Ten Advanced Estate Planning Techniques

4 min

1. Qualified Personal Residence Trust.

Taxpayers can save estate tax on their homes by transferring the home to a trust during the taxpayer's lifetime for a set number of years. The gift tax value of the house is a fraction of what the value would be for estate tax purposes if held until death.

2. Grantor Retained Annuity Trust (GRAT).

Taxpayers can transfer investment property or business property to a trust for a set number of years. The trust pays the taxpayer an annuity (a fixed dollar amount). At the end of the term, any property left in the trust passes to the family free of gift or estate tax.

3. Generation-Skipping Trust.

Each individual can leave $1,000,000 to grandchildren or more remote descendants free of the generation-skipping transfer tax. By setting up a $1,000,000 generation-skipping trust, taxpayers can make this amount available for their spouse and children during their lifetimes, and ultimately transfer the property to grandchildren. This plan makes use of the $1,000,000 exemption, while preserving the wealth for the beneficiaries closest to the taxpayer.

4. Dynasty Trust.

A Dynasty Trust is a generation-skipping trust that lasts for more than two generations. Under Maryland law, a trust can be drafted to last in perpetuity. This type of trust is particularly effective when it is used to purchase life insurance, because $1,000,000 worth of premiums can buy a far greater amount of coverage.

5. Grandchildren's Trusts.

Each person can leave up to $10,000 per year to any other person, including children and grandchildren, free of gift, estate or generation-skipping transfer tax. Because grandchildren often are too young to handle large sums of money, however, it is often desirable to make such gifts to a trust. Such gifts can be made free of tax if the trust qualifies under &#sect;2642(c).

6. Recapitalizing Closely Held Corporation Using Non-Voting Common Stock.

It is often desirable for business owners to begin giving away interests in their business to their children during their lifetimes, to avoid large estate taxes that can cripple the business after death. The business owner may not be ready to give up control, however. One solution is to issue a large class of non-voting Common Stock, which can be given away to family members without giving them a say in the business until the appropriate time.

7. Family Limited Partnership/Limited Liability Company.

Another way to make lifetime gifts without giving up control is to give away non-voting or limited partner interests in a family limited liability company or family limited partnership. These entities can be created with a large variety of assets. The entity essentially creates a "family business" allowing younger generations to participate in the management of the family wealth. Such gifts receive favorable treatment for gift tax purposes, because non-controlling partial interests are valued at a discount from their pro rata share of the assets of the entity as a whole.

8. Buy/Sell Agreements.

In the case of a family business, a Buy/Sell Agreement should be in place to restrict transfers of interest in the business. The Agreement should apply both during lifetime and at the death of the owner of the interest. The Agreement also can establish a mechanism for the business or the other owners to buy out the share of a deceased owner. Life insurance is often helpful for this purpose.

9. Charitable Remainder Trust.

Instead of leaving assets to charity in their Wills, many clients can benefit from setting up a charitable remainder trust during their lifetime. In the simplest version of this trust, the taxpayer transfers the property to the trust, and the trust pays the taxpayer a fixed percentage of the trust each year for the rest of the taxpayer's life. Setting up a charitable remainder trust allows the taxpayer to claim an income tax charitable deduction during his lifetime for assets that pass to charity at his death. Also, the trust can liquidate appreciated stock without capital gain tax, thus converting low yield property into a stream of income for the taxpayer.

10. Wealth Replacement Life Insurance Trust.

A charitable remainder trust often works best in conjunction with a life insurance trust. The lifetime advantages of the charitable remainder trust discussed above (income tax deduction, higher yield on investments) can be used to purchase life insurance on the taxpayer's life inside a standard life insurance trust. Thus, at the death of the taxpayer, the life insurance proceeds go to the family, and the charitable remainder trust goes to the charity. Both the charity and the family are benefited, instead of just one.