Complex Estate Planning (Large Estates)

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" rowspan="2" width=185 BGCOLOR="#003333" TEXT="#F7F7FF" bgproperties="fixed" background="199d4c00dduajq.jpg"> <bR> <bR> <bR> <div> <A HREF="id25.htm" TARGET="_top" TITLE="Q A"><B><IMG SRC="01109110.png" border=0 width="9" height="17" ALT="previous" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></A><B>       </B><IMG BORDER="0" SRC="1x1.gif" HEIGHT="17" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" WIDTH="17"><B>   </B><IMG BORDER="0" SRC="1x1.gif" HEIGHT="17" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" WIDTH="17"><B>       </B><A HREF="id30.htm" TARGET="_top" TITLE="Family Owned Business Exclusion"><B><IMG SRC="01409110.png" border=0 width="9" height="17" ALT="next" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></A></div> <div> <A HREF="id27_m.htm#the_family_limited_partnership" TARGET="TRLX_Middle" TITLE="Complex Estate Planning (Large Estates)"><B>The Family Limited Partnership</B></A></div> <div> <A HREF="id27_m.htm#the_charitable_remainder_trust" TARGET="TRLX_Middle" TITLE="Complex Estate Planning (Large Estates)"><B>The Charitable Remainder Trust</B></A></div> <div> <A HREF="id27_m.htm#charitable_lead_trust" TARGET="TRLX_Middle" TITLE="Complex Estate Planning (Large Estates)"><B>The Charitable Lead Trust</B></A></div> <div> <A HREF="id27_m.htm#irrevocable_life_insurance_trust" TARGET="TRLX_Middle" TITLE="Complex Estate Planning (Large Estates)"><B>The Irrevocable Life </B></A><A HREF="id27_m.htm#irrevocable_life_insurance_trust" TARGET="TRLX_Middle" TITLE="Complex Estate Planning (Large Estates)"><B>Insurance Trust (ILIT)</B></A></div> <div> <A HREF="id27_m.htm#grat__grantor_retained_annuity_trust_" TARGET="TRLX_Middle" TITLE="Complex Estate Planning (Large Estates)"><B>GRAT</B></A></div> <div> <A HREF="id30.htm" TARGET="_top" TITLE="Family Owned Business Exclusion"><B>Next Page</B></A></div> <div> <A HREF="id25.htm" TARGET="_top" TITLE="Q A"><B>Prior Page</B></A></div> <div> <A HREF="id12.htm" TARGET="_top" TITLE=" Trust and Estate Planni"><B>Estate Planning Page</B></A></div> <bR> <div> <A HREF="index.htm" TARGET="_top" TITLE="Law Offices of Mathews Bergen Grier"><B>Home</B></A></div> <bR> <div> <A HREF="mailto:mbglaw@cts.com" TARGET="_top" TITLE="mailto:mbglaw@cts.com"><B><IMG SRC="01573ce0.jpg" border=0 width="115" height="206" ALT="E-mail MATHEWS BERGEN & GRIER" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></A></div> </td> <td valign="top" height=60 BGCOLOR="#FFFBF0" TEXT="#080000"> <div> <I>Complex Estate Planning (Large Estates)</I></div> <div> </div> </td> <td valign="top" rowspan="2" width=175 BGCOLOR="#FFFF33" TEXT="#080000"> <div> <FONT SIZE="4" COLOR="#FF0033" FACE="Arial" ><B>Warning:</B></FONT><FONT SIZE="4" COLOR="#0000FF" FACE="Arial" > </FONT><I>The information on this and the following pages is provided in summary </I><I>only</I><I> and is not intended to offer advice as to any particular circumstance, tax situation, or estate plan. The devices described are </I><I>sophisticated</I><I>. Proper legal </I><I><B>AND</B></I><I> tax advice is </I><I><B>MANDATORY</B></I><I> </I><I>before attempting to use any of the described vehicles.</I></div> </td> </tr><tr> <td valign="top" height=420 width="100%" BGCOLOR="#FFFBF0" TEXT="#080000"> <div>  <A NAME="the_family_limited_partnership"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A>The Family Limited Partnership</div> <bR> <div>      One of the disadvantages of making gifts directly to your heirs is that you lose control of the assets (your gift) and lose any income that you might receive from it. By transferring the gift to an entity such as a limited partnership first and then making gifts of a portion of the partnership interest to your heirs, you can both control the gift and possibly receive the full income for your lifetime. By effectively making gifts, you may reduce your potential estate substantially, passing more money along to your heirs then would be possible just with a fully funded, tax-sensitive, living trust. </div> <div>      A family limited partnership consists of general partners and limited partners. The general partners are you (and your spouse). They have the exclusive right to manage and control the partnership business. The general partners may receive a fee for managing the partnership. The limited partners have neither control over the partnership nor any liability for what the partnership does. The limited partners would generally be your heirs. </div> <div>      Here is an example: Suppose that you and your spouse own a piece of rental property currently consisting of a small strip shopping center worth about $1,600,000.00 and you have three children who are your heirs. Further, assume that your entire estate, including this property, is worth 4.7 million dollars. You want to be able to give the shopping center to your children and avoid estate tax at the same time. You set up a limited partnership and transfer title of the shopping center to the partnership. The partnership now owns and operates the shopping center. You receive a certificate from the partnership which indicates that you are both the limited and general partners. Initially, the value of the shopping center remains in your estate because you are "the owner" of all of the partnership interest. As a general partner, you control the partnership, which means that you control the shopping center and pay yourself a management fee equal to the net income earned by the shopping center . </div> <div>      Then, you, and your spouse, give a combined gift to each of your children. You can, of course, given only $24,000.00 per child, per year. However, instead of giving a deed of $24,000.00 