Advanced Estate Planning

The motivation to create an estate plan often arises from the realization that more sophisticated solutions are required for the preservation of one’s estate. Advanced estate planning may involve the creation of dynasty trusts for multiple generations, implementing strategies for protection of assets from creditors or controlling in-laws, or establishing irrevocable trusts to avoid or minimize the estate tax burden on one’s descendants. These techniques are best served within a comprehensive estate plan designed to ensure wealth preservation for generations to come.

IRREVOCABLE TRUSTS

There have been several major changes in the estate, gift and income tax provisions affecting our estate planning clients over the past ten years, and the future is uncertain. Our advice to our more affluent clients has been to review their estate planning documents and their asset portfolios to determine whether their estate plan require attention and, perhaps, modification to update their documents.

While the estate tax exemption has been increased significantly since 2018 (the current exemption amount is $12,920,000 per taxpayer), the legislation making those changes will expire in 2025. If no successive tax legislation is enacted by then, the exemption amount will revert to about $7,000,000 per taxpayer. It is possible, of course, for Congress to enact estate tax legislation in the interim to lower that threshold even further to generate tax revenue.

The use of certain irrevocable trusts may also be restricted by future legislation. However, we continue to prepare and implement grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs), since these vehicles still represent opportunities for our clients to protect appreciating investments from estate taxation before the next legislative session. The use of irrevocable life insurance trusts to provide liquidity to the beneficiaries without estate taxation is still a viable tool for affluent clients and for business succession strategies.

ASSET PROTECTION STRATEGIES

The primary objective of planning for asset protection and wealth preservation are to deter the judicial attachment of valuable resources by potential claimants. Deterrence is achieved by minimizing or eliminating the incentive to seek a judgment through the strategic creation of certain trusts and business entities and funding them with key assets. The Domestic Asset Protection Trust is a state-sanctioned trust which facilitates the implementation of the desired strategy without the need to go “offshore” to protect one’s at-risk resources.

Note that these techniques generally are ineffectual where a court determines that known claims pre-dated the inception of the asset protection planning. Therefore, we will not recommend or implement asset protection strategies where the intent is to defraud creditors or government authorities, or to evade legitimate, enforceable responsibilities.

GIFT TAX EXCLUSION STRATEGIES

Advanced estate planning strategies often include an element of making lifetime gifts to heirs, whether made outright or into irrevocable trusts for their benefit. The most basic strategy takes advantage of the annual gift tax exclusion amount (which increased to $17,000 per donee per year as of January 1, 2023). Larger gifts of property require the calculation of discounted values designed to minimize or eliminate gift and estate tax liability, and they are typically made in trust or in the form of minority interests in legal entities such as limited liability companies and partnerships. Gifts made into trusts or which apply valuation discounts must be reported on a federal gift tax return (Form 709) for the year of the gift.

CHARITABLE GIFT PLANNING

The accumulation of wealth often motivates clients to consider arranging for gifts to their charitable causes, whether the transfer is made during life or upon death. Depending upon the goals of the individual client, charitable gifts may take the form of a bequest of a dollar amount under her will or revocable trust, a beneficiary designation on her IRA account, a charitable trust, or even a private foundation. Each of these arrangements, if properly structured, have income, gift and estate tax benefits for the donor. Charitable trusts provide options for a retained interest in the assets contributed, allowing a donor to benefit the family as well as the charitable organization.

It is often the nature of the asset which compels one to establish a charitable trust, such as highly appreciated but non-income producing real property. The sale of such property by the trustee following contribution will both minimize and defer the capital gains tax liability that would otherwise be imposed on the donor.

Notably, it has been our experience that clients who implement charitable giving strategies are motivated by their desire to establish a legacy for their special cause, rather than by the tax benefits to be achieved.