Tax Avoidance: 8 Legal Tricks for the U.S. Rich – Financial Article

They say that “money goes to money” – and it is no coincidence: among other things, the richest American taxpayers have at their disposal a series of tools that allow them to pay less to the government.

Tax Office: 20,000 taxpayers are summoned to obtain clarifications or conduct a regular audit

Some practices, such as the use of donations to charities through trust funds, may seem contradictory, but – in the United States at least – they are perfectly legal.

Business Insider has compiled and presented some methods available to wealthy people in the United States to reduce the amounts they are required to contribute to government revenues.

Trump interrupts

As the international financial website reported, a series of tax cuts enacted during Trump's presidency allow Americans to transfer nearly $13 million in assets without paying the federal estate tax. The tax breaks are so broad that only 0.2% of taxpayers are concerned about the tax.

For example, taxpayers can place residences and vacation homes in trusts that last for decades, and as a result any increase in property value does not count against their taxable estate. It is possible to use life insurance to save tens of millions of dollars in taxes if the relevant package is obtained through brokers in the Cayman Islands and Bermuda.

Currently and until tax breaks enacted by the Trump administration expire, individuals and couples can donate or inherit $12.92 million and $25.84 million, respectively, before the 40% federal estate tax kicks in.

Legal tax evasion techniques

• Use trusts to move homes and cottages

So-called qualified personal residence trusts, known as “QPRTs,” freeze the value of the property for tax purposes. The homeowner places his or her primary residence or vacation home in the trust and retains ownership for as many years as he or she chooses. When the trust terminates, the property is transferred from the taxable estate. The estate only has to pay gift tax on the value of the estate at the time the trust is created, even if the home is worth millions.

QPRTs have become more popular in the past year as rising interest rates provide another tax benefit.

• Transferring wealth to future generations through deposits lasting up to 1,000 years

From the Wrigley family behind the eponymous chewing gum brand to Jeff Bezos' mother, some of America's richest people are using intergenerational trusts to avoid paying wealth transfer taxes.

These so-called trusts allow taxpayers to transfer wealth to unborn generations, who will be subject to a one-time 40% tax. Many states have relaxed restrictions on trusts to win the business of the wealthy, with Florida and Wyoming allowing Een Trusts to last for up to 1,000 years, covering about 40 generations!

The heirs do not own the trust assets, but they do have lifetime rights to the income and estate. These trusts also protect assets from future creditors and protect them in the event of a divorce.

How trust works

These funds work in the following ways:

• Charitable donations through trust funds

Charitable Trusts (CRTs) allow wealthy Americans to have “the whole pie and feed the dogs.”

For the wealthy, charitable donations are deducted from their taxable income. The wealthy can turn their charitable work into a guaranteed income for life.

Taxpayers place assets in the trust, collect annual payments throughout their lives, and receive a partial tax break. Only 10% of the amount remaining in the CRT must go to a designated charity to pass an audit by the federal government's Internal Revenue Service (IRS).

These trusts can be funded with a wide range of assets, from yachts to closely held businesses.

• Get loans to pay inheritance taxes

Unlike QPRTs and CRTs, this technology is heavily regulated by the IRS and comes with several hurdles.

Asset-rich, cash-poor families facing a high inheritance tax bill can either rush to sell those assets or take out a loan.

If illiquid assets make up at least 35% of the inheritance value, families can defer inheritance tax for 14 years by paying in installments with interest and effectively obtaining a loan from the government.

• Purchasing life insurance policies in foreign countries

Private life insurance, or PPLI, can be used to pass assets, from stocks to yachts, to heirs without incurring inheritance tax.

In short, a lawyer creates a trust for a wealthy client. The Fund owns life insurance policies that are originated abroad. The assets in the trust are treated as annuities and, if properly structured, the benefits of the policy and assets are inherited free of inheritance tax.

However, this tactic is only available to the wealthy, because it often requires $5 million in down payments as well as a small army of professionals to set up and manage, including trust and estate attorneys, asset managers, custodians, and tax advisors.

• Moving assets during a market downturn

When the market declines, it provides an ideal opportunity for high net worth individuals. It is an ideal time to set up new trusts, into which assets can be transferred to ensure lower taxes.

As Business Insider notes, popular donor-advised annuity trusts (GRATs) can deliver significant tax savings during a recession. These funds pay fixed annual premiums throughout their existence (usually two years), and any increase in the value of the assets is not subject to inheritance tax.

• Keep assets in spouse's trust funds

The wealthy can save taxes by placing their wealth in trusts before the Trump tax cuts expire, but some are still not willing to donate their wealth to their children.

In these cases, using a spousal lifetime trust, also known as a “SLAT,” married taxpayers can hide their assets in trusts that pay distributions to their spouses rather than giving the assets to their children. The beneficiary spouse can use this cash flow to finance the couple's lifestyle. After the spouse dies, the trust passes to new beneficiaries, usually the couple's children.

If, of course, a divorce occurs in the meantime, it will result in the person who transferred the assets to the trust being lost forever. But as Business Insider points out, for wealthy Americans, the tax savings are worth the risk.

• Use of trusts that pay cash to spouses but reserve assets for children

When wealthy people remarry, they often have to balance the needs of their new wives and their children from a previous marriage. The boxes can be used to nurture couples, but adult children want their own piece of the pie.

There is a way to make everyone happy. Through a qualified terminable REIT, also known as a “QTIP,” married taxpayers can place their assets in trusts that pay distributions such as stock dividends to their spouses. However, the income-producing assets remain unchanged, and when the beneficiary spouse dies, everything in the trust passes to the new beneficiaries, who are usually the adult children of the spouse holding the trust.

The main advantage of QTIPs is peace of mind. If the beneficiary spouse remarries, he or she still receives the cash but cannot provide the assets to his or her new partner.