Three Valuable Estate Planning and Tax Cutting Tools
When preparing an estate plan, an estate planner may suggest a number of ways to minimize taxes for yourself and for your beneficiaries now and after your death. Below are some of the estate planning tools that may be available to you.
1. Charitable Trusts
A charitable remainder trust (CRT) is a good tool for a person who has charitable motives and also desires an immediate, substantial tax deduction. A CRT is especially good for people who wish to donate property to charity but don't want to give up all the benefits of the property prior to their death. Although a CRT is irrevocable, the grantor may reserve a fixed dollar amount or a percentage value of the trust and receive those benefits until his or her death. Not only does the grantor receive an immediate federal income tax deduction, the grantor also removes property from his or her estate that would be subject to the estate tax upon death. If a grantor contributes property that has appreciated in value to the trust, the grantor avoids paying the capital gains tax that would result if the grantor had sold the property and then contributed the proceeds into the trust. This is a great tool for anybody who is considering leaving a portion of his or her estate to a charity. It is also valuable for people who have no heirs or beneficiaries, and would like an immediate tax savings. If you have beneficiaries, you may consider a charitable lead trust (CLT) that allows you to discount the value of the gift and keep the property in the family. You may name your own charitable foundation as the charitable recipient. The tax rules applicable to charitable trusts are highly complex, and generally require the assistance of a professional estate planner to achieve the maximum benefits.
2. Family Limited Partnerships
Family business owners often create a family limited partnership (FLP). Several states have adopted limited liability limited partnership (LLLP) statutes. In these states, an FLP may elect LLLP status. Usually, a parent serves in the role of general partner and maintains complete control of the partnership (which consists of the family business). The parent/general partner is shielded from personal liability in the same way that the limited partners are protected. The limited partners are the children who have no control of the partnership and no liability for the partnership debts and obligations beyond whatever they may have contributed to the partnership. An FLP is a good way for parents to make gifts to their children, obtain significant tax benefits, and structure the gift in such a way that the children are prevented from selling the business without the parent/general partner's consent. Another key benefit of forming an FLP is that upon your death, your interest in the partnership may be valued, for tax purposes, significantly less than it is worth. However, before setting up an FLP, remember that the Internal Revenue Service requires that FLPs have a legitimate purpose.
3. Generation Skipping Transfer
You and your spouse may each be able to use your full generation skipping transfer (GST) exemption. By doing so, you may realize considerable savings in taxes in the course of a single generation. Through the use of trusts, you skip the payment of taxes but you do not skip the benefits for the next generation. Your beneficiaries may serve as their own trustees, and by giving them powers of appointment, they will control the investments and make the decisions regarding the final disposition of assets. Savings are enhanced when the trust continues for the maximum period allowed by law, and the trust is funded with discounted partnership interests or the remainder interest in a charitable lead trust. Due to changes in the tax laws made in 2001 and 2010, care needs to be taken when making gifts to irrevocable trusts to assure that the GST exemption is allocated as intended.
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