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...strategies are numerous and varied, but all focus on the following goals:

  • Valuation reduction for tax purposes, obtained through fractional interest, minority, and lack of marketability discounts
  • Estate tax deferral through trusts which span several generations
  • General creditor protection provisions

Some of these trusts can be drafted as "grantor defective" under the Internal Revenue Code, which means that all income is taxed to the "grantor" regardless of who actually receives the income. This can be a powerful income and gift tax planning tool, for it allows the grantor to pay the tax liability of the person who receives the income. Included in these planning options are the following: 

  • Irrevocable Life Insurance Trust
  • Generation Skipping Trust
  • Irrevocable Descendants Trust
  • Supplemental Needs Trust
  • Standby Trust
  • Qualified Personal Residence Trust
  • Grantor Retained Annuity Trust
  • Family Limited Partnership
  • Charitable Remainder Trust
  • Charitable Lead Trust

Irrevocable Life Insurance Trust is designed to be the owner of life insurance on the client, with provisions which will benefit the insured's family members.  This trust protects life insurance proceeds from estate taxes, from creditors, and from division in the event of a divorce.  This trust can be structured so that a "trust protector" can unwind the instrument and move the policy out of the trust.  A member of the client's family usually acts as trustee.

Generation Skipping Trust is designed to confer nearly 100% of the benefits of outright ownership of property to a beneficiary, while giving the beneficiary the ability to access income and principal, and to direct where the trust assets pass when the beneficiary dies. At an appropriate age, the beneficiary usually acts as his/her own trustee.

Irrevocable Descendants Trust  is a preferable alternative to the "UTMA" gifts to a minor.  This trust is designed to hold assets beyond the minor's 21st birthday.  Assets are creditor protected, protected against division in the event of a divorce, and the trustee can be given flexibility in postponing a beneficiary's right to withdraw assets, if it is in the beneficiary's interest to do so.  Grantor provisions can be included so that only a 1 page tax return is required, and income is taxed at the minor's rates.  A member of the client's family usually acts as trustee.

Supplemental Needs Trust is a form of trust designed to hold assets for a beneficiary who is (or who may become) eligible for governmental benefits (such as Medicaid or Social Security) because of a disability.  These programs may either (1) disqualify an applicant because of funds to which the applicant has access, or (2) file claims for reimbursement against gifted funds set aside for the applicant.  The "SNT" trust includes special provisions to avoid these problems.  A member of the client's family usually acts as trustee.

Standby Trust  is a form of trust designed to receive assets from individuals (example: children) to be held on "standby" for others (say, the parents of the children).  Income and principal can be used for the parents, and on their death, the trust assets are redistributed to the children who created the trust.  Trust assets are not included in the parents' estates, and are protected from their creditors.  Any type of assets (including gifts made to the children from the parents) can be put in the trust.  The trust allows for a consolidated approach for investment of "pooled gifts", and offers assurances to the parents that the funds will always be on "standby" during their lives.  This type of trust is usually drafted as a grantor trust, so that the children are taxed on all income, and only a simple 1 page return is required.  A member of the client's family usually acts as trustee.

Qualified Personal Residence Trust
  is a "split interest" trust, which receives title to a personal residence (a primary home, or vacation property).  The client reserves the right to live rent-free in the home for a number of years, with the home passing to beneficiaries after the specified term.  Thereafter, the clients pay rent to the trust.  The reserved right results in a valuation discount (which can be increased by a husband and wife each creating separate trusts with 50% interests in the property).  We usually prepare our "QPRTs" as defective grantor trusts, so that the clients' rental payments after the end of the term are not taxable income (or gifts) to the children.  The client acts as his/her own trustee during the reserved term; thereafter, we give the client the right to remove and name new trustees after the reserved term.

Grantor Retained Annuity Trust  is another "split interest" trust designed to receive assets which the client believes will appreciate over a short period of time.  Fixed annuity payments (in cash or property) are made to the client, and at the end of the term, all growth passes to beneficiaries (typically children).  The most common form of "GRAT" is a so-called zeroed-out trust, which lasts for 2 years, during which time payments are made to the client which for gift tax purposes equal the value of the property put in the trust.  This means that all growth is effectively passed to beneficiaries at no gift tax cost.  Further, we can draft the GRAT so that after the specified term, the trust continues with grantor status: this allows the client to pay the income taxes on all income received by the beneficiaries without these payments being treated as gifts.  The client acts as his/her own trustee during the reserved term; thereafter, we give the client the right to remove and name new trustees after the reserved term.

Family Limited Partnership  is a form of business arrangement which creates General Partner and Limited Partner ownership rights.  Most of the value of the partnership is usually assigned to the Limited Partnership units, and the partnership provisions contain severe restrictions on Limited Partners, so that valuation discounts in the range of 15% to 40% are common.  The clients hold all General Partnership units, so they retain control of the operations of the partnership.  The clients/General Partners are entitled to take management fees from the partnership, and any remaining income can (but need not) be distributed among all of the partners.  On the death of the survivor of the clients, the General Partnership units are typically distributed to the children, or held in trusts of which the children are beneficiaries.

Charitable Remainder Trust  is a "split-interest" trust to which the client transfers assets, retaining the right to receive payments for a period of years, or for the life of the client.  The client receives a charitable income tax deduction for the calculated value of the gift which will pass to charity.  Payments to the client can be in the form of a fixed annual amount (an "annuity" payment), or a percent of the value of the trust property, revalued each year (a "unitrust" payment).  Low basis assets are typically used in this planning arrangement, for the trust does not incur any capital gain on the sale of assets. Payments received by the client are taxable to the extent the trust has realized taxable income.  At the end of the term of years (or at the death of the client), remaining assets are distributed to charities selected by the client (these charities can be changed at any time).  The client acts as his/her own trustee during the reserved term.

Charitable Lead Trust  is the "flip" of a Charitable Remainder Trust, in that payments of a fixed amount are made to charities for a specified period of time.  At the end of the term, all property in the trust passes to beneficiaries named by the client in the trust, in the form of a future gift.  The "remainder gift" to the beneficiaries is discounted by the calculated value of the payments to be made to the charity or charities.  While no income tax deduction is available to the client with this type of trust, this type of planning device creates the possibility of passing significant assets to family members at a gift tax value which is only a fraction of the actual value of the property when the transfer occurs.