ADVANCED ESTATE PLANNING TECHNIQUES

Advanced estate planning can be critical for people with complex or taxable estates. Advanced planning methods go beyond the basic estate plan foundation and provide targeted solutions to achieve specific objectives such as minimizing or eliminating estate taxes, perpetuating family values, and protecting assets for the benefit of future generations or charitable causes.  Advanced planning employs sophisticated techniques including, but not limited to: use of Irrevocable Life Insurance Trusts (ILITs), Qualified Personal Residence Trusts (QPRTs), Dynasty Trusts (aka Legacy Trusts or Generation Skipping Trusts), business formation and succession planning, formation of Family Limited Partnerships, Charitable Trusts (e.g., CRATs and CRUTs), Private Foundations, Grantor Retained Trusts (GRATs, GRUTs, and GRITs), and general gift tax planning. 

The following is only a general overview of a handful of advanced planning techniques; advanced estate planning is unique to individual situations and requires the assistance of an experienced attorney.

CHARITABLE PLANNING

There are a variety of ways to benefit philanthropic causes through estate planning.  Which tool or entity best fits a specific situation is heavily dependent on donor goals.  Creation of a Private Foundation or Charitable Trust or making gifts from retirement assets are just a few of the most common ways to achieve philanthropic goals.  

Private Foundation

Private foundations are ideal vehicles for family-based charities and are often used to carry family values throughout generations.  Private foundations are typically created with large initial contributions.  A private foundation can be drafted as a wholly charitable trust or a non-profit corporation.  Each structure offers different advantages.

A trust-based foundation is generally operated in a less formal manner than a non-profit corporation.  There are few filing requirements and certain formalities, such as annual meetings, are not required.  A trust can also be established more quickly than a non-profit corporation.  

The non-profit corporate structure affords more flexibility than a charitable trust. Corporate officers are able to amend organizational documents and tailor certain items to fit the foundation’s current mission.  Trust-based foundations make amendment or departure from the Donor’s original charitable intent or directive very difficult.

Donors to either form of foundation enjoy the same income tax and capital gains tax benefits.  The appropriate choice of foundation structure (trust v. corporation) is heavily dependent not only on the Donor’s intent, but on the type of activity the foundation will ultimately undertake.

Charitable Remainder Trust

Charitable Remainder Trusts (CRTs) have long been used as charitable/tax planning tools.  The CRT is an irrevocable trust that can allow a donor to preserve the value of highly appreciated assets and enjoy income tax deductions while making a charitable gift.  The donor transfers assets to the CRT and retains the right to receive a stream of annual payments, for themselves or their beneficiaries, for a term chosen by the donor.  Upon death or end of term, the remaining trust assets go to the charitable beneficiary. There are rules that govern the value of the trust that must end up with charity and the penalties for running afoul of the remainder rules are harsh.  The so called “remainder rule” dictates that at least 10% of the net fair market value of the assets as of the date the assets are contributed to the CRT.

CRTs are great tools for philanthropists with long-term appreciated assets.  It should be noted that there are extensive regulations associated with CRTs and if the value of the trust is below the remainder requirement, there can be retroactive loss of income, gift, and estate tax charitable deductions.  There are several types of CRTs; the appropriate type of CRT for a particular donor is heavily dependent on the assets held and the age of the donor.

Planning with Retirement Assets

There are tax advantages to giving directly from a retirement asset during life or after death.  During life, individuals reaching the age at with a required minimum distribution must be taken (age 72 after the enactment of the SECURE Act in 2020) can donate up to $100K to one or more charities directly from a taxable IRA instead of taking the annual required minimum distribution.  The so-called Qualified Charitable Distribution (QCD) is limited to IRAs.  By making a QCD, the donor is able to avoid paying income taxes on the distribution.   Although there are some exclusions and considerations to be made, this a great option for those account holders who are philanthropically inclined and do not want or need the RMD.  This is also a tool for taxpayers to help keep AGI and taxable income within a desired range.

Designating a charitable beneficiary to receive a retirement asset upon death also has benefits.  While individual beneficiaries must pay income tax on any distribution received from an IRA after the death of the participant, charities do not pay income tax.  This means the full amount of the retirement account will benefit the charity.  If retirement assets are part of a donor’s giving strategy, it is crucial that other aspects of the overall estate plan (such as a Will or Trust) are considered.

A carefully orchestrated charitable giving plan can support a cause close to a donor’s heart and lower taxes while doing so.  Would-be donors should consult with their advisor team, including an estate planning attorney experienced in philanthropic strategies, to discuss which option best fits their particular financial situation and goals.  Call our office to make an appointment today.

BUSINESS FORMATION 

Business owners have a variety of choices to make from inception of business through retirement and/or sale of the venture.  Choosing an entity under which to form is one of the threshold decisions for a business owner.  There are several business entity forms to choose from, including corporations, partnerships, or limited liability companies.  

Partnerships

There are two basic types of partnerships: general and limited.  When two people go into business together, a general partnership exists by default.  Creation of a limited partnership requires filing of a certificate of limited partnership and certain other limited formalities.

