Advanced Estate Planning
Advanced estate planning is not a replacement for basic estate planning, but should enhance and augment the basic estate plan. Such planning is employed to accomplish unique or specific objectives above and beyond the general distribution of a client's estate.
Much advanced estate planning involves the application of irrevocable trusts to remove certain assets from the taxable estate, thus avoiding the Federal Estate Tax. Below are brief explanations of some of the more common irrevocable trusts and advanced planning techniques.
- Irrevocable Life Insurance Trust (ILIT)
- Grantor Retained Income Trust (GRIT)
- Charitable Remainder Trust (CRT)
- Qualified Personal Residence Trust (QPRT)
- Tax-Exempt Charitable Foundation
- Generation-Skipping Transfers
- Marital Agreements
- Asset Protection
Other advanced estate planning techniques may involve postmortem planning, such as dividing a trust after the death of the first spouse to die, sub-trust funding, probate, estate litigation or the filing of the 706 federal estate tax return.
Advanced estate planning is not a replacement for basic estate planning, but should enhance and augment the basic estate plan. Advanced estate planning may involve the application of one or more of the above techniques. One client may have a QPRT Trust to protect the home, a life insurance trust to provide liquidity to pay the estate taxes, and a corporation or limited liability company to provide asset protection. Each advanced estate planning entity or technique, however, should be tailored to the individual needs of each client.
Irrevocable Life Insurance Trust (ILIT)
ILITs and tailored gifting programs can be effective in transferring wealth from one generation to the next without incurring gift taxes. Annual premiums are first gifted to the trustee of the Life Insurance Trust, usually on an annual basis, and then children or beneficiaries have the right to withdraw the gifts. In most cases the gifts are waived, via "Crummey Letters," and the trustee subsequently writes a check to the insurance company for the annual premium in order to preserve the death benefit of the insurance policy owned by the trust. Using this advanced estate planning technique, conservative annual gifts can create and maintain a policy with a substantial death benefit that can later be used to pay federal estate taxes or augment the estate of the children or beneficiaries-a benefit which can be free from estate taxes.
Grantor Retained Income Trust (GRIT)
The GRIT is a very efficient tool to transfer appreciating property away from one's gross esate, thus avoiding a tremendous tax liability. The GRIT is an irrevocable trust in which the grantor (creator) transfers property to a trust and retains the right to income from the property transferred for a specified term, At the end of the term, the trust terminates and the corpus is distributed to the remainder beneficiaries. Any property remaining in the GRIT after the term, including appreciation and earnings, is paid to the trust beneficiaries and is not includable in the creator's gross estate. If the creator survives the term of the GRIT, none of the transferred property, appreciation, or earnings are included in the creator's taxable estate. Unfortunately, if the creator does not survive the term of the GRIT, the appreciated property is included in the gross estate. Notwithstanding, the annuities continue and the intended distribution remains.
Charitable Remainder Trust (CRT)
CRTs are often used to allow a client to sell a piece of highly appreciated real estate without having to pay the capital gains tax. At the same time, the client can enjoy a lifetime income stream and an income tax deduction based on the present value of the remainder interest of the charitable gift. After the client dies, the remainder of the CRT will pass to the client's chosen charity, but the client will receive a charitable income tax deduction at the inception of the trust and at the time of the initial contribution to the CRT. In today's real estate environment where so many properties are highly appreciated, the CRT is a valuable and popular technique to avoid capital gains taxes, create a stream of income for retirement, and at the same time benefit a charity.
Qualified Personal Residence Trust (QPRT)
A QPRT is an irrevocable trust that can discount the value of a client's personal residence (often the most valuable asset in the estate), and essentially freeze the value, avoiding estate tax on all of the future growth and appreciation in the value of the home. There are however risks associated with establishing a QPRT. One must outlive the term of the QPRT. The cost basis of the home will not receive a step-up after death, as is the case with other assets passed through to beneficiaries from a Revocable Living Trust. Nevertheless, for estates where the primary residence comprises a substantial portion of the taxable estate, a well-drafted QPRT or Split-QPRT (one for each spouse) can result in significant estate tax savings.
Tax-Exempt Charitable Foundation
Some clients are happier creating their own charities, thereby enhancing their control over money that is intended for charitable purposes. For these clients, creating a Private Family Foundation, known as a 501(c)(3) private foundation, may be the best advanced estate planning technique. Assets contributed to a Private Foundation are not subject to gift or estate tax, and can be administered by a family over the generations to accomplish a wide variety of charitable and philanthropic objectives. A Private Foundation can not only avoid estate taxes and capital gains taxes, but it can instill a family and future generations with a sense of charitable giving and responsibility.
Generation Skipping Transfers
Some families with sufficient wealth may wish to employ trust provisions that provide for assets to be transferred to future generations through special generation skipping provisions, GST. Assets can be held in trust for the limited use and benefit of the children, to be passed to the grandchildren or great-grandchildren upon the death of the children, thus avoiding one potential generation of estate tax. The maximum amount that can be passed by each spouse to two or more generations below the grantor's generation is referred to as the Generation Skipping Transfer Tax Exclusion, and is usually the same amount that can be passed without estate tax.
Marital Agreements
Sometimes a pre-marital or post-marital agreement can provide an effective way for married couples to organize their assets, settle questions about ownership rights and responsibilities, and protect parties from loss and confusion in the event of a dissolution of the marriage.
Asset Protection
Some clients are greatly concerned about asset protection. In such cases the attorney may create a corporation or limited liability company to protect a client's assets, or to allow the client to operate a business with reduced fear that repercussions or lawsuits from the business will affect his or her personal assets. The creation of such business entities, and the subsequent gifting of fractional interests in those entities, may also provide the estate with opportunities to discount assets for federal estate tax purposes, ultimately reducing the value of the taxable estate, and the tax itself.
