New York Estate Planning & Elder Law Blog
Estate planning relies on a countless number of assumptions. One assumption is that assets only flow in one direction: from older person to younger person. In reality, this does not always have to be the case. By making the most of some unconventional estate planning techniques, people can realize some tax and estate planning advantages. This is where the concept, of “reverse estate planning” comes in.
Some adult children who have more assets than parents and can help take care of the older generation. In these cases, reverse estate planning can play a valuable role. This is particularly true when parents will not be able to use the entirety of their estate and gift tax exemptions. This is just as true if a parent is in a lower tax bracket than their child.
Tax Advantages through Reverse Estate Planning
Adult children can utilize various tax and estate planning techniques to transfer assets to their parents in a way that makes the most of taxes. After the adult child transfers assets to the parent, the parent then takes advantage of his or her lifetime exception to transfer assets to the younger generation, which might include children or grandchildren. Sometimes, the older adult even benefits older children by passing money to irrevocable trusts that cannot be touched or altered by the children.
An Ideal Way to Make Loans Between Family Members
Consider another situation. An adult child makes a low-interest payment to a parent, who then utilizes assets from the loan to buy funds that are poised to appreciate. Eventually, the adult repays the loans and the appreciation passes through estate tax-free to their grandchildren or other children either through direct gifts or trusts. Other times, parents pass on gifts to the younger children through the use of trusts by utilizing their lifetime exemptions.
Making the Most of Capital Gains
Some parents are in low capital gains tax brackets and older children have appreciated assets that they are interested in selling. These older children then pass on some of the appreciated funds to their parents through the use of either the annual gift tax exclusion or the lifetime estate exemption. After receiving these funds, the parents sell off these funds and pay little taxation on these funds. The gains realized by the parents can then be inherited from the estate or can utilize the lifetime exemption to gift funds.
Consider if Reverse Planning Is Right For You
These are just a few of the powerful techniques that older children and parents might decide to utilize to make the most of reverse estate planning. Understandably, when done properly, this technique can reduce income taxes while making the most of assets.
Remember, if reverse planning seems like a good idea for your loved ones, now is the time to take advantage of it. Existing lifetime and gift tax exemptions will almost certainly lower again shortly. The 2017 tax regulation that raised these thresholds substantially is poised to end in 2025.