Many people don’t realize that a well-crafted will and revocable trust might not go far enough in their particular case. The most effective tax planning may require further action during life. Lifetime tax planning can provide the leverage that is simply unavailable for dispositions taking effect only at death.
: Tax planning is caught up in the current uncertainties regarding the future of the federal estate tax, but such planning should still be given consideration, given the substantial likelihood, in the view of many Washington observers, for a reinstatement of the tax. If federal exemption amounts were to return to 2009 levels, then individuals fortunate enough to have accumulated wealth in excess of the credit-shelter amount ($3.5 million per individual and potentially $7 million for a married couple), could benefit from some form of lifetime tax strategy. For Massachusetts residents, a lifetime strategy may provide tax advantages even if you are somewhat less wealthy, since the Massachusetts credit-shelter amount is only $1 million.
: Planning to maximize the wealth transferred to loved ones commonly entails some kind of lifetime gift or sale. A gift or sale can work for all kinds of property interests, including art, real estate, marketable securities, stock in closely-held C corporations and S corporations, member interests in limited liability companies, interests in limited or general partnerships, and life insurance policies. The implementation of the planning, however, will vary some depending on the kind of interests involved.
: There are numerous strategies to reduce the value of the transferred asset for transfer tax purposes, and thus to maximize the value received by your beneficiaries. The strategies can invoke a variety of techniques:
1. Outright lifetime gifts to family members or to family trusts (including life insurance trusts
2. Valuation discount gifting strategies:
- creating fractional interests in property
- incorporating property into business entity (such as limited partnership or limited liability company, where otherwise appropriate)
3. Estate tax “freeze” strategies:
- transfers to grantor retained annuity trusts (GRATs)
- sales to intentional grantor trusts
- transfers to freeze partnerships
The key is for the owner to transfer the desired portion of his or her interests with a sufficient lead time before a likely spike in the value of the interests. Any of the “freeze” strategies might be further leveraged by combining it with a valuation discounting strategy.
: When property is contributed to a recognized charitable organization both the federal and Massachusetts tax laws permit a deduction for estate tax purposes, and federal law permits a deduction for income tax purposes. Under certain specific circumstances, gifts may be “split” between charitable and non-charitable beneficiaries, such as family members. While the charitable deduction available for these “split gifts” is smaller than would be the case if the same property were gifted to a charitable organization outright, “split gifts” can:
- help to manage both the donor’s and the beneficiary’s income tax situation
- be used in conjunction with or as part of certain estate tax “freeze” strategies
- avoid or defer capital gain taxes on contributed property
: Life insurance policies are common vehicles for gifting. This is because the owner often will not much “miss” the policy (though he or she might lose the ability to tap into accumulated cash surrender value), and the policy already has built into it the potential to balloon in value upon death. By gifting the policy, the policy owner can seek to remove the policy proceeds from his or her taxable estate. The policy owner often will give the policy to an irrevocable life insurance trust, rather than to any individual. The trustees can obtain the money for ongoing premium payments through regular gifts by the policy owner to the trust. Those gifts often can be sheltered from the gift tax under the owner’s annual gift tax exclusions, though for some technical tax reasons, this requires some careful crafting of the trust, creating in the beneficiaries the right to withdraw designated dollar amounts of the funds contributed to the trust. When the trustees do ultimately collect the policy proceeds, they can provide liquidity to the estate by lending money to it or purchasing otherwise illiquid estate assets. Sometimes a policy owner can obtain additional leverage through various kinds of premium structures or financing or through so-called split-dollar arrangements.
: Another technique, applicable only to personal residences, is the qualified personal residence trust (QPRT). It effectively provides for an inherent valuation discounting.
: Some families, particularly those with substantial wealth, may benefit from taking a long-range, multigenerational view of their planning. Within applicable rules of professional responsibility, we can represent members of two or more generations of a single family and seek to integrate their planning. Such planning can involve multigenerational trusts (sometimes known as “dynasty trusts, when pushed out to extended time periods). It can provide to the beneficiaries substantial protection of their inherited wealth. It may also offer tax minimization between the generations, within the limitations imposed by the generation-skipping transfer tax.
: Planning for state estate taxes has become more complex since the federal government eliminated the credit for state death taxes and many states have, as a consequence, “decoupled” their state estate tax from the federal. Many individuals whose wealth remains under the threshold to be concerned with the federal estate tax (to the extent it might re-emerge), still need to pay attention to state estate taxes. Though the state tax rates universally are lower than the federal rates have been, they can still exact a considerable toll. State estate tax laws now vary considerably, so the issues are particularly acute for individuals with property in more than one state. We can help plan for non-residents with property in Massachusetts and for Massachusetts residents with property in other states. We can also assist individuals seeking to secure residency in a lower-tax state (a state without an estate tax or without an income tax).