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Estate planning and qualified opportunity funds

On Behalf of | Feb 14, 2020 | Estate Planning

Life brings changes. Even when individuals in Colorado and elsewhere have found a secure career and have found stability for their family, changes are always occurring. Thus, one should prepare for things to change for the worse or better. An estate plan is not only used to ensure one’s assets are passed onto one’s heirs or beneficiaries of his or her choosing, it can also protect certain investments and business dealings.

Investing in opportunity zones

Qualified opportunity funds or QOF are a compelling strategy to defer taxes. Additionally, they provide many benefits in the estate planning process. This, of course, aligns with the gift and estate tax laws currently in place. This year, the gift tax exemption is set to increase to $11.58 million, which means that an individual can transfer their wealth by a lifetime gift or upon their death without it being taxed so long as it falls below this amount. It should be noted that this amount is set to return to around $6 million in 2026.

With regards to a QOF investment, the death of an investor does not trigger tax on the deferred gains. Instead, the recipient of the QOF investment will simply step into the shoes of the decedent Thus, the recipient will qualify for a full step-up in basis after 10 years from the original investment just as the original investor would have.

The downside

The downside of receiving a QOF investment is the potential for the investment being subject to a 40% estate tax on its date-of-death value. However, unlike most assets, a QOF investment does not get a full step-up in basis to the date-of-death value; thus, the recipient must pay tax on the originally deferred gain, if applicable.

Estate planning and QOF

An estate planning strategy that makes sense for those with a QOF investment involves setting up an irrevocable grantor trust. This allows the grantor or the one setting up the trust to be treated as the owner of the assets for income tax purposes. However, upon their death, the trust is designed to be excluded from the grantor’s estate when it comes to federal taxes. This creates several benefits when it comes to avoiding certain taxes.

The estate planning process can be complex and can include many facets. Thus, it is important to understand how certain assets, such as investments, could be impacted. Designing an estate plan to protect these assets can help one’s beneficiaries in many ways.