Practice Areas - Advanced Tax Planning
Irrevocable Life Insurance Trusts • Family Limited Partnerships
Grantor Retained Income Trusts • Dynasty Trusts
The Irrevocable Life Insurance Trust (ILIT) is one of the most commonly used estate planning vehicles. Although proceeds of life insurance are received income
tax free by a beneficiary, they are nonetheless included in the estate of the insured owner of the policy and thus subject to estate tax. In order to remove the life insurance proceeds
from the estate of the insured, and to provide additional liquidity for payment of estate taxes, ownership of the policy is often placed in an ILIT. Contrary to common belief, transferring
ownership of the insurance to an ILIT does not necessarily prohibit access to the cash value. A properly drafted ILIT can allow the spouse of the insured to access the cash value during
the insured’s lifetime.
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A Family Limited Partnerships (FLP) is an effective estate planning vehicle used to reduce estate and gift taxes while maintaining control of assets during the grantor’s lifetime. The
grantor typically transfers property into the FLP and then makes gifts of limited partnership interests during lifetime, usually at a discounted value. This structure allows the grantor to
remove assets and future appreciation from his estate. Additionally, because the grantor transfers only limited partnership interests to family members and retains a general partnership
interest, he keeps complete control over management of the assets during his lifetime. Essentially, an FLP is like a family’s very own private hedge fund allowing family investments to be
invested in a common pool while providing for centralized management of assets.
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A Grantor Retained Income Trust (GRIT) can be a valuable tool in estate planning. Payment of the income may be by either a fixed annuity (GRAT) or a variable
annuity (GRUT). Either form can be provide a favorable means of removing rapidly appreciating property from a client’s estate while passing on substantial wealth to children and future
generations. Moreover, although the grantor is treated as having made a completed gift at the time the GRIT is established, by making full use of the gift tax exclusion, the transaction
may be structured so that little or no gift tax is due.
If the grantor has used most or all of his or her lifetime gift tax exclusion, it is critical that the calculated gift comes as close to zero as possible such that there is no
current gift tax liability. This is referred to as the “Zeroed Out GRAT” or the “Walton GRAT.”
In the event the grantor dies during the term that the GRAT or GRUT is in existence, the fair market value of the remaining trust assets will be included in the grantor’s
estate. Nonetheless, because the cost of setting up a GRAT or GRUT is minimal and the benefits may be substantial, we often recommend it to clients with substantial estates. In addition,
the risk of premature death can be hedged using life insurance to cover the period of the annuity.
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For those clients wishing to provide for successor generations, a “Dynasty Trust” may be the answer. A Dynasty Trust is an irrevocable trust
that is designed to continue for the lives of children, grandchildren and even great-grandchildren. Because transfers to successor generations are subject to the generation skipping
transfer tax, (GST) special care must be taken in drafting to avoid, or minimize the tax. Each taxpayer has a GST exemption that can be placed in a trust that will continue on for
generations with no estate taxes imposed after the parents have died. When this tax is successfully avoided, then assets can accumulate for generations completely outside the estate and
gift tax systems, thereby preserving family wealth for future generations.
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