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Advanced Estate Planning Strategies

Advanced Estate Planning Strategies

The Marsalese Law Group's Estate Planning Practice Group routinely utilizes advanced estate planning strategies, which are designed to lower if not eliminate estate taxes. Now that the tax exemption has doubled under the New Tax Cuts and Jobs Act from $5.6 million individually and $11.2 million for married couples to $11.18 million and $22.36 million there exist Trusts, which no longer serve their original purpose. A review of your current estate plan is now in order.


Some of the advanced strategies, which are currently at the forefront of our estate planning practice, include the following:


Family Limited Partnerships


If your family has amassed a substantial amount of wealth, it might pay to look into a family limited partnership (“FLP”). As the name implies, a family limited partnership is a limited liability partnership controlled by members of a given family.


As a limited partnership, there are two classes of ownership: the general partner(s) and the limited partner(s). The general partner(s) has control over the family limited partnership and is personally responsible for the debts that the partnership incurs.


An FLP can be a powerful estate planning tool that may (1) help reduce income and transfer taxes, (2) allow you to transfer an ownership interest to other family members while letting you keep control of the assets, (3) help ensure continued family ownership of the assets, and (4) provide liability protection for the family members.


The primary advantage of an FLP is that your family's resources are pooled into a single business partnership, whose shares can be distributed to future generations at a lower tax rate than would be paid in estate or gift taxes. FLPs are also fairly flexible and can typically be amended as family circumstances change, such as in the case of divorce.


Buy/Sell Agreements


A Buy-Sell agreement is a binding legal agreement that clearly outlines how a company and/or its owners will distribute ownership shares after the death, retirement, departure or disablement of one of its owners. The agreement essentially dictates how the business is sold, to whom and for how much.


A Buy-Sell agreement effectively provides for the sale of a business interest to other owners or partners, the business entity itself or a hybrid. Alternatively, the agreement may cover a sale to one or more long-time employees.


Buy-Sell Agreements can be funded (most often with life insurance) or unfunded (usually with promises to pay). Funding a Buy-Sell Agreement with life insurance is the most practical method to fund a buy-sell. With life insurance, the heirs receive cash and walk away, and the surviving owner gets the deceased owner’s shares immediately. Unfunded Buy-Sell Agreements are usually better than no agreement, but the odds of the heirs ever getting paid are substantially reduced. Quite often the earnings of the company going forward are not sufficient to pay off the heirs.

Charitable Remainder Trust


A Charitable Remainder Trust (“CRT”) transfers appreciated property into an irrevocable trust and designate a charity as the beneficiary. A portion (or all) of the assets within the trust are then sold and reinvested to provide income to the person donating the assets. A charitable remainder trust offers income to the donors or their beneficiaries while alive, and then at the death of the donor, or after a specified number of years, the trust expires and the property remaining within the trust is transferred to the charity.


The Charitable Remainder Trust has long been a popular planning vehicle for individuals interested in leaving something to charity. A Charitable Remainder Trust is also a great way to shelter a highly appreciated asset. The Charitable Remainder Trust is, for example, one way for retired couples to sell their homes of many years, downsize, and not pay huge capital gains taxes. A couple can deed over the percentage of a residence to the Charitable Remainder Trust that is above the $500,000 capital-gains exclusion on a personal residence. Cash, real estate, securities, valuables, and shares in a corporation, a limited liability company, or a partnership can all be transferred to a Charitable Remainder Trust. Finally, a donor can replace one designated charity with another or multiple charities.


Irrevocable Life Insurance Trust


An Irrevocable Life Insurance Trust sometimes referred to as an “ILIT” is a trust primarily set up to hold one or more life insurance policy(s). The Irrevocable Life Insurance Trust is both the owner and beneficiary of the life insurance policies. An individual can transfer ownership of an existing policy to the Irrevocable Life Insurance Trust after it's been formed, or the trust can purchase the policy directly. Upon the death of the insured, the trustee invests the insurance proceeds and administers the trust for one or more beneficiaries.


An Irrevocable Life Insurance Trust is commonly used to prevent the taxation of life insurance proceeds after the death of the insured person. Although life insurance proceeds are not subject to income tax, they are includable in the taxable estate of the insured. If the estate is large enough, up to 40% of the life insurance death benefit can be lost to federal estate tax. The solution is to purchase the policy using an Irrevocable Life Insurance Trust or to gift an existing policy to an Irrevocable Life Insurance Trust, so that the ILIT owns the life insurance policy, making the insurance proceeds estate tax free thereby leaving more money to your beneficiaries by removing the proceeds from your taxable estate.


The individual who creates the ILIT can't serve as trustee of the trust, and must relinquish any right to make changes to the trust or to dissolve it, however, their spouse, their adult children, a friend or even a financial institution or an attorney can serve as trustee.


Qualified Personal Residence Trusts


A Qualified Personal Residence Trust (“QPRT”) is a special type of irrevocable trust that is designed for those with significant assets to transfer their primary home or a secondary home into a Qualified Personal Residence Trust because homes within the trust will not count towards your taxable estate. 


A Qualified Personal Residence Trust can freeze the value of the residence at the time the trust is created.  This can result in significant tax savings.  Aside from tax benefits, the QPRT allows the grantor to continue to use the home as their personal residence if desired during their lifetime, but then allows the home to easily transfer to a spouse or another heir. A Qualified Personal Residence Trust is also considered a grantor trust, allowing the grantor to claim an income tax deduction for any real estate taxes paid and a deduction for the value of the estate when initially transferred. 


