Sophisticated Estate Planning
It has been said that there is no greater gift that one spouse can give the other, or parents can give their children than a well drafted Living Trust. The writer endorses that statement wholeheartedly. If follows that the foundation of a sophisticated estate plan begins with a Living Trust.
Living Trusts. Living Trusts are the best vehicle for avoiding probate and minimizing the impact of estate and inheritance taxes at death. The living trust is traditionally revocable, subject to amendment, flexible, controllable, expeditious, and permits passing assets from the grantor(s) of the trust to loved ones with a minimum of expense and anxiety. It must be fully funded and used with a "pour-over" type will. Taxable Estates. Certain documents and techniques are employed for the purpose of reducing taxable estates in excess of those within the exemption afforded by the "uniform credit", which for the years 2000 and 2001 will by $220,550 affording an effective exemption of $675,000 in net taxable estate per taxpayer. Federal estate tax cuts in at 37% and reaches 55% on taxable transfers over $3,000,000.
Gifting. The first method of reducing the taxable estate is to utilize inter-vivos exempt gifting. Under present law, gifts between spouses, during life or after death, are unlimited and gifts to any donee may be up to $10,000 exempt, or if the spouse consents that the gift may be considered one-half from him or her, the gift may be doubled to $20,000. Gifts to qualified charities can reduce the taxable estate and lifetime gifts provide the added benefit of an income tax deduction.
Unified Credit. The second fundamental consideration is to utilize the full "uniform credit" of each taxpayer. This is done by language of the Living Trust, which sets up a "unified credit" by-pass trust to the extent of the exemption and in the case of married persons, provides for non-taxable gifting to the surviving spouse of the balance of the trust. In typical second marriage situations, either spouse may desire to control the ultimate distribution of the trust estate. This can be accomplished by utilization of provisions for a QTIP Trust (Qualified Terminal Interest Property) which provides life income to spouse, remainder to other designated beneficiaries, and which provision still qualifies as an exempt gift under the marital exemption. Caveat: If the trust does not provide for the "uniform credit" exemption and pours the trust estate into the estate of the surviving spouse, additional taxes in excess of $250,000 could result at the time of death of the surviving spouse.
Irrevocable Life Insurance Trusts. If estate taxes are anticipated, the use of an Irrevocable Life Insurance Trust is recommended as the most commonly used method of meeting the tax burden. This is a separate irrevocable trust from Living Trust sometimes referred to as a "Wealth Replacement Trust" and is funded by annual exempt gifting of premiums to beneficiaries, employing "crummy powers" to covert deferred gifts into present interest gifts. This type of trust, if properly drafted and funded, is not subject to income tax nor estate tax, and provides funds to pay anticipated estate taxes with leveraged dollars. The use of a "second to die" type policy, which pays out at the death of the survivor of grantors, if there are more than one grantor, substantially reduces the policy premiums.
Trusts for Minors. Gifts to grandchildren and other minor beneficiaries for college education and other needs may be funded by the use of a trust to be funded by gifts of the annual exclusion amount with provision for "crummy powers" as provided in Sec. 2503© of the Internal Revenue Code. This provides a method of safeguarding the gifts from the minors spending until age 21 years and may be extended to age 25 years with suitable provisions.
Family Limited Partnership. Many financial advisors have been recommending the Family Limited Partnership (FLP) as an estate planning tool. The family wealth can be transferred into the FLP by the original partners. Annual exempt gifts of partnership interests can be made at a discount to beneficiaries without surrendering any of the rights to the use of the assets or the income from the assets used to fund the FLP. Creditor protection is afforded as in other limited partnerships. The grantors can be both general partners and limited partnerships. The entity could be controlled by as little as 1% of the total assets, if that was the extent of FLP interests allocated to the general partner(s). The problem with the FLP in Florida is that the fees payable to the Secretary of State are exorbitant. (Initial filing: $7.00 per $1,000 up to $1750 maximum and annual report fees of $7.00 per $1,000 - not less than $52.50 nor more than $437.50).
