Further Estate Planning
Most people understand the need for a Living Trust. Unfortunately, many people stop planning their estates after creating their Living Trust. They therefore fail to take advantage of additional ways to protect their assets from creditors, avoid taxes, or to pay the tax at a reduced rate, and never develop an asset protection plan. Here are several different vehicles that we use to create a comprehensive estate plan for our clients, and that can also protect you.
- Irrevocable Life Insurance Trusts (ILIT)
- Limited Liability Company (LLC)
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT)
- Qualified Personal Residence Trust (QPRT)
- Charitable Lead Trust (CLT)
- Dynasty Trust
- Irrevocable Life Insurance Trusts (ILIT)
- Hart, Mieras & Morris – Irrevocable Life Trusts
Unlike a traditional insurance policy that is part of your estate and subject to estate tax, you can set up an Irrevocable Life Insurance Trust (ILIT) as an entity separate from your estate. The benefits paid to the Trust are not subject to estate taxes and can be earmarked to pay all or part of the estate’s tax liability following your death. The result is that your estate does not have to sell assets to produce cash to pay the estate taxes.
To set up an ILIT, you have two choices: transfer an existing life insurance policy to an ILIT, or purchase a new policy through an ILIT. Transferring an existing policy removes that asset from your estate, but the process of changing the policy ownership to the trust can be complex. Also, there is a tax rule that requires the inclusion in your estate of the proceeds of any life insurance transferred by you, the insured, within three years of your death. For this reason, an ILIT is best funded with cash and the Trustee then acquires a new policy for the benefit of the trust, tax free. Married couples can consider buying a survivorship life, or second-to-die, insurance policy, which insures both spouses, but pays benefits only when the second spouse dies, which is when the insurance benefits will be needed to pay estate taxes. Typically this type of insurance is less expensive than insuring either spouse individually.
California Limited Liability Companies and California S-Corporations are legal entities that the State of California recognizes as having their own independent legal liability. They each protect the owner(s) from liability and are structured around liability-creating assets, such as a family business, or rental real estate (commercial and residential). If an asset held in an LLC or a S-Corp. is sued, all of the other assets owned by the owner(s) such as home, bank accounts, other businesses and rental properties, are protected. Many times LLCs and S-Corps are used for Estate Planning purposes, to reduce the size of your estate and decrease the amount of Federal Estate Tax, which is due on the net value of your assets upon your death.
A CRT allows you to act on your charitable intentions while reducing your estate taxes by removing a highly appreciated asset, such as stock or real estate, from your estate. With this type of trust, you as the grantor, make a charitable gift of a highly appreciated asset to the CRT’s Trustee (who can be you), and the Trustee sells the asset (without paying capital gains taxes because the trust is a charitable entity) and reinvests the proceeds. For the term of the trust you receive income either as a fixed dollar amount or a fixed percentage of the asset’s value, revalued each year. After the term expires, the balance goes to the charity you have named. Because you are able to sell an appreciated asset inside the CRT without paying capital gains taxes, you are able to enjoy a higher income stream for life from the earnings of the CRT assets, which can grow income tax free while invested inside the trust.
GRATs are irrevocable trusts allowing you to transfer income-producing or highly appreciated assets into the trust, while you enjoy an annuity from the assets for the fixed term of the trust. At least once a year, you as the grantor, receive a fixed dollar amount. After the trust ends, any assets remaining in the trust, after payment of your annuity, go to the beneficiary. The gift tax is paid based on the asset’s original value reduced by the present value of your retained annuity and can be substantially less than corresponding estate taxes, if the asset appreciates significantly.
The QPRT removes your home from your estate at a discounted value. With a QPRT, your residence is transferred into a trust for the ultimate benefit of your beneficiaries (usually your children) after a specified time. Prior to the end of the trust term, you can continue living in your home. When the trust ends, the house becomes the property of the beneficiary, and you must either move or pay rent to continue living there. The QPRT is most appropriate if your net worth is between $2 million and $10 million and your house accounts for a substantial portion of your assets. Because using a QPRT involves giving up your home, this type of trust works best for a vacation home.
A CLT is functionally the opposite of a CRT. In a CLT, the charity receives the income from the trust and the remainder reverts back to the donor’s family (usually children) after the trust ends. As with a CRT, a CLT reduces the size of your estate. The value of your gift to your children is discounted because the total value of the property contributed to the CLT is reduced by present value of the income stream to be paid to the charity. If you have an asset that you think will appreciate at a rate in excess of the IRS’s conservative rate assumptions, the excess appreciation may be transferable to your beneficiaries with little or no gift tax cost. A CLT is appropriate if you are charitably motivated.
A Dynasty Trust uses your per donor exemption (indexed for inflation) to transfer assets in trust for future generations, typically your grandchildren or great-grandchildren. This is a complex planning tool intended to protect as much as possible for as long as possible. By skipping one or more generations, your family can avoid the estate tax burden that would otherwise be levied at each generation. A Dynasty Trust can provide for your children, but is structured in a way that your children benefit from the assets without having the assets included in their personal estates.
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