Estate Tax Minimization and Advanced Estate Planning
This subject covers a variety of vehicles to best mitigate or altogether remove negative tax implications in the estate plans of those with higher net worth. There are many options. What follows is simply a list of some of our more favored methods. The best solution for you may or may not be listed below.
Irrevocable Life Insurance Trusts (ILIT) are constructed with a life insurance policy as the asset owned by the trust. As an alternative to naming an invidual beneficiary, ILITs offer several legal and financial advantages to heirs, including favorable tax treatment, asset protection, and the assurance that the benefits will be used in a manner concurrent with the benefactor's wishes.
Supplement Needs Trusts (SNT) come in many forms including third party, (d)(4)(A) self-settled, (d)(4)(B) Miller Trust, or pooled (d)(4)(C). SNTs form a legal arrangement and fiduciary relationship that allows a physically/mentally disabled or chronically ill person to receive income or have assets without reducing their eligibility for the public assistance benefits provided by Social Security, Supplemental Security Income, Medicare or Medicaid.
Intentionally Defective Grantor Trusts (IDGT) are an estate-planning tool used to freeze certain assets of an individual to avoid estate taxes and higher income taxes potentially associated with irrevocable trusts.
Grantor Retained Annuity Trusts (GRAT) are created when you transfer assets to the GRAT while retaining the right to receive fixed annuity payments, payable at least annually, for a specified term of years. After the initial term of the trust, that is, the term during which the Grantor is to receive annuity payments from the GRAT, the remaining principal of the GRAT will be excluded from the Grantor’s gross estate for federal estate tax purposes.
Qualified Personal Residence Trusts (QPRT) allow you to transfer your home to your named beneficiaries (usually your children) at a future date, at a substantially reduced gift tax rate. Individuals with a valuable home or second home can take advantage of this technique to save hundreds of thousands of dollars in estate taxes.
Charitable Remainder Trusts (CRT) are exempt from tax on the investment income earned or realized in the trust. Therefore, the trustee can sell assets gifted to a CRT and reinvest the full proceeds. The donor may deem it to be advantageous to contribute a concentrated position (such as closely held stock or business interest) to the CRT so that it can be sold in a tax-efficient manner and allow the donor to diversify his or her personal investments. This trust substitutes charitable giving for taxes.
Charitable Lead Trusts (CLT) provide for payment of the income interest of the trust to a charitable organization for a period of time, and, upon expiration of the period, provides that the remainder interest in the trust either reverts to the grantor or passes to a non-charitable beneficiary. Stated differently, the charitable lead trust is a charitable gift of the income interest in property. This trust substitutes charitable giving for taxes.
2503(c) trusts (Minor’s Trust) and 2642(c) trusts (Grandchildren’s Trust) avoid estate taxes similarly to 529 plans and UTMAs, but without their inherent limitations. They have proven to be a much more flexible vehicle to provide for your grandchildren.