Advanced estate planning involves assessing the anticipated estate and income tax liability of an individual or married couple and determining which combination of recognized – or creative – strategies will reduce or eliminate these taxes. Where appropriate, arrangements can be made to provide heirs with funds intended to replace the assets confiscated by high taxes. The following are some of the more common advanced estate planning vehicles:
Credit Shelter Trusts and Marital Trusts. These trusts are incorporated into a married client’s estate planning documents to take effect on the first death, and assets are titled in the name of the individual client or their revocable “living” trust to be sure that they are funded properly. As of January 1, 2012, an individual will be able to shelter up to $5,120,000 (the credit) from estate taxation, while allowing the surviving spouse to have access to the assets in the trust (often called a “family trust” or “bypass trust”) until his or her death. The balance of the estate is often held in a marital trust, the terms of which can tend to protect the assets for the children of the first spouse to die (in case of remarriage or spendthrift tendencies of the survivor). These trusts are the foundation of any good estate planning where the client’s assets exceed the available exclusion amount, or credit, for an individual.
Irrevocable Life Insurance Trusts. Depending upon the size of the estate, it may be most appropriate to make gifts to an irrevocable trust to pay premiums on a life insurance policy on the life of the taxpayer/client for the benefit of the family. These policies can be purchased on the life of a single individual or on the lives of a married couple (called survivorship, or second to die, policies). The proceeds are not included in the taxable estate of the insured(s), and they can be held in the trust for later generations, as well. They are often used in the estate plans of those who have family businesses or real estate, assets which are not likely to be sold quickly to pay the estate taxes. These trusts also provide the liquidity needed to keep special assets in the family.
Charitable Remainder/Lead Trusts. For clients with appreciated assets they wish to convert to cash or other investments, the charitable remainder trust and charitable lead trust can provide an opportunity for significant estate and income tax savings. Typically, appreciated assets are transferred into an irrevocable trust and sold without capital gains tax liability, and the reinvested assets are used to pay an income stream of a fixed amount or percentage of the trust assets. If the income is paid to the donor or his designated recipient(s), with the remainder passing to charity on the donor’s death (or the expiration of a period of up to 20 years), the trust is called a charitable remainder trust. In the charitable lead trust, the charity receives the stream of income during the trust term, and the family receives the remaining principal at the end of the trust term. Both trusts have significant income, gift and estate tax benefits, and they can be paired with the irrevocable life insurance trust to give the children the value of the asset going to charity, each without taxation.
Personal Residence Trusts. These vehicles are designed to reduce the tax value of the principal residence or vacation home of the taxpayer in order to transfer the property to the children at a significant gift tax discount and to remove the future increases in the value of the residence from the donor’s estate. The client(s) still occupy the home for the term of the trust, as they determine, after which time the title passes to the children, taking the untaxed appreciation from the date of the trust with it as well. The capital gains tax is an issue to be considered, but in most cases, the gift and estate tax advantages far outweigh the income tax implications.
Family Limited Partnerships. The concept of a limited partnership is to give partial interests in an entity to children and grandchildren into which property has been transferred. Because the gift is usually one of a minority interest and has a restricted market for resale, the value of the partnership interest transferred is often discounted for gift and estate tax purposes. The transfer is normally structured to take advantage of the available exclusions from the gift tax so that no tax is actually paid during life. Best of all, the parents can retain control of the partnership but not be concerned that the entire value of the assets in the partnership will be taxed as a part of their estates (only the interest not given away will be subject to tax). The process of planning, establishing, valuing and transferring a limited partnership requires commitment, discipline and good advice, but the tax benefits can be significant. In addition, the partnership gives families an excellent vehicle for the orderly transfer of assets, including family business interests, as well as certain creditor protections.
GRATs and GRUTs. Stocks, bonds, mutual funds and other liquid investment assets can be given to family by way of an irrevocable trust using the same general concepts as apply in the case of the personal residence trust. The variations are found in the way the income stream is valued and paid from these trusts, and the rules governing the creation and administration of GRATs and GRUTs are very complex and unforgiving. Thus, experienced tax advice is critical to the success of these vehicles in one’s estate plan.
Miscellaneous Planning Tools. Beyond these groups of estate planning strategies, there are other techniques and options available for consideration when evaluating an estate for achieving the goals of the clients. There are also non-tax considerations, such as planning for the blended family, protecting assets from litigation, and sheltering funds for the education and support of minors. Non-citizen spouses require special trust arrangements. Business succession agreements can make all the difference between a successful transition to the next generation and litigation among the heirs. Pre-marital or marital or marital agreements can be effective tools to minimize litigation and protect family relationships.
Summary. Experienced counsel can apprise clients of the available options and take the lead in planning and implementing the chosen advanced estate planning strategies. It is also the attorney’s goal to bring together and coordinate the team of advisors for clients to bring tax, legal, business and financial perspectives to the table for consideration, resulting in a thorough and efficient planning process, and providing to the client valuable peace of mind, knowing that one’s desires and goals for the family can be achieved.