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Advanced Estate Planning Techniques

GRAT: A Grantor Retained Annuity Trust is an arrangement where you may "give away" one or more of your assets, while retaining the right to receive a set percentage of the value of that asset for a period of time. For example, if you transfer a $100,000 asset, you may decide to receive 5% per year, or $5,000 of annual cash flow back from the GRAT. At the end of the trust term (you get to decide how long the term will be), the remaining assets of the trust pass to your chosen beneficiaries, or a trust for their benefit. This is one member of the family of "split interest" trusts. You retain a predictable cash flow, but give away the remaining value. Think of it as "giving away the tree, but keeping the fruit" for a period of time.


IDGT: One of the reasons we like this trust, is it provides both estate freezing and estate squeezing opportunities. The acronym actually stands for Intentionally Defective Grantor Trust.

Why would you want something intentionally defective? The word defective in the name of this trust is not a comment on the quality of its drafting. Instead, it refers to the fact that although gifts to an IDGT are effective so far as federal gift and estate taxes are concerned, the very same gift is not sufficiently complete (i.e. "defective") so far as federal income taxes are concerned.

This puts us in a very special and advantageous position. The Trustmaker still pays income taxes on the assets he or she just gave away. The trust benefits from having someone else pay the income taxes on the property it owns. Wouldn't it be nice not to have to pay taxes on your income? Another way to think of it is this: every year the Trustmaker pays income taxes on IDGT owned property, it's like the Trustmaker gets to make another "gift" to the IDGT without having to pay associated gift taxes.


"His & Hers" Trusts": This trust appeals to married clients who want to remove assets from their estate, but are not quite ready to transfer financial benefits to their heirs. It also appeals to couples who are on the cusp of having a taxable estate. They may want to engage in an estate freezing technique, but don't want something overly complicated when they are only slightly above the estate tax threshold.

It is possible to remove assets from your taxable estate, and still permit your spouse to retain access to these assets for his or her lifetime. Essentially, each spouse establishes a trust for the benefit of the other. By design, it requires the use some or all of your lifetime gift tax exemption, so it must only be implemented after careful consideration.

Further, if one is going to be created for each spouse, the trusts must be planned with care. If the trusts are identical in their terms and are created on the same day, the IRS will likely be able to disregard the whole arrangement and the estate tax benefits will be lost. We can help to navigate these issues.


Family Limited Partnership (FLP) and Family Limited Liability Company (FLLC): As the names suggest, these are actual business organizations. However, the ownership is usually held by immediate family members only.

There are a number of reasons why our clients might consider organizing a business to hold assets. They include: lawsuit protections, centralization of asset management, facilitation of gifting and controlled business succession.

There are many circumstances and types of assets where creating an FLP or FLLC may be beneficial. Many families have successful businesses that are operated as sole proprietorships. Others have portfolios of income producing real estate. Sometimes, even a portfolio of investment securities may be considered appropriate.

After establishing an FLP or FLLC, certain estate and gift tax advantages present themselves. Because the limited partners (or non-managing members of an FLLC) do not have any management control or ability to demand distributions, the value of their percentage ownership of the business does not correspond to the value of the assets owned by that business. This presents an opportunity to "leverage" the value of gifts and bequests.
 
Planning with FLPs and FLLCs often includes making use of related strategies, such as the IDGT. Properly done, dramatic estate freezing and estate squeezing can result, even where continued client control is a planning priority.


QPRT: The IRS name for this strategy is a "Qualified Personal Residence Trust." However, we prefer to call it a "House Trust." It's one member of the family of split-interests trusts where you give something away and you keep something. In this case, you transfer your house or vacation home (or both) to a House Trust today, but retain the right to live in it for a specified number of years.

When the term of years has passed, the ownership of the property passes to children, or to a trust for their benefit. Thereafter, it will not be taxed as an asset of your estate when you die. If you fail to survive the term of the House Trust, its value will be included in your estate, putting you in essentially the same tax position as if you had not created it. This is just about as close as you come to a "heads I win; tails I break even" proposition.

After term of years has passed, you don't have to move out of your house, but you do have to enter into a fair rental arrangement. While it may sound odd (and perhaps undesirable) to rent your own house from your children, the arrangement offers additional estate reduction and income shifting opportunities. Over time, significant beneficial results can accumulate.


CRT: The Charitable Remainder Trust is another "split interest" trust arrangement, where you give something and keep something. In this case, you transfer assets to the CRT and retain a stream of income for a set number of years or for your lifetime. Unlike the GRAT, the beneficiaries at the end of the trust term are not family; they are charities.

The makers of a CRT determine how much of a lifetime income stream they wish to retain. For example, if the annual payments were set at 5%, the maker of the trust would receive $5,000 for each $100,000 of trust principal. In this case, the trust is re-valued on an annual basis. So, if the trust investments exceed the percentage paid to the maker every year, the annual payments grow proportionately.

A CRT may last for the lifetime(s) of the maker(s), or for a set number of years, not exceeding 20. Either way, whatever balance remains in the CRT at the end of the term will go to the maker's designated charities. Though the identity of the charitable organizations may be changed by the maker, the remainder beneficiaries must always be IRS qualified charities. Because of this requirement, the maker will benefit from a charitable income tax deduction upon the creation of the trust. That's right . . . even though the charitable gift is not actually made for many years, there is a charitable income tax deduction available at the very beginning of the arrangement.

CRTs are a potentially powerful estate tax reduction technique. Even where the non-charitable beneficiaries will receive cash distributions for many years, the ultimate charitable gift can significantly reduce estate taxes. Like the GRAT, think of this as "giving away the tree, but keeping the fruit," but only for a period of years. At some point, the tree goes to your favorite charities.


CLT: A Charitable Lead Trust is essentially a CRT in reverse. In this split interest trust, the named charities receive the annual percentage distributions. The remainder of the trust typically goes to your non-charitable beneficiaries such as children and grandchildren (or trusts for their benefit).

Charitable Lead Trusts also provide one of the best ways to eliminate ALL Federal Estate Taxes. They may be structured to deliver significant sums to charities (instead of the IRS, in the form of estate taxes), and provide a "second inheritance" to children or grandchildren after the term of the CLT is complete. For a detailed description of how this "Testamentary CLT" works to eliminate estate taxes, just give us a call.


"Dynasty" Trust: The term Dynasty Trust is most frequently used to describe an arrangement where assets are transferred to a trust designed to last for many generations. Often, a single "pot" is established that benefits a selected group of descendants, based on their differing and individual needs. A Dynasty Trust may be established during the life of the Trustmaker, or funded with estate assets after death.

Typical objectives of a Dynasty Trust include providing for education expenses, helping descendants into their first home, paying for medical/dental expenses, providing a source of capital to help descendants establish a business and many others. One can set up such a trust to accomplish just about any objective, whether limited or broadly defined.

Among the benefits of a Dynasty Trust, whatever the stated purpose, the assets may pass from generation to generation without estate taxes being imposed as each older generation passes away. In some cases, these trusts are designed to last for three or four generations. In some, they are designed to last for hundreds of years!

Dynasty Trusts will also be established in such a way that, for so long as the trust lasts, the assets are protected from loss in the event a descendant gets divorced or sued for money damages.