interest in the property, you give to the children a $24,000 interest in the limited partnership as limited partners. The children do not own the shopping center. Even if you give away a substantial majority (perhaps retaining as little as two percent) of value of the shopping center, you control 100% and can receive 100% of the income. </div> <div>      Another important feature of the family limited partnership is that you will be able to give the value of the shopping center to your children more quickly than normal. In the example above, to fully gift the $1,600,000 value of the shopping center outside of a limited partnership would take more than 22 years ($72,000 X 22.2 = $1.6 million). However, the gift value of a percentage of a <I>limited</I> partnership is less (sometime, substantially less) than the same percentage fair market value of the entire property if title were held individually or in a regular partnership. This is called discounting. Through the dynamics of "minority discounting" (the reduction in taxable value of a partial, less than majority of interest in the business), you will be able to gift a greater percentage each year than is otherwise allowed. In this example, you <I>might</I> be able to gift the entire $1,600,000 value in as little as twelve years.  For larger estates such as this example, benefits begin to flow (exceeding the not insubstantial costs of these devices) in as little as two to three years.</div> <div>      This scenario represents the best of both worlds for those of you with assets exceeding $4,000,000 (as of 2006, <FONT SIZE="4" COLOR="#006600" FACE="Arial" ><A HREF="id28_estate_and_gift_tax_exemption_schedule.htm" TARGET="_top" TITLE="Federal Estate Unified Rate Schedule">see table for later years</A></FONT>), a portion of which are actively earning income (not dividends or interest) even if passive income from rental property. This vehicle is not generally used with your own residence, since it is not generating income. There are other factors which must be considered. However, this useful device is available to extend the power of your estate plan, if your circumstances are appropriate. </div> <bR> <div>      This advanced estate planning device is for the larger estate where the expense is far outweighed by the advantage of potentially saving a significant amount of Federal Estate Tax.</div> <bR> <div>  <A NAME="the_charitable_remainder_trust"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A>The Charitable Remainder Trust</div> <bR> <div>      Secure a lifetime income, save taxes and benefit favorite charities. Too good to be true? Today, many estate planning professionals recommend establishing a charitable remainder trust to accomplish these goals. This type of trust involves an irrevocable transfer that allows the grantor (owner) to transfer highly appreciated assets such as real property or stocks to a trustee (trust company or bank) which assets can then be sold at full market value without the immediate capital gains tax liability that would be incurred by an individual. </div> <div>      The proceeds can be reinvested in assets that provide reasonable income to the grantor for his/her lifetime or for a specified period up to 20 years. After the income recipient dies, the remaining funds are distributed to the charities specified in the trust. That's why the document is called a charitable remainder trust. </div> <div>      A charitable remainder trust may have an immediate, positive impact on the grantor's tax liability. By transferring highly appreciated assets from the grantor's estate, the estate's overall value is reduced, thus decreasing the amount of taxes owed at death. The grantor also receives an immediate charitable income tax deduction in the year the trust is established. </div> <div>      There are two types of charitable remainder trusts. An "unitrust" allows the grantor to receive a payment equal to set percentage of the market value of the trust assets each year. The unitrust income amount will vary because the trust's market value varies. An "annuity trust" provides a guaranteed fixed payment annually regardless of investment performance. This type of trust is usually a good choice for older grantors who depend on a certain amount of income. Also, other individuals designated by the grantor may receive income from the trust.</div> <div>      As with any estate planning tool, a charitable remainder trust is not "just for anyone", and specific legal and tax advice is generally required.</div> <bR> <div>  <A NAME="charitable_lead_trust"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A>Charitable Lead Trust</div> <bR> <div>      If the remainder interest (what is left after the decease person's death) is to benefit the charity, the trust is called a <FONT SIZE="4" COLOR="#006600" FACE="Arial" ><A HREF="#the_charitable_remainder_trust" TITLE="Complex Estate Planning (Large Estates)">charitable remainder trust</A></FONT>. If the initial benefit, i.e., income, from the gift is given to the charity during the lifetime of the settlor, but the remainder interest is given to a non-charity beneficiary (or beneficiaries), the trust is described as a "charitable lead trust."</div> <div>      This trust vehicle is frequently used where a major objective is to obtain an immediate income tax (federal and state) benefit (such as the capital gains tax on highly appreciated assets). Other valuable deductions are possible which may reduce or eliminate taxes on the trust property or on its income.</div> <div>      These trust are highly technical in nature.