Common Estate Planning Options

Lifetime Trusts.

Rather than giving your beneficiaries their inheritance outright, you can instead place the inherited property in individual, lifetime trusts for their benefit. Lifetime trusts, also commonly referred to as generation-skipping trusts, are trusts which last for the lifetime of the beneficiary and then pass to the next generation of beneficiaries without being subject to estate taxes upon the death of that beneficiary. These trusts have the added advantages of being insulated from the claims of creditors and spouses in the event of divorce. If desired, the beneficiary of a lifetime trust can be allowed to serve as the sole trustee of the trust after attaining a specified age.

Lifetime Trusts Created by Parent(s) at Their Death.

Rather than inheriting property from your parents directly, a better method might be to inherit that property in a trust designed to last for your lifetime. If properly structured, the trust property will pass to the next generation of beneficiaries without being subject to estate taxes upon your death. A lifetime trust can avoid the stacking of inherited assets onto your estate, thereby avoiding unnecessary Federal estate taxes. Lifetime trusts have the added advantage of being insulated from the claims of creditors and spouses in the event of divorce.

Gifts to 529 Accounts.

College savings accounts known as 529 accounts (after Section 529 of the Internal Revenue Code) can be an excellent way to remove property from your estate and to save for a child's college education. The main advantage is that the earnings and most withdrawals are income tax free. Importantly as well, gifts to a 529 account not only qualify for the $13,000 annual gift tax exclusion, but five years worth of gifts can be made now and be treated as being made equally over a five year period. That means a married couple can presently give $130,000 to each beneficiary. The investments in the 529 account are not subject to estate taxes either (unless death occurs within the five year period in which case part of the gift will be subject to estate taxes).

Gifts to one or more Irrevocable Investment Trusts.

You can give as much as $13,000 each year to each of your descendants or other beneficiaries. These gifts do not need to be made outright, but instead can be placed in an irrevocable trust that you control until you die, not just until the beneficiary reaches a specified age. These trusts can accumulate investments over time and thereby avoid considerable estate taxes.

Making of Annual Exclusion Gifts.

Each year, any person can give to any other person as much as $13,000 in cash or other property without any gift tax consequences. Over time, a considerable amount of property can be given away, none of which will be subject to Federal estate taxes upon your death.

Payment of Tuition Expenses or Medical Bills.

In addition to the $13,000 annual exclusion, you can make payments to the provider of education (such as a private school, college, or university) or for medical expenses (such as doctors' bills, medical insurance premiums, and prescription drugs) and none of the payments will be treated as taxable gifts. Importantly, though, the payments must be made directly to the provider, and if the payment is made to the student or recipient of the medical care, even as a reimbursement for payments already made, then the payment will be treated as a gift. The tuition and medical expense exclusions provide an opportunity for considerable amounts of wealth to be shifted to your descendants or other beneficiaries without any transfer tax consequences.

Making of Charitable Gifts.

Gifts to charity during lifetime qualify for a Federal income tax deduction. Gifts to charity made at death qualify for a Federal estate tax charitable deduction and are not subject to estate taxes. Therefore, considerable estate taxes can be saved by making gifts to charity either during lifetime or at death, or both.

Life Insurance Trust.

Although the proceeds of a life insurance policy generally pass income tax free to the named beneficiary, those same proceeds are typically included in the insured's estate and subject to Federal estate taxes. By giving some or all of the life insurance on your life to an irrevocable trust, the proceeds can be excluded from estate taxes. Other important benefits are available as well by the creation of such a trust.

Family Limited Partnership.

A limited partnership created by and among members of a family (FLP) can be a useful estate planning tool. A FLP is a way to centralize the management of investments, thereby allowing one or several family members to manage a variety of investments for other family members. Importantly, as well, the interests held by the limited partners in the partnership are generally worth less than the underlying value of the partnership assets due to factors such as the ownership of a minority interest, lack of control, transfer restrictions, and the inability to demand distributions.

Qualified Personal Residence Trust.

A qualified personal residence trust (QPRT) is a trust created to own an interest in a home. The QPRT would benefit you for a specified number of years and then terminate and pass to your beneficiaries or to trusts for their benefit. A QPRT is one of the last very favorable techniques available to allow a wealthy individual to transfer huge amounts of property to the next generation without generating gift or estate taxes.

Charitable Remainder Trust.

A charitable remainder trust, in general terms, is a trust created for the initial benefit of either the person creating the trust, or another person or persons, and for the subsequent benefit of one or more charities. The idea is to give away property to a charitable trust, retain an interest in the trust which is in the form of annuity or unitrust payments, and then allow the trust property to pass to charity upon termination of the trust. Even though the charity will not be receiving any property for many months or years, an income tax deduction is available presently, and the trust properties will be excluded from estate taxes.

Grantor Retained Annuity Trust.

A GRAT is a trust where the person creating the trust retains the right to receive a fixed annuity payment. The fixed amount may be a stated dollar amount or a fixed fraction or percentage of the initial fair market value of the property transferred to the trust, payable at least annually. The fair market value of the retained annuity interest is subtracted from the fair market value of the gift in determining the value of the transfer. Typically, a GRAT is used to transfer an appreciating asset that has considerable value. By retaining an annuity with a fair market value equal to the value of the asset transferred to the trust, either no or a relatively small gift is made, and all appreciation on the asset which accrues during the term of the trust will be passed to the next generation without imposition of gift taxes.

Grantor Retained Unitrust.

A GRUT is a trust where the person creating the trust retains the right to receive a fixed fraction or a percentage of the net fair market value of the trust property, determined annually. The fair market value of the retained annuity interest retained by the person creating the trust is subtracted from the fair market value of the gift in determining the value of the transfer. Typically, a GRUT is used to transfer an appreciating asset that has considerable value. By retaining a series of payments with a fair market value equal to the value of the asset transferred to the trust, either no or a relatively small gift is made, and all appreciation on the asset which accrues during the term of the trust will be passed to the next generation without imposition of gift taxes.

PLEASE NOTE: To the extent that this website contains tax related matters, it is not intended to be used for the purpose of avoiding penalties that may be imposed by law.

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