 Annual Premium for 10 years ($300,000)
• Annual Tax-Free Income; Ages 50 – 90: $75,000
• Cumulative Tax-Free Income at Age 90: $3,000,000
• Net Death Benefit to GST Trust at Age 90: $4,179,661

*Values based on the 2018 Mass Mutual Dividend Rate – Dividends are NOT guaranteed

It would behoove you to consider the benefits of these tax saving strategies. Ensuring that your grandchildren and other heirs are comfortable in the future depends on careful planning.

Don’t hesitate to reach out with any questions.