Limited Liability Company. The Limited Liability Company (LLC) has some advantages over the FLP as a tool for Estate Planning. One person can form an LLC. The owners of an LLC are called "members" and the owners may consist of individuals, aliens, partnerships, trusts, corporations, and other legal entities. The ownership rights may be used to fund gifts in the same manner as outlined above for an FLP. However, a member may assign his/her/its right to income, but not the decision-making right. Prior to 1997, the LLC type entity in Florida did not allow pass through treatment of income such as is allowed in S type corporations and partnerships. The earnings of an LLC were taxed at the Florida corporate rate of 5 1/2%. The law has been changed to allow pass through treatment of income to the members. The LLC offers: excellent liability protection; no limitation on the number of members; full participation of owners in management; simplicity in taking profits out without double taxation; no citizenship requirement for members; treatment of a member's personal creditor as an assignee, with no forced sale or dissolution of the company; and indemnification of members by statute for any judgment, debt, or obligation of the LLC.
Charitable Remainder Unitrust. The Charitable Remainder Unitrust (CRUT) is an excellent planning tool to reduce the taxable estate with many advantages. The CRUT offers: an opportunity to benefit charity(s) of your choice; avoidance of capital gains tax on highly appreciated assets; increase of your annual income; a current charitable deduction for income tax; and, reduction of your estate tax exposure to zero. The trust is open ended and additional contributions can be added. If the trust is properly structured, the grantor(s) do no part with the principal of the trust until death of the grantor(s) or a minimum period of 25 years. Since the trust is tax exempt, the trustees can sell the assets, reinvest the sale proceeds and bypass capital gains tax. As long as the assets are invested in publicly traded securities and there is no self-dealing, the grantor of the trust can also serve as trustee. The CRUT can be combined with an ILIT and premiums on the life insurance policies can be funded from income from the CRUT using the "crummy powers" to qualify the gifts.
Using IRA for Charitable Objectives. In estates subject to estate tax, the IRA or pension plan may constiture a large percentage of the estate. The income from the IRA or pension is taxed when it is paid out. Combining income, generation-skipping, and estate taxes, this could result in taxation from 70% to 80%. TRA 1997 repealed the excise tax on transfers of IRAs to qualified charities. Transfer of an IRA to charity will bypass both income tax and estate tax and the transfer of the IRA or pension plan will be completely tax free. Charitable Remainder Unitrust Using IRA. An inter-vivos unitrust or a (CRUT) may be designated the beneficiary of an IRA or retirement plan by means of a testamentary unitrust plan provided for in the Last Will and Testament of the donor(s). This trust saves a portion of the estate tax and all of the income tax otherwise payable on the IRA or pension plan. Thus, the full value is available to earn new income for the loved ones of the donor(s) for the allowed or selected number of years. If the bequest is balanced against the exemption, you have what is called a zero tax testamentary exemption unitrust.
Charitable Lead Trust. A charitable lead trust created during the life of the donor(s) results in gift tax charitable deduction for the present value of the income distributed to qualified charities. Similarly, a "Testamentary Lead Trust" receives an estate tax deduction equivalent to the present value of the income stream distributed to a qualified charity. The increase in the "Unified Credit Exemption" provided under TRA 1997 will make possible passing through substantially larger amounts to family members. If the gift is balanced against the exemption, you have what is referred to as a zero tax load trust.You can still have your cake and eat it too, but you don't get greedy. Your annuity trust or unitrust under TRA 1997 must have a charitable deduction of at least 10% of the initial fair market value of the gift when it passes to the charity to qualify for capital gains bypass or exempt status.
This paper does not begin to cover the spectrum of probate and tax avoidance but hopefully it provides information concerning some of the accepted techniques.
Wendell Pendleton, Esq.
Slaymaker & Nelson, P.A.
6027 South Suncoast Boulevard
Homosassa, FL 34446
(352) 628-1204