Popular Advanced Planning Techniques
GRAT: A Grantor Retained Annuity Trust is an arrangement where you may "give away" one or more of your assets, while retaining the right to receive a set percentage of the value of that asset for a period of time. For example, if you transfer a $100,000 asset, you may decide to receive 5% per year, or $5,000 of annual cash flow back from the GRAT. At the end of the trust term (you get to decide how long the term will be), the remaining assets of the trust pass to your chosen beneficiaries, or a trust for their benefit. This is one member of the family of "split interest" trusts. You retain a predictable cash flow, but give away the remaining value. Think of it as "giving away the tree, but keeping the fruit" for a period of time.
IDGT: One of our colleagues calls this trust an "I Dig It." One of the reasons he (and so many others) love this trust, is it provides both estate freezing and estate squeezing opportunities. The acronym actually stands for Intentionally Defective Grantor Trust.
Why would you want something intentionally defective? The word defective in the name of this trust is not a comment on the quality of its drafting. Instead, it refers to the fact that although gifts to an IDGT are effective so far as federal gift and estate taxes are concerned, the very same gift is not sufficiently complete (i.e. "defective") so far as federal income taxes are concerned.
This puts us in a very special and advantageous position. The Trustmaker still pays income taxes on the assets he or she just gave away. The trust benefits from having someone else pay the income taxes on the property it owns. Wouldn't it be nice not to have to pay taxes on your income? Another way to think of it is this: every year the Trustmaker pays income taxes on IDGT owned property, it's like the Trustmaker gets to make another "gift" to the IDGT without having to pay associated gift taxes.
"His & Hers" Trusts": This trust appeals to married clients who want to remove assets from their estate, but are not quite ready to transfer financial benefits to their heirs. It also appeals to couples who are on the cusp of having a taxable estate. They may want to engage in an estate freezing technique, but don't want something overly complicated when they are only slightly above the estate tax threshold.
It is possible to remove assets from your taxable estate, and still permit your spouse to retain access to these assets for his or her lifetime. Essentially, each spouse establishes a trust for the benefit of the other. By design, it requires the use some or all of your lifetime gift tax exemption, so it must be implemented after consideration
However, if one is going to be created for each spouse, the trusts must be planned with care. If the trusts are identical in their terms and are created on the same day, the IRS will likely be able to disregard the whole arrangement and the estate tax benefits will be lost. We can help to navigate these issues.
Family Limited Partnership (FLP) and Family Limited Liability Company (FLLC): As the names suggest, these are actual business organizations. However, the ownership is usually held by immediate family members only.
There are a number of reasons why our clients might consider organizing a business to hold assets. They include: lawsuit protections, centralization of asset management, facilitation of gifting and controlled business succession.
There are many circumstances and types of assets where creating an FLP or FLLC may be beneficial. Many families have successful businesses that are operated as sole proprietorships. Others have portfolios of income producing real estate. Sometimes, even a portfolio of investment securities may be considered appropriate.
After establishing an FLP or FLLC, certain estate and gift tax advantages present themselves. Because the limited partners (or non-managing members of an FLLC) do not have any management control or ability to demand distributions, the value of their percentage ownership of the business does not correspond to the value of the assets owned by that business. This presents an opportunity to "leverage" the value of gifts and bequests.