Grantor Retained Annuity Trusts


A Grantor Retained Annuity Trust (“GRAT”) is a special type of irrevocable trust that minimizes the tax liability that usually accompanies intergenerational transfers of estate assets. One of the most popular ways to pass a business on to someone is through a Grantor Retained Annuity Trust. Under a Grantor Retained Annuity Trust, an irrevocable trust is created for a certain term or period of time.


Basically, the owner of the business would form an irrevocable trust, and transfer the shares of stock if a corporation, or membership units if an LLC, to the Trust.


The trust creator pays a tax when the trust is established. Assets are then placed in the trust and an annuity is paid out every year. When the Grantor Retained Annuity Trust term expires, the Trustor no longer retains an interest in the property and it is either paid out to the beneficiaries or continued to be held in trust for their benefit. The trust would have a trustee, other than the grantor to protect the assets from creditors and to remove the assets from the taxable estate, if it exists. A Grantor Retained Annuity Trust is not beneficial in a low-interest rate environment; an installment sale to a grantor trust has more certainty and yields better results. 


Qualified Terminable Interest in Property Trust


In some situations, a Qualified Terminable Interest in Property Trust (“QTIP”) is ideal for the surviving spouse. Where some couples (especially those in second marriages) may not want to give the surviving spouse complete control over the couple’s assets and control over who will inherit at the surviving spouse’s death. It is held for the benefit of the surviving spouse during the spouse’s lifetime, but the deceased spouse has already selected the beneficiaries who inherit upon the surviving spouse’s death.


A Qualified Terminable Interest in Property Trust is a separate entity and is required to file its own income tax return, the trust’s income is distributed to the surviving spouse and the surviving spouse pays the income tax at his or her marginal rate using the individual income tax rate brackets.


Under a Qualified Terminable Interest in Property Trust the decedent spouse’s assets are included in the surviving spouse’s estate and therefore qualify to be “stepped-up” to the value of the property on the date of death, and then “stepped-up” again when the surviving spouse dies. These provisions eliminate capital gains tax.



Generation­-Skipping Trusts


A Generation-Skipping Trust is exactly what it sounds like - a trust in which a grantor’s assets are locked up in a trust to be transferred to the grantor’s grandchildren, while skipping the grantor’s children. The generation the grantor's children belong to skips the opportunity to receive the assets to avoid the estate taxes on an individual's right to transfer property upon his or her death, which would apply if the assets were transferred to the children. The recipient of a generation-skipping transfer doesn't necessarily have to be a family member.


The generation-skipping trust is designed specifically to escape these taxes while protecting the family’s assets from generation to generation as they appreciate in value. This does not mean that the grantor’s children are left out completely; the grantor can still make income generated by the trust’s assets, such as dividends, available to his or her children. If the grantor’s children directly inherit the grantor’s assets, they will be taxed the standard 45% estate tax. Later on, when the grantor’s children wish to pass their assets on to their children, they will be taxed 45% again.


Grandchildren's Trusts


A Grandchildren’s Trust can be created to provide funds for a specific purpose, such as education or the purchase of a first home. These trusts also allow the trustee a great deal of freedom when choosing to make a distribution for any purpose. By setting up a Grandchildren Trusts, the Grantor can state how you want the money you leave to your grandchildren to be managed, the circumstances under which it can be distributed, and when it should be withheld. As with Children’s Trusts, a Grandchildren’s Trust is created with an end plan in place so that the principal is distributed to the beneficiary at a specific age.


One of the advantages of establishing Grandchildren’s Trust is that the Grantor can work write specific instructions into the trust language, which influences how the grandchildren use the funds. For instance, the Grandchildren’s Trust can be created to release funds at key milestones - such as when the grandchildren reach ages 20, 25, 35, and 50 - rather than all at once.


In most respects, Grandchildren’s Trusts are just like the type of trust a grantor might create for his or her children. One unique quality of Grandchildren’s Trusts is that transfers made into these trusts are subject to the generation-skipping transfer tax.


Closely Held Corps Using Non-Voting Common Stock


When a business is recapitalized into voting and non-voting common stock, the owner can transfer nonvoting stock and retain voting stock without the application of IRS Code Section §2701. In recapitalizing the business into voting and non-voting shares, voting shares are essentially exchanged for a combination of voting and/or non-voting shares. (Example: The sole owner exchanges his 100 voting shares for 5 voting shares and 95 non-voting shares.) The shares remain identical except for the right to vote.


After the business is recapitalized, non-voting shares could be transferred via gift or sale. The non-voting shares should qualify for discounts based on lack of control due to the fact the shareholders cannot vote on corporate matters. Discounts also may be available for lack of marketability, minority interest, and restrictions on disposition. Accordingly, by keeping the voting interests and transferring only non-voting interests, the transferor could remove much of the company’s value and future appreciation from his or her taxable estate. The interests can be transferred to a child, or a trust for the child’s benefit, at a potentially substantial valuation discount.


The shares must be identical except for the voting rights. Otherwise, you’ll breach the two classes of stock rule that is applicable to S Corps. For whatever reason, the IRS chooses to treat two classes of stock as “one class” of stock if the only difference between them is voting rights. The same principles, with minor variations, are applicable to limited liability companies. 

For information on how the Marsalese Law Group can provide professional, effective, and efficient legal advice, contact us anytime at 586-915-2184 or

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