Advanced planning tools are used when an estate is over the Federal Estate Tax Exemption.  These tools have the effect of reducing the overall size of the estate that is subject to estate taxes.  Most of the tools involve transferring assets during life.  Some of these tools are more complicated than your core documents, and should be reviewed, drafted and implemented by your attorney and CPA.

Examples of advanced estate planning tools include:

Gifting is the most prevalent advanced estate planning tool used today. It can take a wide variety of forms, but essentially involves a person giving away assets outright or in trust. Gifts can be general or for a specific use. The federal gift tax rate is 40% and some states impose an additional estate tax. Thus, it is important to avoid triggering the tax.

Structured properly, gifts can be made estate tax-free. Payments made directly to a healthcare or educational institution on behalf of a loved one are gift tax-free. The annual gift tax exclusion also allows a donor to give a certain annual gift to any person in the world without paying any gift tax or reducing their lifetime exclusion amount. For example, grandparents with 3 children and 9 grandchildren could each give away $168,000 per year from their estate. Finally, you can also apply a portion of your lifetime exclusion to avoid currently paying any gift tax.<br>
Many other tools and techniques leverage the gifting tool as well. For example, the Irrevocable Life Insurance Trust uses annual gifts by the grantors to the trust to pay the premiums on the life insurance policy owned by the trust.

Recently, clients have been taking advantage of the large lifetime gift and estate tax exclusion to move significant assets and appreciation out of their estate. Today’s low values and future appreciation potential make this tool extremely attractive.

A common desire is to provide for the educational expenses of a minor. These transfers are gifts. It is important to make sure the gift is not subject to the tax, is excluded from your estate and restricts the beneficiary from withdrawing the money for non-authorized purposes. An easy solution is to make the gift directly to the institution. However, if you do not know which institution the beneficiary will attend, more flexibility is needed.

Small gifts can made to a Uniform Transfers to Minor Account at a bank or other financial institution. Larger gifts can be made to a 529 plan. If you desire more control over the investment of the assets irrevocable trusts and 2503(c) trusts can be used. Administered properly, all of these tools will be excluded from your estate. The variables of the amount of the gift, the use restrictions and your desire to retain investment control will dictate the proper form. Keeping the plan simple must be balanced against your other objectives.

Portability allows a surviving spouse to take advantage of a deceased spouse’s lifetime Federal estate tax exclusion. The surviving spouse can use his or her last deceased spouse’s exclusion either for gifts or for estate tax purposes at the surviving spouse’s subsequent death. This is a relatively new tool, introduced in 2010 and made permanent in 2013. To use this tool the first spouse’s personal representative makes an appropriate election on a timely filed estate tax return that computes the unused exclusion amount. The exclusion can be lost if the surviving spouse remarries before it is used.

Whether to rely on portability for your estate plan is a complex and difficult analysis. The size of your estate, desired distribution scheme and control preferences, income tax considerations, family situation, creditor protection and estate growth assumptions will often dictate the use of this tool. Although the purpose of portability is to simplify estate planning, the possibility of relying on portability makes the planning process more complicated.

The estate planning process is more complicated because an additional issue must be addressed for married couples with estates between $5,000,000 and $10,000,000. The question is whether to use portability or a credit shelter trust to take advantage of the first spouse’s exclusion? Factors indicating relying on portability include (a) a competent spouse who can manage assets, (b) a first marriage or no children existing by prior marriage of either spouse, (c) clients who are more interested in income tax basis step up at the second spouse’s death than getting future appreciation out of their estates, and (d) there is a residence or other assets that would be difficult to administer in a trust. There are other special situations in which portability may offer distinct advantages, but those are beyond the scope of this page.

By contrast, factors indicating using a credit shelter trust include: (i) the desirability of omitting future appreciation from the surviving spouse’s estate, (ii) being able to include persons other than the surviving spouse as a trust beneficiary, (iii) avoiding (or minimizing) inequities in a blended family situation, (iv) the desire for asset protection planning and (v) using the deceased spouse’s GST exemption.

The Wait and See Approach

The wait and see approach utilizes planning that leaves the surviving spouse with the decision of whether or not to rely on portability.

Alternatives are (1) to rely on a disclaimer provision (allowing a surviving spouse to disclaim an outright bequest with a provision that the disclaimed assets pass to a bypass trust ), or (2) to leave assets to a QTIPable trust; portability would be used if a full QTIP election is made (and the first deceased spouse’s GST exemption could be used by making a reverse QTIP election under §2653(a)(3)), and a bypass trust approach would be used if a partial QTIP election is made with a “Clayton” provision (so that the unelected portion would have more flexible distribution provisions than a single beneficiary mandatory income interest trust for the surviving spouse). Obviously, careful drafting must be used to implement this approach.

For spouses, a very common estate tax planning tool is a credit shelter trust, otherwise known as a bypass or “B” trust. This tool is drafted into your will or revocable trust and is funded upon the death of the first spouse. The bypass trust is funded with assets valued at equal to or less than deceased spouse’s estate tax exclusion. The terms of the trust are irrevocable by the surviving spouse.

