Although not everyone in Oklahoma passes on considerable wealth to their children, spouses or other benefactors, everybody does leave behind an estate when they die. Whether you’re a high-income earner or just average, you can use estate planning tools like trusts to build, preserve and transfer wealth.
Examples of estate planning tools
Estate planning refers to everything you do to build, retain and eventually give away your wealth. Usually done with the help of attorneys, common estate planning tools include:
- Last will and testament, which determines who will inherit your estate and what assets they’ll receive
- Living will, which provides doctors and family members with a list of wishes regarding health care decisions to follow should you become incapacitated
- Power of attorney, which appoints someone to make financial, legal and other important decisions on your behalf
- Trust, which gives another party known as a trustee the legal right to hold assets on your behalf and details how to distribute them
Trusts offer several benefits, such as avoiding probate, protecting assets from creditors and reducing tax liability. They also come in several varieties, including the irrevocable trust.
No one can change irrevocable trusts after they’re made. They take assets out of trustors’ hands, preventing the government from taking estate taxes.
The grantor retained annuity trust, or GRAT
This highly specific type of trust involves placing assets into the GRAT and returning them back to the grantor via an annuity. A GRAT’s value has two portions: the annuity stream, or the assets returned to the grantor, and the remainder interest, which grows from the GRAT’s assets just like any other investment. At the end of the annuity, the cumulative interest earned and any leftover assets go to beneficiaries, completely bypassing estate and gift taxes.
Although powerful, grantor retained annuity trusts only make sense for highly wealthy people who plan on transferring more than $12.06 million to beneficiaries; that’s the 2022 exemption threshold for federal estate tax.
While estate taxes range up to 40%, very few people ever pay them. After all, most people don’t have $12 million to give to family members or friends as an inheritance. For people who do have that much money, GRATs are powerful estate planning tools.