News and Commentary

Legacy Planning under Tax Reform by Scott Montgomery, CLU®, ChFC®

Thanks to expanded federal estate tax exemptions introduced in 2018, very few families have been subject to federal estate, gift and generation-skipping transfer (GST) tax. However, because the higher exemption is a temporary provision of the tax law and subject to change under the influence of shifting political powers, families must prepare their estate plans for a gamut of possibilities.

For example, families may successfully remove the income and transfer tax drag on investment property through the use of a family legacy trust, which is commonly referred to as an intentionally defective irrevocable trusts (IDITs) or a spousal lifetime access trust (SLAT). A family legacy trust can provide a family with a complete exemption from transfer taxes for 360 years, and, when executed correctly, may also allow the grantor to pay income taxes for the trust during his or her lifetime.

How does a Family Legacy Trust Work?

The first-generation family member who built substantial wealth may establish a trust or trusts for the benefit of his or her heirs and spouse. During his or her lifetime, the grantor transfers assets to the trust, either as a gift or a long-term loan with low-interest rate repayment terms, which essentially removes those assets from his or her estate for federal estate-tax purposes. The original gift amount or the loan principal is included in the grantor’s estate. However, all appreciation and income retained by the trust is excluded from the estate.

The trust may then create a family-controlled partnership or LLC structure to invest in real estate property using the assets provided by the grantor for the benefit of his or her spouse and heirs.  Not only may the trust, and, by extension, the trust beneficiaries, receive 100 percent of funds required to finance a property acquisition, it may also retain 100 percent of the investment profits as a passive investor in the real estate holding entity. The income tax responsibilities for profits generated by the trust would fall to the grantor, who would receive from the trust repayments of his or her loan, plus interest. In essence, the grantor would be able to pay applicable income taxes with money that will be subject to an estate tax at his or her death. As a result, the trust assets would be allowed to grow at a faster pace since all tax drag has been eliminated during the grantors lifetime.

 Is a Family Legacy Trust Right for Me?

Despite the benefits of potentially freezing the value of an individual’s estate while transferring wealth to future generations, a family legacy trust may not be for everyone.  For one, exposing future generations to a potential estate tax is not a priority for all high-net-worth investors. Perhaps family matriarchs or patriarchs are more concerned with managing cash flow through their retirement years, or they plan to leave significant assets to a charity at their passing.  Secondly, for estates that are near the exclusion amounts in value, it may be more beneficial to maintain assets in the grantors name so that a step-up in the tax basis occurs to avoid the capital gains tax on sale.

Because estate planning is a complex matter, the only way to know if a family legacy trust is right for you is to meet with experienced professionals. This includes financial advisors who can assess your own unique circumstances and make appropriate recommendations to meet the long-term goals of you and your family members.

About the Author: Scott Montgomery, CLU®, ChFC®, is a director with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services.  For more information, call (954) 712-8888 or email

Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

 Scott Montgomery is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.

 Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.

 This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

 The information contained in this report does not purport to be a complete description of the developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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Updated on February 14, 2023