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If you know you have an estate tax issue, have assets with a low cost basis and are facing a huge capital gain tax, are concerned about asset protection, or know that your estate is just complex, your estate plan will need to include an analyze and test phase where combinations of planning theories and strategies will be analyzed, tested and challenged to determine which strategies will work best for your family's situation.
In order to develop a plan that will actually work for a complex estate, it is vital that your attorney, financial advisors and certified public accountant work collaboratively together to design a wealth strategy. All of this strategy needs to be done before any preparation of the legal instruments necessary to carry out your strategic objectives.
Some of the techniques Nickerson Law Group uses when creating a Laureate Plan include tax-free gifts, irrevocable life insurance trusts, spousal access trusts, asset protection trusts, grantor retained annuity trusts, limited partnerships or limited liability companies, charitable remainder trusts or charitable lead trusts.
Federal law lets you give up to $14,000 to as many people as you wish each year without reporting any gift to the IRS. When you actually look at the compounding of this type of gift, it can add up significantly. It is often smart to gift these amounts to a trust, especially if the beneficiaries are minors and if asset protection is an issue.
You can also gift more than $14,000 per person in any given year and not pay any gift tax; however, the amount of the gift must be reported to the IRS and it reduces your estate tax exemption. There are no limits on the amount of gifts to charity, tuition and medical expenses (however, payment must be made directly to the institution).
You can remove the value of your life insurance from your estate by making an irrevocable life insurance trust or "ILIT" the owner of the policies. If you are transferring an existing policy to an ILIT, as long as you live three years after the transfer, the death benefits will not be included in your estate. Usually, the death benefit of the policy will be paid to the life insurance trust and the people who you want (i.e. spouse, children, grandchildren) are the beneficiaries of the trust.
Many wealth strategies require you to give assets away with no strings attached, typically outright to your children, grandchildren or irrevocable trusts. Some couples who want to take advantage of gifting strategies are using spousal access trusts to gift to each other, get assets out of the estate for estate tax purposes, provide asset protection, yet one spouse may continue to have access to the gifted property in the event it is needed.
A grantor retained annuity trust or GRAT lets you transfer an income-producing asset (stock, real estate, business) to a trust for a set number of years, removing it from your estate -- and still receive the income. (If the income is a set amount, the trust is called a GRAT. If the income fluctuates, it's called a GRUT.)
When the trust ends, the asset will go to the beneficiaries of the trust. Since they will not receive it until then, the value of the gift is reduced, thus, maximizing the amount that can be gifted. If you die before the trust ends, some or all of the asset may be in your estate.
LPs and LLCs let you reduce estate taxes by transferring assets like a family business, farm, real estate or stocks to your children now, and still keep some control. They can also protect the assets from future lawsuits and creditors.
You and your spouse can set up an LP or LLC and transfer assets to it. In exchange, you receive ownership interests. You control the LLC (as manager) or LP (as general partner). You can give ownership interests to your children, which removes value from your taxable estate. These interests cannot be sold or transferred without your approval, and because there is no market for these interests, their value is often discounted. This lets you transfer the underlying assets to your children at a reduced value, without losing control.
A CRT lets you convert a highly appreciated asset (like stocks or investment real estate) into a lifetime income without paying capital gains tax when the asset is sold. It also reduces your income and estate taxes, and lets you benefit a charity that has special meaning to you.
With a CRT, you transfer the asset to an irrevocable trust. This removes it from your estate. You also get an immediate charitable income tax deduction.
The trust then sells the asset at market value, paying no capital gains tax, and reinvests in income-producing assets. For the rest of your life, the trust pays you an income. Since the principal has not been reduced by capital gains tax, you can receive more income over your lifetime than if you had sold the asset yourself. After you die, the trust assets go to the charity you have chosen.
A CLT is just about the opposite of a CRT. You transfer an asset to the trust, which reduces the size of your estate and saves estate taxes. But instead of paying the income to you, the trust pays it to a charity for a set number of years or until you die. After the trust ends, the trust assets will go to your spouse, children or other beneficiaries.
Depending on your age and health, buying life insurance can be an inexpensive way to replace an asset given to charity and/or to pay any remaining estate taxes. The three-year look back rule does not apply to new policies. But you should not be the owner of the policy — that would increase your taxable estate and estate taxes. To keep the death benefits out of your estate, set up an Irrevocable Life Insurance Trust.
Prior to ever determining if any of these techniques is right for you, we spend time with you, get to know your hopes, dreams and fears, study your assets, learn about your family and what is truly important to you. We talk about your propensity for any sort of complicated strategies. Only then do we design what techniques are best for your situation. And only after talking about these techniques with you and your family and ensuring you understand them and are completely on board with them do we begin drafting any documents.