The surviving spouse can receive income and principal distributions from the bypass trust. These distributions can be mandatory, at the trustee’s discretion or a set percentage of trust assets (i.e. a unitrust). Properly drafted, the surviving spouse can be the trustee and still retain the estate tax benefit.

The benefits of the credit shelter trust include: (i) the desirability of omitting future appreciation from the surviving spouse’s estate, (ii) being able to include persons other than the surviving spouse as a trust beneficiary, (iii) avoiding (or minimizing) inequities in a blended family situation, (iv) the desire for asset protection planning and (v) using the deceased spouse’s GST exemption. For estates larger than $10,000,000, the creditor shelter will usually be the better option.

By contrast, estate tax portability can be relied on for couples whose estates are in the range of $4,000,000 to $10,000,000. Portability is usually more effective for estates who would otherwise leave their assets directly to the surviving spouse.

The marital deduction trust is more of a tool for deferring estate taxes, rather than saving estate taxes, for married couples.

The marital or QTIP trust is drafted as part of your will or revocable trust. The trust must provide that all income be distributed to the surviving spouse and that the surviving spouse must make the election to treat the assets in the trust as part of their estate upon her death. Hence the estate tax is deferred from the date of the first spouse to die to the date of the second spouse. Upon the first spouse’s death, the trust is irrevocable.

The most common use for the marital deduction trust is for a spouse who does not want the survivor to be able to modify the beneficiaries of the amount over the estate tax exclusion. Another common use is for lifetime transfers to a marital deduction trust to take advantage of a poorer spouse’s estate tax exclusion.

Special rules apply for non-citizens, so care must be taken in drafting trusts for these individuals.

Life insurance is an important part of your financial security. Unfortunately, a large life insurance policy that is included in your estate for estate tax purposes can increase your estate tax obligation upon death. The Irrevocable Life Insurance Trust (ILIT) can solve this issue. An irrevocable trust is formed with someone other than the insured as trustee. The beneficiaries can be a spouse or other family members. The trust applies for the insurance and is the owner and beneficiary of the policy. Each year the insured makes a gift to the trust using his or her annual gift tax exclusion. The trustee receives the gift, gives notice to the beneficiaries and then uses the gift to make the premium payment on the policy.

Upon the insured’s death, the proceeds of the policy are paid to the trust and then held or distributed pursuant to the terms of the trust. If drafted and implemented correctly, the assets of the trust are excluded from the insured’s estate.

The creation and proper administration of a family entity to hold a business or real estate venture can provide substantial estate tax benefits. These entities can be in the form of a limited partnership, limited liability partnership, limited liability company or even a regular c-corporation.

There are many different ways to form and create the family entity, but all rely on lack of control and lack of marketability discounts to achieve the desired estate tax savings. The discounts are applicable because a hypothetical buyer would not pay the same amount for a 10% interest in an entity that held $100 cash as she would for a ten dollar bill. The buyer would not pay the same amount because there is no market for the interest in the entity and she would not have enough voting control to force a liquidation of the entity.

The Internal Revenue Service has fought the use of the family entity in estate planning for years. However, structured and administered properly, a family entity can generate significant estate tax savings.

A donor advised fund is a simple alternative to charitable giving. The fund is set up through your favorite charity or support organization, with members of the organization comprising a majority of the fund’s committee. The host institution takes care of all administration and investment functions. Not all funds are created equal, so make sure you carefully review the host organization’s terms and conditions before establishing the fund.

The benefit to the donor is an immediate deduction for income and estate tax purposes plus some say in how, when and to whom the money is given. In subsequent years, donations must be made from the fund to the approved list of charitable organizations. After the death of the donor or the donor’s representatives, any remaining balance is transferred to the host institution’s general endowment.

Donor advised funds are a great tool for deferred charitable giving without the hassles or complications of a private foundation.

Properly drafted, the Qualified Personal Residence Trust (“QPRT”) is designed to transfer a personal residence or vacation home to your beneficiaries in the future using today’s valuation.

The trust works like this: after the trust is drafted and signed, the residence is valued and transferred to the trust. The donor retains the right to use the residence for a predetermined term of years (ie. 10), at which time the residence passes to the ultimate beneficiaries such as his children. This trust is allowed to sell the home as long as the proceeds are reinvested in another residence.

If the donor does not live until the end of the trust term then the property is included in his estate. If the donor survives the term, he will need to pay rent to the trust if he desires to retain exclusive use of the property.

Most planners will use two QPRTs for a husband and wife. Each trust has their own term of years and if only one dies before the trust matures then only one half of the value would be part of a taxable estate. Unlike other estate planning techniques, the QPRT is expressly authorized under the Internal Revenue Code and its regulations.

This is an excellent tool to transfer personal residences to your beneficiaries.