Dear Clients, Colleagues and Friends,
Phil has had a great year – financially at least. A successful real estate developer, his two longest-term and riskiest bets sold way over asking price, giving him a significant cash windfall. In a normal year, Phil would be spending the holidays at his beach house in Hawaii, celebrating his success with his lovely wife, their three grown children, and their seven precocious, hilarious, adorable – and exhausting – grandchildren.
But this is no normal year. As 2020 comes to an end, Phil spends quarantine stuck inside his house, bored. He has read every book on his wish list and watched every show on Netflix. Soon, reality overtakes his thirst for escapism, and he starts thinking about how to protect his family upon his passing – not from lurking danger or violent death, but from an almost equally insidious blight – one that is particularly cruel to the successful American businessman – estate taxes.
Resolved, Phil decides that giving a huge chunk of his hard-earned estate to the government is simply not an option. He has worked too hard to support his family and wants to continue to do so when he is no longer around.
“In this world nothing can be said to be certain, except death and taxes.”
–Benjamin Franklin, 1789
He Zooms with his estate planning and asset protection legal team, and they go to work. Maximizing tools to keep the bulk of his estate for the benefit of his family, Phil tells his attorney they must find every available vehicle to chip away at his family’s estate tax exposure.
His lawyer considers for a moment, and then asks, “Much has been reported about the income tax benefits available to investors who invest in opportunity zones, but did you know there are significant gift and estate tax benefits as well?”
Phil didn’t. He asks to hear more.
Phil’s lawyer explains that anyone with capital gains can invest into a Qualified Opportunity Zone Fund (known as QOF) to stimulate new investments in real estate or businesses in over 8,000 designated, and generally blighted, inner-city communities located all over the United States and its territories. The purpose of these funds is to reinvigorate commerce where traditional investors are reticent to invest. In addition to significant tax benefits, with proper planning, one can structure investment into a QOF as a beneficial estate planning vehicle. Doing so may allow deferment of any gains on the investment until reported on the 2026 tax return, and under the regulations, the QOF investment may also be transferred at death with the retention of opportunity zone tax benefits.
Phil thinks that this is a brilliant way to preserve a chunk of his estate for his family and asks his lawyer to discuss next steps.
Grantor Trust
The plan is for Phil to establish a flexible gift HYCET Trust, an irrevocable grantor trust designed in such a way as to be a disregarded entity for income tax purposes which will hold his QOF investment. Under the special rules for opportunity zone investments, if Phil’s QOF investment is held the full ten years before disposition, the tax basis will “step up” to fair market value upon the disposition of Phil’s HYCET Trust to its beneficiaries. Thus, neither Phil nor his heirs will pay capital gains taxes on any profits from the QOF investment – even if sold after Phil’s death.
While there are some special rules that could cause the gifted asset to be taxed after the transfer to the Grantor Trust, this can be remedied in the way the Grantor Trust dispositive provisions are drafted.
Phil asks his lawyer to draft up some planning tips so he can avoid any such pitfalls – if he’s stuck inside all day, the least he can do is learn what QOF’s can do for his estate, and how to maximize the opportunity. The lawyer enjoys Phil’s enthusiasm, knowing how much one can truly accomplish by using available law.
Phil never thought estate planning and asset protection could be so much fun. He loves sticking it to the man! Phil now knows more about QOFs and HYCET Trusts than ever, but considering the black hole that was 2020, deploying this available tool for his estate feels like a huge accomplishment. He can end the year happily, knowing he’s protecting his estate against onerous future taxes for his family.
Don’t let death and taxes void your accomplishments at the end of 2020. Call our law offices today for an evaluation on the implementation of QOF tools to protect your hard-earned estate and enjoy the knowledge that your family will benefit for generations to come.
Jeffrey M. Verdon, Esq.
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 the: Jeffrey M. Verdon Law Group, LLP at jeff@jmvlaw.com or 949-333-8143.