There are several types of limited partnerships, but each has two types of partners: at least one general partner and one limited partner.  General partners are personally liable for partnership debts, while limited partners are usually not personally liable.  Daily management and power to bind a limited partnership is typically reserved to general partners, while limited partners may have governance rights as to certain very limited matters.  

Partnerships enjoy pass-through taxation, as well as other desirable characteristics.  There are default rules that dictate profits and loss treatment among partners, but written agreements can alter default rules.  

Corporations

There are two types of Corporations: S-Corps and C-Corps.  There are several differences between the two, perhaps the most notable being that an S-Corp enjoys pass-through taxation. There are many other differences, such as available stock class, distribution rules, shareholder citizenship rules, and further tax differences.

Corporations must follow certain formalities, including  meeting requirements, and various filing requirements.  

Limited Liability Company

The limited liability company has become a popular alternative to the traditional corporation.  It is a hybrid form of business organization combining the features of partnerships and corporations.  The entity is attractive for many reasons, including limited liability for all members.  The entity also offers flexible operation and management and minimal filing requirements.  There is also no tax at the entity level; income and losses pass through to the members.

When choosing an entity under which to operate, it is important to understand the different tax benefits and logistical issues that each type of business structure creates.

BUSINESS SUCCESSION PLANNING

There are a multitude of considerations to be made when a business owner decides to sell or retire from a business.  Succession planning is the creation and implementation of a plan to exit the business.  Having a plan in place (therefore avoiding an eleventh-hour scramble) can result in a smoother, more advantageous, transition.   

One major concern in succession planning is how to convert an illiquid asset into a revenue stream or into cash when the owner retires, becomes disabled, or dies.  Business succession planning for closely-held operations include decisions regarding family members and heirs.  These can be difficult to navigate, particularly when some, but not all, family members or heirs are involved with the business.  This can be further complicated if some, but not all, are willing and capable managers of the business.  

Regardless of whether a business is closely-held, there may be tax planning objectives which require implementation of complex, integrated strategies.  Business owners should consult with an advisor team, including an attorney experienced in business succession planning, far in advance of a planned exit.  Call our office to make an appointment today. 

IRREVOCABLE LIFE INSURANCE TRUSTS

An Irrevocable Life Insurance Trust is created to own and be named beneficiary of a life insurance policy. A properly established and administered ILIT excludes the policy and proceeds from your taxable estate. The policy proceeds can then be used to provide your estate with the liquidity to pay estate taxes, pay off debts, pay final expenses, and/or provide income to a surviving spouse or other beneficiaries.

There are many options to consider when setting up an ILIT.  Examination of potential tax issues, beneficiary-specific issues, and overall estate planning goals are crucial to determining whether this planning tool is appropriate in a given situation.  ILITs have very specific funding and maintenance rules and should only be formed and funded with the assistance of an experienced attorney.

GRANTOR RETAINED TRUSTS

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust into which a grantor funds assets and retains an annuity payment stream for a specified term. At the end of the term, any assets left in the trust are transferred to the trust beneficiaries free of estate and gift tax. Grantor Retained Unitrusts (GRUTs), where distributions are based on a percentage of assets instead of an annuity, and Grantor Retained Interest Trusts (GRITs), where an income interest is retained by the grantor, are alternative types of grantor retained trusts.

INTENTIONALLY DEFECTIVE GRANTOR TRUSTS

An Intentionally Defective Grantor Trust (IDGT) is another form of irrevocable trust established for tax reasons.   While assets can be sold or gifted to an IDGT, more commonly an individual will “sell” assets to the IDGT in exchange for a promissory note. The note is drafted to pay enough interest to qualify as above-market, with the plan that the underlying assets will appreciate at a faster rate. This type of trust leaves the grantor responsible for paying taxes on the income generated by trust assets, but the assets are excluded from the grantor’s estate.  

DYNASTY TRUSTS 

Traditionally, family wealth is taxed at every generation. Use of a Dynastic Trust to transfer assets can address this type of taxation issue. In fact, by creating a Dynasty Trust (aka Legacy Trust or Generation Skipping Trust), a parent can pass assets to subsequent generations without incurring an estate tax at the death of the trust’s beneficiary on the exempt portion of the trust’s assets. The savings to future heirs and beneficiaries can be significant.

In addition to estate tax savings, Dynasty Trusts can provide protection from creditors, lawsuits, or claim in divorce. Dynasty Trusts are valuable estate planning tools that can be used to avoid unnecessary taxation and to preserve assets for generations to come.

Advanced Estate Planning includes a variety of strategies and techniques that be used to achieve specific goals.  The list of options described above is not an exhaustive detail of techniques, but is an overview of the concepts and alternatives which can be tailored to accommodate specific estate planning goals. You should neither take or refrain from any course of action based upon the information herein; this information shall not be construed as legal advice and does not constitute an attorney-client relationship. For further information or assistance with your advanced planning needs, contact our office to schedule a consultation.