Advanced Estate Planning Options

Tools for larger estates and complex goals

By Mark T. Coulter, Esquire
Estate Planning Attorney

The vast majority of people never need to get beyond a basic Will, Revocable Living Trust, Durable Power of Attorney and a Living Will/Health Care Proxy to address their estate planning needs. If, however, your estate is particularly large (2-3 times greater than the lifetime Gift Tax exclusion amount, or double the exemption amount for Estate Tax, more or less), then you may be looking for a more sophisticated estate plan. Similarly, if your estate isn’t of such a large size, but you nevertheless have uniquely complex estate planning goals, then some of the following discussion, with mere tastes of the available tools, may peak your interest.

Advanced estate planning tools are most commonly used to take advantage of the nuances of the various tax laws in ways which maximize your ability to recognize your goals while minimizing the taxable consequences for you and your beneficiaries. Within this elite realm of estate planning, several dominant categories consistently emerge.

These categories are not mutually exclusive, and some tools can fit into more than one class. Nevertheless, these are an adequate method to organize the discussion.

1. Tools to benefit charities and preserve wealth.
   Giving to charity, in life or upon your death, is an easy task. Charitable contributions can be deducted from your income taxes, and are typically free of gift taxes or estate taxes. The tricky part is to find a way to donate assets for charitable purposes, and obtain tax benefits, while still preserving assets for yourself and/or your family to benefit from. These seemingly separate purposes can exist in a symbiotic way, actually enhancing the power of each through the use of several available methods.
   Charitable Remainder Trust: A trust is created, from which you derive the benefits (for yourself or your other named beneficiary) for a period of time, or even a lifetime. Upon the end of that beneficial period, the remainder left in the trust passes to charity. You get a current tax deduction for the actuarially determined present value of the remainder to be left for the charity, and the assets are out of your taxable estate. Moreover, capital gains on appreciated trust assets are usually not taxed, increasing the asset base from which current income is drawn. You can serve as the trustee and direct the investment activity in most cases, and even alter the charity designated as the residual beneficiary. If you design the trust to pay a set amount per year, it is known as a Charitable Remainder Annuity Trust. If the trust is set to pay a fixed percentage of the assets per year, then it is often called a Charitable Remainder Uni-Trust.
   Charitable Lead Trust: Essentially the opposite of a Charitable Remainder Trust, this Trust takes your assets into a trust, pays current income to a charity, and then pays the balance remaining to your named beneficiaries. Because such trusts are irrevocable, the assets are not a part of your estate, and thus not subject to the Estate Tax. There can be gift tax consequences for the value of the residual trust which will pass to your beneficiaries in the future, but the value of the gift is greatly discounted for tax purposes by a reduction in the gift to reflect the amount the charity will take in the intervening years.
   Charitable Gift Annuity: You will note from the name that this isn’t a trust, but an annuity contract. You give assets to the charity as a gift, and the charity agrees to pay you a set amount of money for life, or for a certain period of time. A standardized table establishes the acceptable range of payments from the charity. This annuity gets the assets out of your estate, eliminating estate tax liability thereon, while preserving an income stream for you, along with a benefit to charity.
   Donor Advised Funds: DAF’s let you donate money to a charitable organization, which maintains your donation in a separate account. You or others your designate can ‘advise’ the organization regarding how the money is to be used, and even just who should receive the charitable benefits. The foundation manages the investment and accounting aspects of the fund. This permits a full taxable deduction for income tax, and removes the property from your estate for Estate Tax purposes, while giving your family the nonfinancial benefit of being involved directly in charitable works.
2. Tools to benefit future generations
   Many people with sizable estates, or sizable estate goals, do not want to simply leave money to their children. Instead, they wish to see their assets applied for several future generations, or use the money to teach their heirs how to run a business. These needs can be met with proper estate planning.
   Generation Skipping Trusts: There is no requirement that you leave your money directly to your children. If you want to leave assets for the use and enjoyment of your grandchildren or great grandchildren, then you are free to do so. This tool was used in the Steel Baron days of Carnegie and Rockefeller to pass assets to multiple generations free of taxes. The government caught on ultimately, and enacted a Generation Skipping Transfer Tax, which is intended to make up for missed tax opportunities when property doesn’t get taxes between each generation because it ‘skips’ down to farther generation in the family tree. The GST Tax is substantial, essentially equal to a full second round of taxation at the maximum applicable tax rate (today 45%) in addition to any applicable Gift Tax or Estate Tax already applicable. Still, due to an exemption in the tax, currently valued at $1,000,000 in assets, you can leave substantial sums in trust for future generations, without incurring substantial extra tax liability.
3. Tools to boost the value of gifts to family
   For a person or couple with a very sizable estate, the available exemptions and deductions may not be large enough to protect a satisfactory amount of assets from Estate or Gift taxes. One way to address this is to ‘shrink’ the value of the assets when they have to fit through the applicable tax exemption, and permit them to return to their full benefit thereafter in the hands of your beneficiaries. An example of such a tool is described below:
   Family Limited Partnerships: FLP’s are a recently developed phenomenon, often used to pass valuable assets, including investment accounts and business interests, to family members at a discount, which enables the donor to pass a greater value of assets within the limits of the available tax exclusions and credits. Assets are transferred to a Limited Partnership structure at full value, and then limited partnership interests therein are given to family members. The value of the limited interests is a potentially taxable event, however the value of those gifts is lower than one might think due to several available discounts. You can reduce the taxable value of those gifts to reflect restrictions from a Limited Partnership structure, including the Minority Interest (i.e. the limited interest can’t unilaterally control the asset so it isn’t worth as much), the Lack of Marketability (not many people can, or want to, purchase such a limited interest, so its value is decreased), and others. It is not uncommon for such discounts to amount to 30-40% or more of the underlying assets, permitting a person to effectively transfer nearly $2,000,000 in assets under a $1,000,000 Gift Tax exclusion, plus accumulated annual gift exclusions too, and/or to further distribute remaining interests in the partnership which haven’t been gifted as high as $5,000,000 to $6,000,000 in assets under the Estate Tax exclusion of $3,500,000. In a nutshell, the FLP can let you give away $3.00 but call it $2.00 for tax purposes.

This discussion is by no mean an exhaustive review of the available tools for Advanced Estate Planning, but instead is designed to give you an idea of the range of options which can be tailored to accommodate your estate and your planning goals. If you would like further information or assistance with your planning needs, please contact us.

About Our Law Office

At the Estate Planning Centers at Coulter & May, P.C., we devote our practice to estate planning and assisting families through such transition times with estate and trust administration counseling. We offer guidance and advice to our clients in every area of estate planning, and offer comprehensive and personalized estate planning consultations. For more information or to attend an upcoming seminar or to book a consultation directly, please contact us at (412) 253-7526 or visit us online at www.estateplanningcenters.com.

Disclaimer: The information presented in this article is a conversational summary of a complex area of law and should not be construed to constitute legal advice. No person should rely upon the content of this article for making any decisions, and should instead consult with appropriate legal and tax professionals.