</div> <bR> <div>  <A NAME="irrevocable_life_insurance_trust"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A>Irrevocable Life Insurance Trust</div> <bR> <div>      An inter vivos trust may be created for the specific purpose of acquiring and owing one or more life insurance policies. A Trust that is created to acquire and own life insurance on the life of the settlor (or settlors) and that is not intended to hold any other substantial assets is typically described as a "life insurance trust."</div> <bR> <div>      Of course, the death benefits of a life insurance policy may be payable to any kid of trust, testamentary (a trust created solely by a will and generally subject to probate) or inter vivos, revocable or irrevocable. However, granting the benefits of a policy of life insurance to a testamentary trust will not remove any assets from the decedent's gross estate.</div> <bR> <div>      Life insurance trusts are generally used to provide a liquidity factor to the estate. If a life insurance trust is properly structured, the death benefits payable to the trust will escape being included in the deceased person's estate -- and, thus, will escape Federal Estate Tax.</div> <bR> <div>      The death benefit can then be used to pay debts, to pay taxes, or may be used in a more direct way to benefit the settlor's family, beneficiaries of devisees. One frequent use is to establish an "educational fund" for grandchildren (or, even great grandchildren).</div> <bR> <div>      The effect of making such a trust irrevocable (where the settlor[s]) retain neither a benefit nor control, the entire benefit may pass without inclusion in the gross estate. </div> <bR> <div>  <A NAME="grat__grantor_retained_annuity_trust_"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A>GRAT (Grantor Retained Annuity Trust)</div> <bR> <div>      A grantor retained annuity trust (GRAT) is designed to be used by a settlor to make a gift, usually to one or more family members, of cash or income-producing property in which the settlor retains an annuity interest, i.e., the right to receive periodic payments (at least annually) in fixed dollar amounts for life or for a specified term of years [see I.R.C. Section 2702(b)(1),(3)]. The interest retained by the settlor is a "qualified interest" for purposes of I.R.C. Section 2702, making the interest subject to special valuation under I.R.C. Section 7520. Computation of the value of the retained interest is highly technical and complex.</div> <bR> <div>      The value of the GRAT as an estate planning tool depends on fluctuating interest rates and the growth of the value of the trust assets over the term of the GRAT and the percentage of pay out retained by the settlor. When interest rates are low, the settlor's retained interest has a correspondingly high value, which results in a lower transfer tax cost than when interest rates are high.</div> <bR> <div>      Under some GRATs, the settlor will retain an annuity interest in the trust assets for a specified term of years, but the trust term will expire earlier if the settlor dies before expiration of the specified number of years. At the end of the specified number of years, if the settlor is still alive, the property will be distributed to specified remainder beneficiaries, typically the settlor's children.</div> <bR> <div>      The length of the term of years must be determined on a case-by-case basis by balancing the settlor's age and probable life expectancy against the tax savings that can be realized from reducing the value of the remainder interest by postponing distribution to the remainder beneficiaries for as long as possible. It is always a calculated risk. The provision providing for termination of the settlor's interest if he or she does not survive the term recognizes that the tax-savings purposes of the trust may be frustrated by the early death. Under I.R.C.  2036(a), the </div> <div> gross estate of a decedent will include property that the decedent had the right to use or enjoy at the time of death. Recognizing this, most settlors will wish to control the disposition of the property if they die before the expiration of the term of years. This can be done by specifying in the trust instrument that the property will be distributed to the settlor's estate if the settlor dies before expiration of the term of years. Such a provision, in effect, creates a reversion. Inclusion of a reversion is desirable because it reduces that value of the remainder interest and, therefore, the amount of gift tax that will have to be paid on the transfer. A similar result can be obtained if the settlor reserves a general testamentary power of appointment over the trust estate and the trust instrument states that an exercise of the power will be effective only if the settlor dies before expiration of the term of years.</div> <bR> <div>      The trust instrument will require that the annuity amount be paid in each taxable year of the trust [see I.R.C. Section 2702(b)(1)], but will allow the trustee to pay the amount in monthly or quarterly installments. It will also prohibit distributions of corpus to any beneficiary other than the Settlor before expiration of the term interest. The trust instrument will also include the required provision prohibiting commutation (prepayment) of the settlor's term interest. </div> <bR> <div>      Generally, GRATs do not allow contributions or additions to the trust estate after the settlor's initial contribution. It is recommended that a separate GRAT be established for any subsequent contributions.</div> <bR> <div>      Because of the sophisticated nature of the GRAT, generally, the attorney will work closely with the client's tax professional to assure that the intended benefit is realized.  There are, however, inherent risks with this type of device which must be weighed against its benefits.</div> </td> </tr></table></body>