Advanced Planning Strategies
Additional planning strategies are available beyond the foundation plan for clients with taxable estates and charitable desires. Here is a brief summary of some of the more common of these strategies.
Irrevocable Life Insurance Trusts
Many people mistakenly believe that life insurance policies are estate tax free. Life insurance grows income tax free but the death benefit is includable in your gross estate for estate tax purposes.
Even young couples who otherwise would not have taxable estates, often own a significant amount of life insurance that will be estate taxable and will reduce the benefits available for their children. An Irrevocable Life Insurance Trust (ILIT) will remove the proceeds from your estate with the result that the proceeds will be fully available to your family instead of being reduced by as mush as 55%.
The ILIT becomes the owner of your life policies. Annual exclusion gifts are often made to the policy for the benefit of the trust beneficiaries and then used to pay the policy premiums. These completed gifts allow the policy proceeds to be exempt from estate taxation at death. The proceeds can then be used in full to create liquidity in an estate, pay other estate expenses, or create wealth for loved ones.
Family Limited Partnership and Limited Liability Companies
Family limited partnerships (FLP) and limited liability companies (LLC) are businesses entities created with family members for the purpose of achieving family asset management goals while creating opportunities for gift, estate tax and asset protection. Many states offer significant advantages and choice of jurisdiction should be an important consideration.
Grantor Retained Trusts
A grantor retained annuity trust (GRAT) is an irrevocable trust planning technique allowing you to transfer assets and retain an annuity income. The income amount is based on IRS discount rates. At the end of the trust term, assets in the trust pass to other beneficiaries, no longer subject to tax in your estate. Other grantor retained trusts include the grantor retained unitrust (GRUT), where periodic distributions are based on a percentage of assets held in the trust and grantor retained income trusts (GRIT) where an income interest is retained. The goal of grantor retained trusts is to transfer assets to other beneficiaries while providing you with an income benefit.
Charitable Planning Techniques
Charitable planning can be a win-win solution for your family. Charitable trusts such as charitable remainder trusts (CRATs and CRUTs) and charitable lead trusts (CLATs and CLUTs) produce income and estate tax benefits. You will have a choice of using a family foundation, a supporting organization or a donor advised fund, depending upon how much involvement you choose for your family. Charitable planning techniques support charitable organizations allowing you to redirect taxes to the causes you support.
Advanced estate planning tools and techniques need to be implemented as part of a comprehensive wealth design. The irrevocable nature of these planning tools requires a coordinated, integrated design, carefully implemented and meticulously maintained. Seek out a qualified legal professional and wealth design team (certified public accountant, appraisers, and financial professionals) skilled in income, gift and estate tax planning.