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 using a family legacy trust, commonly referred to as an intentionally defective irrevocable trust (IDIT) 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 their lifetime.

How Does a Family Legacy Trust Work?

The first-generation family members who built substantial wealth may establish a trust or trusts for the benefit of their heirs and spouse. During the grantor’s lifetime, assets are transferred to the trust as a gift or a long-term loan with low-interest rate repayment terms, essentially removing those assets from their estate for federal estate tax purposes. The grantor’s estate includes the original gift amount or the loan principal but excludes all appreciation and income retained by the trust.

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 their spouse and heirs. Not only may the trust and, by extension, the trust beneficiaries receive 100 percent of the funds required to finance a property acquisition, but 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 repayments of the loan from the trust, plus interest. In essence, grantors could pay applicable income taxes with money subject to an estate tax at their death, leaving trust assets to grow faster since all tax drag has been eliminated during the grantor’s 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 the 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 is a director and financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Ft. Lauderdale, Fla. office at (954) 712-8888 or

Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, Fla. 33301 (954) 712-8888.

Scott Montgomery is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.

 This material is being provided for information purposes only and is not a complete description or a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove correct.

 Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult your financial advisor about your individual situation.

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Updated on January 16, 2024