Knowledgeable Attorney Helping Boca Raton High Net Worth Clients With Advanced Estate Planning
Families with significant wealth typically need more complex, sophisticated and customized estate planning strategies. High net worth clients will be provided with various alternative ideas based upon Mr. Asarch’s comprehensive knowledge of federal gift, estate, generation skipping transfer tax laws, fiduciary income tax rules, and asset protection strategies. Mr. Asarch counsels clients on the most efficient and effective manner to execute wealth preservation goals for their families. Following are just a few examples of those strategies.
Family Limited Partnerships (“FLP”) and Family LLCs
The FLP has been one of the leading tools of trusts and estates attorneys. This type of structure can reduce federal gift, estate and generation skipping transfer taxes (“transfer taxes”) and provide significant protection from the future creditors of the FLP’s owners. A substantial advantage is the ability to discount the value of assets for transfer tax purposes without giving up control of the entity. An FLP can own various types of assets including closely held businesses, investment real estate and marketable securities.
One beneficial feature of the FLP structure is the capability to give fractional interests in the entity to children and grandchildren (or to trusts for their benefit) at a significant discount from the value of the underlying assets. The new owners of these limited interests will have no say in the management of the FLP and will have significant restrictions on their ability to sell their interests. As a result of these limitations, the IRS permits the value of these limited interests to be valued significantly below the market value of the FLP’s underlying assets. The discounts would reduce the value of these limited interests you might give away during your life and the remaining interests you still own at your demise.
The use of an FLP can also protect the underlying assets from the claims of future creditors. Even if a creditor wins a judgment against one or more of the limited partners, that judgment may not be satisfied with the FLP’s assets. The judgment creditor may only receive a “charging order” or lien on the limited interest but no access to the assets or the management of the FLP.
Dynastic (Generation Skipping) Trusts (“Dynasty Trust”)
A Dynasty Trust is an irrevocable trust intended to last for a long period of time, sometimes indefinitely, with the goal of making family wealth available to future generations while avoiding federal and state transfer taxes. Under Florida law, a Dynasty Trust may last for up to 360 years. A dynastic trust may be established and funded as a gift during your life or by the terms of your last will (or revocable trust) at your demise. The most efficient funding of these trusts is with a gift (or bequest) of any amount equal to or less than your remaining lifetime exemptions from federal transfer taxes (i.e., gift, estate and generation skipping transfer taxes). Under current law, each person has a lifetime exemption from gift, estate and generation skipping transfer tax of $11,180,000 ($22,360,000 for a married couple). A Dynasty Trust also may be designed to protect the assets in the trust from the possible claims of future creditors of each of the trust’s beneficiaries for generations.
A grantor trust is a trust in which the trust’s creator (the grantor) or someone else has certain rights and powers which causes the grantor or other person to be the deemed owner of the trust’s assets for income tax purposes. Grantor trusts may be used in various kinds of estate planning strategies, but two of the more widely used are installment sales to grantor trusts and grantor retained annuity trusts.
Installment Sales to Intentionally Defective Grantor Trusts (“IDIT”)
If you have appreciating, income-producing assets (e.g., a business, investment real estate, etc.) that you want to transfer to your children, you could sell that asset (or a fractional interest thereof) to a grantor trust in exchange for a promissory note, thereby “freezing” the value of the asset for estate tax purposes. The income from the asset (e.g., dividends, net rents, etc.) would be used to pay the interest and principal payments due on the note. Accordingly, you would receive an ongoing income stream for many years, your children would have the asset as beneficiaries of the trust, and the property is out of your estate; the asset will grow for the benefit of your descendants without reduction for transfer taxes. Importantly, because the asset is sold to a grantor trust, there is no capital gains tax generated by the installment sale and you won’t pay income tax on the note interest, just on the income of the underlying asset.
Grantor Retained Annuity Trust (“GRAT”)
A GRAT is a grantor trust into which the grantor transfers (i.e., gifts) an asset and retains an income stream, a fixed annuity payment based on the initial value of the asset. A GRAT provides a method of discounting the value of gifts to your descendants and is a type of “split interest” trust in which the IRS assigns a portion of the asset’s value you (i.e., the annuity payments) and the remainder interest to the trust beneficiaries which is the value of the taxable gift. These trusts work best when funded with appreciating assets in a low interest rate environment.
Qualified Personal Residence Trusts (“QPRT”)
If you have a valuable residence or vacation home that you would like to keep within the family and/or to reduce exorbitant federal transfer taxes, a QPRT can help you achieve these wealth preservation goals. With this strategy, you would establish a QPRT, transfer your residence to that trust and retain the right to use the residence rent-free for a period of years (which you would determine in advance). The property is now out of your estate and the value of the gift transfer to the QPRT is subject to a discount the size of which will depend on the length of the initial term of the trust (i.e., the number of years you chose to retain the free use and occupancy of the residence). At the end of the initial term, the property would be transferred outright or in further trust to one or more of your descendants. Your Florida residence transferred to a QPRT would retain full homestead status and the associated benefits during the initial term, and possibly beyond.
Charitable Giving Techniques
If you desire to benefit one or more charitable organizations, there are a variety of tax efficient methods available to accomplish these goals, including but not limited to the following:
Charitable Remainder Trust (“CRT”).
Funding this type of trust with appreciated assets (e.g., marketable securities, etc.) is the best way to achieve the tax benefits with a CRT. You can retain an income stream for your life (and, if desirable, the life of a spouse or a child), avoid the capital gains tax on the sale of the appreciated assets and receive a current charitable income tax deduction. The CRT’s assets will be transferred to the charitable organizations of your choice when you pass away and will not be subject to estate tax at your death.
Here, you contribute assets to your own private foundation, appoint the directors or trustees of your choice to manage it and receive a current income tax charitable deduction for the full value of the contributed property. The foundation must give away 5% of the value of the foundation’s assets to public charities each year. A private foundation is a great way to involve your children and grandchildren in charitable giving for the long haul.
Donor Advised Fund (“DAF”)
You can establish a DAF with a public charity or a DAF management company. You would contribute cash or securities to the DAF and receive a current income tax charitable contribution deduction for the full value of the property. A DAF is more flexible and easier to administer than a private foundation; the DAF has no annual minimum public charity contributions and the company that holds the DAF funds will handle the administration.
Irrevocable Life Insurance Trusts (“ILIT”)
Life insurance is an easy and convenient way to provide liquidity to your loved ones when you die. In many instances, it can be used to provide an untaxed fund to pay estate or even income tax liabilities. The proceeds of life insurance are not income taxable to the beneficiary, but as the owner of the policy, the death benefit would be includable in your estate for federal estate tax purposes. However, if you establish an ILIT and have the ILIT acquire life insurance on your life, the policy death benefit will not be taxed in your estate since the ILIT, not you, is the owner.