If you attended the 2011 World MoneyShow in Las Vegas, Nevada recently, you would know about our new HYCET Trust℠. At this event, I had the wonderful opportunity to be interviewed by MoneyShow.com to share this exciting news with anyone interested in learning how to use our HYCET Trust℠ to supercharge their estate planning and to take advantage of the biggest tax breaks in our nation’s history!
Watch the interview:
If you were unable to attend the 2011 World MoneyShow in May, here is an overview about our HYCET Trust℠.
One of the remarkable pro-taxpayer changes to the 2010 tax law increases the amount a taxpayer may gift on a tax free basis from $1M to $5M per donor. This new gift tax exclusion is only available until the end of 2012. Why is this new tax law so important? If a 60 year old taxpayer makes a gift of $5M in 2011, and the average return on investment (ROI) on the gifted asset is 6%, in 30 years the gift has grown to $29M free of any estate tax of the donor’s and that of his children and grandchildren. A ROI of 10% will result in $87M of wealth being removed from the taxable estate in 30 years. However, once the clock strikes midnight on December 31, 2012, the current $5M exclusion reverts back to $1M.
The challenge with a gift of this size is that once the donor makes the gift, under traditional gifting methods, if the donor needs or wants the gift back, there is no assurance that he can get it from the donee. The HYCET Trust℠ may be the solution. HYCET stands for “Have Your Cake and Eat It Too.”
The HYCET Trust℠ is an irrevocable gift trust compliant with recent favorable IRS rulings, which held that a taxpayer who formed an irrevocable trust in a qualifying jurisdiction made a completed gift, and the grantor retains a “discretionary beneficial interest” in the trust and removes all future value of the trust assets from his taxable estate.
A married couple owns income-producing real estate inside a LLC generating a cash flow of 10% per annum. To take advantage of the generous but temporary gift tax exclusion, and remain consistent with their overall estate tax reduction strategy, the couple wants to take advantage of the new gift tax exclusions but realizes that making a gift will not allow them to regain the benefit of the cash flow should their future financial circumstances change.
The HYCET Trust℠ can provide the solution. The couple establishes the trust in a qualifying jurisdiction (such as Nevada) and selects an independent but friendly trustee. The trust is established to include the couple’s children and grandchildren as primary beneficiaries. Pursuant to the recent IRS rulings mentioned above, the couple also includes themselves as discretionary beneficiaries of the trust so that should they need financial assistance from the trust, they are in a position to receive it.
Let’s examine what the couple has accomplished by instituting the HYCET Trust℠:
- Utilized the $5M exclusion before it expires after 2012
- Removed an appreciating asset from their taxable estates without any gift tax
- In 30 years, almost $90M of value is removed from their estates – gift and estate tax free
- If the couple should end up in a position where they need the income from the trust, the trustee may make such distributions without causing the value of the trust’s real property to be included in the couple’s taxable estates
- Because Nevada is an asset protection trust state, the property and the income held in the HYCET Trust℠ are protected from lawsuits, divorcing spouses, and liability from creditors.
To maximize the value of the wealth passing to the next generation, the HYCET Trust℠ should purchase a Second to Die life insurance policy on the couple:
- The amount of the death benefit jumps to $25M or more
- The life insurance deposits are financed at an interest rate of 2% (adjustable annually)
- The cash flow from the real estate more than covers the annual interest expense
- The cash values of the policy exceed the amount of the loan in all years of the policy’s existence; if interest rates increase to a level where it is no longer prudent to keep the life insurance loan, the trustee can use the cash value in the policy to repay the bank loan and stop paying interest
- The death benefit will be reduced by the loan payoff, but still far exceed the value of the real property given to the HYCET Trust℠.
For more information on the HYCET Trust℠ and how it may be used in conjunction with other estate tax reduction techniques, please feel free to contact us.
For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact Jeffrey M. Verdon Law Group, LLP at firstname.lastname@example.org or (800) 521-0464.