Category Archives: Estate Planning

The ABCs of Trust Planning

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Estate Planning, like many specialty fields, has a language all its own.  For professionals involved in the field, short hand acronyms for various planning techniques are well-known and understood.  For the individuals and families seeking estate planning advice, however, it can leave your head spinning.

Fortunately, once explained, many of these techniques are fairly easy to understand and extremely helpful in achieving your estate planning goals.  This is especially true of a group of “alphabet soup” trusts that are common techniques used by most estate planners.

This is not exhaustive list of trusts or estate planning techniques, but these are some of the more commonly used trusts:

Charitable Lead Trusts (CLT)

How it works: The Grantor (the person who creates and funds the trust) contributes property to the trust and gives a charity or other exempt entity an income interest for a term of years.  Upon the end of the trust term, the remaining property passes to the Grantor’s descendants or other named beneficiaries.

Benefits: The Grantor receives a charitable deduction based on the present value of the income stream and the contributed property is removed from the Grantor’s taxable estate.

Charitable Remainder Trusts (CRT)

How it works: A CRT works exactly like a CLT except the beneficiaries are reversed.  The Grantor or a member of the Grantor’s family receives an income interest for a term of years.  At the end of trust term, the remaining property passes to a charity or exempt organization.

Benefits: The Grantor receives a charitable deduction based on the present value of the remainder interest and the contributed assets are removed from his or her taxable estate.

Grantor Retained Annuity Trusts (GRAT)

How it works: The Grantor contributes property to a trust and receives an annuity interest for a term of years.  At the end of the trust term, the property passes to the Grantor’s descendants or other beneficiaries.

Benefits:  By using the present value of the property and the Section 7520 interest rate, the value of the gift made by the Grantor is zero for gift tax purposes.  The remainder beneficiaries receive the remaining property without the Grantor incurring any gift tax.

Intentionally Defective Grantor Trusts (IDGT)

How it works:  By retaining certain powers over the trust (for example, the power to substitute trust property), a trust is considered a pass through for income tax purposes.  The grantor, rather than the trust, pays any income tax attributable to the trust property.

Benefits:  The income tax rates for individuals are typically more favorable than the tax rates for trusts.  Additionally, the Grantor reduces his taxable estate by paying taxes on the trust income.  IDGTs are often used in sales transactions between the Grantor and the Trust, which also allows the property to pass without estate or gift tax.

Irrevocable Life Insurance Trusts (ILIT)

How it works:  The Grantor contributes cash or cash equivalents to the trust which are used to purchase life insurance on the Grantor’s life.   Each year, the Grantor makes additional contributions to pay the premiums on the life insurance.  Upon the Grantor’s death, the death benefit of the policy(ies) is paid to the Trust.

Benefits:  The proceeds of the life insurance policy(ies) are outside the Grantor’s estate for estate tax purposes.  Additionally, the proceeds may be used to pay any estate taxes due on the Grantor’s estate and allows the Grantor’s estate to avoid liquidating assets such as real estate or business interests.

Qualified Personal Residence Trusts (QPRT)

How it works: The Grantor contributes his or her residence to the trust and retains the right to reside in it for a term of years. At the end of the trust term, the residence passes to the remainder beneficiaries, typically the Grantor’s descendants.

Benefits: Upon the contribution of the residence, the property is removed from the Grantor’s taxable estate.  The value of the gift made by the Grantor is reduced by the value of his or her interest in the residence during the initial trust term.

Each of these trusts is not without its disadvantages and complications.  Unless they are properly drafted and administered, the benefits discussed above may be thwarted.  Despite this, for those looking to reduce their taxes, to pass property to their descendants and/or make a charitable gift, they are well worth diving into the ‘alphabet soup’ to find the right transaction for you.

Please contact info@levyestatelaw.com for more information about these and other trust transactions.

“I Don’t Have An Estate-Why Do I Need An Estate Plan?”

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A 2010 survey by Lawyers.com found that 65% of adult Americans lack any form of an estate plan.  In past surveys, the findings were similar as were the reasons for avoiding estate planning. The reasons given included financial concerns, discomfort with talking about death and disability, a belief that their assets would pass properly without an estate plan and a lack of knowledge regarding estate planning.

But, for one in five respondents, their lack of planning came from the belief that they had insufficient assets to require planning.  They had no “estate to plan.”  I have encountered this line of thinking many times with people who believe that estate planning is only for the super affluent.  In reality, many people beyond the very wealthy need estate planning.  They include:

  1. Families with minor children-Who will care for your children, how the assets you leave for them will be controlled and when the children will have full access to the assets in the event both parents pass are key components of a well executed estate plan.
  2. Families with special needs relatives-Disabled individuals may only own limited assets in order to qualify for government assistance.  Families can provide these relatives with additional assets by using a special needs trust or other planning vehicles.
  3. People concerned with disability and incapacity- Most estate plans include a durable power of attorney, an instrument that allows an agent to legally step into the disabled person’s shoes and complete certain transactions on their behalf.  Another component is a health care proxy and living will which gives an appointed health care agent the ability to make medical decisions for an incapacitated person.
  4. People with current health issues or a family history of health issues- Many illnesses strike quickly and leave little time to get your financial house in order.  An estate plan can provide the families of the chronically ill with one less issue to worry about.
  5. Families with children from multiple marriages-The dynamics of a family of second or third marriage present many issues regarding inheritance.  Without an estate plan, assets may pass in a manner inconsistent with the parents’ wishes.
  6. Non-traditional families including same sex couples-Same sex couples and other non-traditional families are not granted the same inheritance and tax rights as traditional families.  Even with the recent changes to the New York law, an estate plan is essential to protect the rights of spouses and children of these families.
  7. Professionals in areas with malpractice exposure or other liability concerns-Many professionals seek ways to protect their assets from lawsuits and other liabilities.   By using trusts and other asset protection vehicles, assets can be shielded from exposure to any future liabilities (please note that such plans cannot protect assets from existing or known liabilities).
  8. Small and Family Business Owners-A estate plan coordinated with a business succession plan allows a business owner to protect both his business and avoid family conflict over the transfer of the business.
  9. People with assets in excess of their state’s estate tax exemption-All three states in the tri-state area have state estate tax exemptions significantly lower than the federal exemption ($2 million in Connecticut; $1 million in New York; and $675,000 in New Jersey).  And while the tax rates are also lower, many people who would not be subject to federal estate tax may be subject to state estate tax.
  10. People who wish the control how their assets are passed-If you die without a will, your assets with pass through the intestacy law, which specifies who inherits your property and who may petition the court to control your assets.  In essence, by not having a properly executed estate plan, you transfer decision-making regarding your assets to the government.  Giving such power away is a tough pill for almost everyone to swallow.

None of these concerns or scenarios is predicated on having an estate worth more than the federal estate tax exemption.  And yet, each of these groups would benefit from a properly drafted estate plan.  So, who really needs an estate plan?

The answer is pretty much everyone.

Please contact info@levyestatelaw.com for more information about estate planning.