When you plan your estate with the benefit of legal counsel, you can make fully informed decisions. There are advanced estate planning devices that can be utilized to accomplish specific goals, and we can help you make the right choices.
Limited Liability Companies
A limited liability company (LLC) is a commonly used legal entity that protects the interests of business owners. If your business is a limited liability company, generally speaking, your personal resources would be out of reach in most situations if your business is the target of a lawsuit.
On the other side of the coin, if you are personally sued, the LLC would be protected. You enjoy pass through taxation when you have a limited liability company, so you claim profits and losses on your regular income tax returns.
Non-U.S. Person Revocable Trust
A revocable trust set up by a non-U.S. person can be structured to own an offshore company, which in turn holds ownership of a US LLC that holds title to US property, which can ultimately benefit US persons, in order to minimize the impacts of any gift and estate tax on the Non-US person for transfers to the US persons.
Non-U.S. Person Irrevocable Trust
Many clients have family ties overseas. If a Non-U.S. person wants to transfer funds to a U.S. family member, they can accomplish this by having the Non-U.S. person set up an irrevocable trust, where the U.S. family member(s) are designated beneficiaries under the trust.
Family Limited Partnerships
A family limited partnership (FLP) is another asset protection structure that is used by some small businesses, professionals, and investors. As the name would indicate, the participants are members of the same family, and you would be the general partner if you establish an FLP.
The general partner has sole decision-making authority, and family members that are added are partners with limited power. If you convey your business or a rental property into a family limited partnership, property that is directly owned by the partners would be protected.
Conversely, if any limited partner is sued, litigants would not be able to reach property that is held by the partnership unless the allegations are made against the partnership. In addition to the asset protection, family limited partnerships can facilitate estate tax-efficient asset transfers.
When you establish an irrevocable trust, you surrender incidents of ownership because you cannot revoke the trust generally, and you cannot act as the trustee. Property that is held by an irrevocable trust is not part of your estate for tax purposes, and it is protected from most legal actions.
Irrevocable trusts are also used by people that want to qualify for Medi-Cal to pay for long-term care. Medicare coverage does not extend to living assistance, but Medi-Cal will cover the expenses if you can gain eligibility.
Since it is a need-based program, you cannot qualify if you have more than $2000 in countable assets in your name. Resources that are held by an irrevocable trust would not be counted toward this $2000 asset limit.
Irrevocable Life Insurance Trusts
There is a federal estate tax that can have a significant impact on your legacy because it carries a 40 percent maximum rate. The exclusion is an amount that can be transferred before the tax would potentially be applicable on the portion of an estate that exceeds the exclusion.
At the time of this writing, the exclusion is just over $12 million, but it is scheduled to revert to the 2017 figure of $5.49 million indexed for inflation by the end of December of 2025. There are 12 states in the union with state-level estate taxes, but California is not one of them.
There is also a federal gift tax that is unified with the estate tax. As a result, you can’t give large gifts to avoid the tax.
An irrevocable life insurance trust (ILIT) is a device that can be used to ease your estate tax burden. Life insurance policies that are held by an ILIT trust are not part of your estate for tax purposes.
Grantor Retained Annuity Trusts
The “zeroed out” grantor retained annuity trust (GRAT) is another estate tax efficiency strategy. To implement it, you fund the trust, and you set up a distribution schedule. You will receive distributions throughout the duration of the term that you establish.
When a trust agreement is being drawn, you name a beneficiary that will inherit assets that remain in the trust after the term expires. The transfer to the beneficiary would be a taxable act of gift giving.
Since there may be a taxable event, the IRS will apply the Section 7520 rate to add anticipated interest to the taxable value of the trust. This is 120 percent of the federal midterm rate, and it is sometimes called the “hurdle rate.”
Over the course of the trust term, you receive distributions that are equal to the entire taxable value of the trust. Theoretically, it would be zeroed out, but the assets in the trust may appreciate at a rate that exceeds the Section 7520 rate.
Interest rates have been very low over recent years, so there is a good chance that the assets will outperform the hurdle rate. If this happens, the beneficiary will inherit the remainder, and the gift tax would not be applicable.
Since minors cannot directly handle their own finances, you should use a children’s trust if you will be leaving an inheritance to a minor. The trustee that you designate will manage the assets on behalf of the child beneficiary.
The assets will typically be used for education, health, and support purposes. When you establish the terms, you can determine when the trust will terminate. It can be terminated as soon as the child reaches adulthood, or it can remain active for a longer period of time.
Qualified Personal Residence Trusts
A qualified personal residence trust (QPRT) is yet another estate tax efficiency tool. The idea is to transfer your home into the QPRT, and you name a beneficiary that will inherit the property upon the expiration of a prescribed term.
This interim is called the retained income period, and you live in the home rent-free as usual during this period. You remove the property from your estate for tax purposes when you transfer it to the trust, but the beneficiary will be receiving a taxable gift.
The IRS calculates the taxable value of the home in light of the fact that the beneficiary will not be taking immediate possession of the property. As a result, the taxable value will be far lower than the true fair market value, so the home will be transferred at a tax discount.
Some younger people have no financial management experience, and there are those that are simply not good with money. A spendthrift trust can be used to provide for a beneficiary that is not ready to handle a significant inheritance.
If you establish a revocable living trust with a spendthrift provision while you are alive, you would act as the trustee while you are living. You would name a successor trustee to assume the role after your death, and you would designate the beneficiaries.
After you are gone, the trust would become irrevocable, and the successor trustee would administer the trust. The beneficiaries would have no access to the principal, and their creditors would “step into their shoes,” so they would not be able to reach the assets.
When you are creating the trust, you can set up a long-term distribution schedule that prevents reckless spending. You could instruct the trustee to distribute larger lump sums when the beneficiaries reach certain age thresholds.
A dynasty trust is a trust that remains active over multiple generations, but there is just one imposition of the estate tax. This type of trust can remain active for up to 90 years under the California Uniform Statutory Rule Against Perpetuities.
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There is no one-size-fits-all estate plan that is right for everyone, and as you can see, there are different tools that can be utilized. Personalized attention is the key to a properly constructed plan, and this is what you will receive when you work with our firm.
You can schedule a consultation at our Pasadena, CA estate planning office if you call us at 213-830-9933, and you can use our contact form to send us a message.