Estate Planning: Advanced

You’ve worked hard throughout your life to provide for your family, helping to ensure their financial security.  However, the important assets you have gained may be subject to taxation by the IRS and state taxing authorities as your estate is being distributed.  Advanced estate planning strategies can help you avoid this.

Our firm frequently assists affluent families by employing sophisticated legal tools, including Family Limited Partnerships or Limited Liability Companies, Personal Residence Trusts, Irrevocable Life Insurance Trusts, and a variety of charitable gifting strategies to reduce Federal Estate Taxes, Gift Taxes, and Generation Skipping Transfer Taxes.

Using Family Limited Partnerships in Your Estate Plan

A Family Limited Partnership (FLP) is a type of limited partnership formed among members of a family. The primary benefits received from an FLP include savings on estate and gift taxes, as well as asset protection. At the same time, while enjoying these benefits you can also maintain control of the assets transferred into the partnership.

Upon establishing the FLP and transferring assets to it, you can grant limited partnership interests to your children or other beneficiaries. This achieves several different estate planning goals at the same time.

First, since the value of your taxable estate decreases with the gift of each limited partnership interest, any tax your beneficiaries might have to pay after your passing also decreases. Furthermore, because the gifts are made using the annual gift tax exclusion, you won’t be liable for any gift tax on the transfer.

Second, you can maintain greater value in the assets in the partnership relative to the value of the limited partnership interests. By definition, limited partners are not allowed to direct or control the routine operations of the partnership, which means a minority discount can be applied to reduce the value of any limited partnership interests you choose to transfer. In addition, because the partnership is a closely-held entity, a similar discount can be applied because the limited partnership interest cannot be sold publicly. Therefore, while you remain in control of the assets of the entire partnership, you are also able to leverage the FLP as an instrument to grant more wealth to your beneficiaries. Finally, a well-constructed FLP may provide protection from creditors, since the general partners are not required to distribute the partnership’s earnings.

Using Qualified Personal Residence Trusts in Your Estate Plan

Our homes frequently hold great value for us, both sentimental and material; as they are often among the largest parts of our estate, they can also hold great value to federal and state tax agencies.  One way to reduce the tax burden generated by a home is to establish a Qualified Personal Residence Trust or QPRT (pronounced “cue-pert”).  With this type of trust, you can still live in your home or vacation house, but transfer ownership for a substantial discount and freeze its value when it comes to estate taxes.  It works like this: You grant the title to your house to the QPRT (often to benefit your family members), but specify that you can continue to live in the house for a certain length of time, usually years. After that period has passed, the property passes to your beneficiaries without any additional estate or gift taxes, despite any appreciation in value the house may have accrued.  Once that happens, you are allowed to continue living in the home but must pay rent to your family or beneficiary so that the property is not included in your estate.  This can be advantageous, serving to further decrease the value of your taxable estate, although the rent income will be taxable as income for your family.  On the other hand, should you die before the end of the period, inclusion of the total value of the house in your estate is unavoidable, but in the majority of cases you are no worse off than you would have been had you not established a QPRT.  A QPRT also provides great protection from creditors: once the QPRT is created and your residence is transferred to it, the property is technically owned by the trust, rather than you.

Using Irrevocable Life Insurance Trusts to Lower Estate Taxes

It is commonly understood that the proceeds of a life insurance policy paid to your beneficiaries are not subject to income taxes. Unfortunately, this does not hold true for Federal Estate Taxes.  In fact, since life a insurance pay-out is considered part of your taxable estate, your family or beneficiaries could stand to lose up to half of its value to estate taxes.

To avoid this scenario, our attorneys can help you create an Irrevocable Life Insurance Trust. The goal of an ILIT is to own your life insurance policy, keep the policy outside of your estate, and prevent the proceeds from being taxable as part of the estate. Those untouched proceeds can then be used as your beneficiaries see fit, from paying estate taxes, debts, and final expenses to providing income to your survivors.  The ILIT serves as both the owner of the policy and the beneficiary.  Once created, you can then provide cash gifts to your trust by making use of an annual gift tax exclusion. The trustee uses these gifts to pay the life insurance premium, and the proceeds are made available to your beneficiaries upon your death.

There are a number of ways to set up an ILIT.  As one option, ILITs can be built to provide income to a surviving spouse while granting the rest to your children from a previous marriage.  And in the case of a child who is not financially responsible, you can arrange for distribution of a restricted amount of the insurance proceeds over a given length of time.

Our firm is dedicated to helping clients make educated, informed decisions about their assets and will work with you and your team of financial advisors and CPAs to implement a highly sophisticated and effective estate plan that allows for the maximum transfer of assets to your loved ones.