You’ve worked hard your whole life to provide for your family and make your loved ones more secure. Without advanced estate planning strategies, much of the significant assets you have accumulated may end up with the IRS and state taxing authorities.
Our firm regularly assists affluent families with such sophisticated planning strategies as Family Limited Partnerships or Limited Liability Companies, Personal Residence Trusts, Irrevocable Life Insurance Trusts and a wide range of charitable gifting techniques to reduce Federal Estate Taxes, Gift Taxes and Generation Skipping Transfer Taxes.
Family Limited
Partnerships
A Family Limited Partnership
(FLP) is a form of a limited
partnership among members of a
family. The main advantages of
forming and funding an FLP
involve estate and gift tax
savings and asset protection.
An FLP also allows you to
retain control over the
transferred assets while
enjoying these advantages.
Once the FLP is established and your assets are transferred to it, you can make gifts of limited partnership interests to your children or other beneficiaries. This accomplishes several different estate planning objectives simultaneously.
First, the value of each limited partnership interest which you give away decreases the value of your taxable estate and, consequently, any tax which your heirs would have to pay upon your death. The gifts are made using the annual gift tax exclusion, so depending on its value, you may not have to pay any gift tax on the transfer.
Second, the value of the partnership interests transferred to your beneficiaries is far less than the corresponding value of the assets in the partnership. Since limited partners do not have the ability to direct or control the day-to-day operation of the partnership, a minority discount can be applied to reduce the value of the limited partnership interests which you are gifting. Furthermore, because the partnership is a closely-held entity and not publicly-traded, a discount can be applied based upon the lack of marketability of the limited partnership interest. This allows you to leverage the FLP as a vehicle to transfer more wealth to your beneficiaries, while retaining control of the underlying assets. Lastly, a properly-structured FLP can have creditor protection characteristics since the general partners are not obligated to distribute earnings of the partnership.
Qualified Personal
Residence Trusts
Our homes are often our most
valuable assets and hence one
of the largest components of
our taxable estate. A
Qualified Personal Residence
Trust or a QPRT (pronounced
“cue-pert” allows you to give
away your house or vacation
home at a great discount,
freeze its value for estate tax
purposes, and still continue to
live in it. Here is how
it works: You transfer the
title to your house to the QPRT
(usually for the benefit of
your family members), reserving
the right to live in the house
for a specified number of
years. If you live to the end
of the specified period, the
house (as well as any
appreciation in its value since
the transfer) passes to your
children or other beneficiaries
free of any additional estate
or gift taxes. After the
end of the specified period,
you may continue to live in the
home but you must pay rent to
your family or designated
beneficiary in order to avoid
inclusion of the residence in
your estate. This is may
be an added benefit as it
serves to further reduce the
value of your taxable estate,
though the rent income does
have income tax consequences
for your family. If you
die before the end of the
period, the full value of the
house will be included in your
estate for estate tax purposes,
though in most cases you are no
worse off than you would have
been had you not established a
QPRT. An added benefit of
the QPRT is that it also serves
as an excellent asset/creditor
protection vehicle since you no
longer technically own the
property once the trust is
established and your residence
is transferred to the QPRT.
Irrevocable Life
Insurance
Trusts
There is a common misconception
that life insurance proceeds
are not subject to Federal
Estate Taxes. While the
proceeds are received by your
loved ones free of any income
taxes, they are countable as
part of your taxable estate and
therefore your loved ones can
lose about half of its value to
estate taxes.
An Irrevocable Life Insurance Trust is created specifically for the purpose of owning your life insurance policy. A properly established and administered trust holds the policy outside of your estate and keeps the proceeds from being taxable to your estate. The proceeds from the insurance policy can then be used to provide your estate with the liquidity to pay estate taxes, pay off debts, pay final expenses and provide income to a surviving spouse or children. The ILIT will be the policy owner and beneficiary. Once your trust is established, you use your annual gift tax exclusion to make cash gifts to your trust. Your beneficiaries forgo the present gift (in lieu of the future proceeds) and the trustee uses the remaining gift to pay the premium on the life insurance policy.
There are many options available when setting up an ILIT. For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.
Our firm is dedicated to helping clients make educated, informed decisions about their assets and will work with you and your team of financial advisers and CPAs to implement a highly sophisticated and effective estate plan that allows for the maximum transfer of assets to your loved ones.
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