Charting a Course for Family Security

Advanced Estate Planning

If you are single and your estate exceeds the applicable exclusion ($3,500,000 in 2009) or are married and your combined estates exceed the applicable exclusion, you may wish to make gifts to reduce the size of your estate for estate tax purposes.


Each person is entitled to give away $13,000 per person, per year transfer tax free.  A husband and wife can join together to make gifts of $26,000 per person, per year.  Over a period of time and, given enough recipients (i.e. children, spouses of children, grand-children), a substantial amount could be given away. 


Each person is entitled to a transfer tax exemption of $1,000,000 in 2009. This exemption may be applied either to reduce gift taxes for lifetime gifts in excess of the $13,000 per person, per year exclusion or to reduce estate taxes at the time of death.  If this exemption is used during your lifetime to exempt gift taxes on gifts up to the exemption amount, then future appreciation (increase in value after the date of the gift) is not included in your estate at the time of your death for estate tax purposes.  Gifts of appreciating assets during your lifetime (up to the exemption amount) could therefore significantly reduce the ultimate size of your taxable estate at the time of your death.  Gifts in excess of your exemption amount would result in current gift taxes being payable.  This might be beneficial to you since the taxes paid would further reduce the size of your estate and would be less than the estate tax payable if the gift had not been made.


Life insurance which you own and which pays out at the time of your death is taxed in your estate.  The reason is because you own the policy.  If you transfer ownership to your children or to an irrevocable trust (and live three years after the transfer) then you do not own it at your death and there is no estate tax.

If the life insurance pays out at the death of the first of you and your spouse to die, the trust could be set up so that when the insured dies, the proceeds would be held in a trust for the benefit of the surviving spouse and then at his or her death distribute to your children.

That is, the surviving spouse could be the trustee, get all the net income, have discretion to take out principal for purposes of his or her health, education, maintenance and support, and be given the power to change the beneficiaries who are to receive the remaining proceeds at his or her death.

Since the life insurance would be held in an irrevocable trust and not owned by the insured, the proceeds of the life insurance at the death of the insured would not be included in the insured's estate for estate tax purposes.

Further, during the surviving spouse's lifetime, the proceeds would be protected from the claims of his or her creditors and not be included in the surviving spouse's estate for estate tax purposes at his or her death even though the surviving spouse had substantial control and use of these proceeds during his or her lifetime.


If the life insurance is a survivorship policy where the proceeds are payable upon the death of the second of you and your spouse to die, then the ownership of the policy could either be assigned to your children or into an irrevocable life insurance trust.  The purpose would be to get the proceeds out of both husband's and wife's taxable estates for federal estate tax purposes yet still have the proceeds available to provide cash to pay estate taxes at the second death without requiring the forced sale of other assets.


A Qualified Personal Residence Trust is an irrevocable trust used for the purpose of transferring your home (or vacation home) to your children while retaining the right to use the home for a stated number of years.

Under this arrangement, you would place your home into an irrevocable trust.  You would serve as your own trustee.  You would continue to live in your home for a certain number of years which you would select (for example, five or ten years).  If your home was sold, a new home could be purchased with the proceeds.  If a new home was not purchased, the trust would pay an annuity to you for the balance of the term of the trust.  At the end of the trust term, the trust would terminate and your home or the proceeds of its sale would be distributed to your children.  At that time, you would either move out of your home and find another place to live or rent the home from your children at fair market rental.  No pre-arrangement to do this may be made.

Upon setting up this trust, you would be making a gift to your children of the value of the home reduced by the value of your retained right to use the home for the term of years.  You would therefore have made a gift of the home to your children at a reduced gift tax cost. Typically, you would use part of your applicable exclusion ($3,500,000 in 2009) so that no gift tax would be currently payable.

Further, appreciation on the home after the date the trust is set up would not be included in your estate for estate tax purposes at the time of your death but would rather be with your children.

A disadvantage would be that the home would not take a new (stepped-up) income tax basis at the time of your death.  The income tax basis for the home in the hands of your children would be the same as your original income tax basis. 

For this plan to work, you would need to outlive the term of the trust.  You would therefore select as the term of the trust a number of years which you feel confident you would outlive.  This, of course, is a bit of a gamble but if you die before the trust terminates, the downside is that you are back to the same place you would be as if you had not set up the trust in the first place.

Since the value of the gift is the actuarial value of the remainder interest, you would be able to transfer a larger amount at a lower gift tax cost and additionally get future appreciation on the home out of your estate.  Under the right circumstances, this form of trust planning could be quite beneficial to your family in reducing estate taxes.


Trustee: You.
Occupant:  You.
Term:     ?    Years.
(Note:You must outlive this term!)
Distribution: To your children at end of term.
(Note:You then either move out or pay fair market rent.)


For persons who want to transform highly appreciated low income property into higher income property without paying capital gains tax or who wish to make substantial contributions to charity and yet still retain the income from their property during their lifetime, a Charitable Remainder Trust may be the answer.

Under this form of trust, the appreciated property is transferred into a trust under which you would retain either a fixed or variable annuity over your lifetime.  You would be entitled to a current income tax charitable deduction for the actuarially determined value of the gift after reducing the value of your annuity.  Additionally, the amount in the trust would not be included in your estate at death for federal estate tax purposes.

Upon your death, Charitable Trust terminates and distribution is made to the charity of your choice.

If the asset which you transferred into the Charitable Remainder Trust was highly appreciated, the Trustee could sell this asset and not pay any income tax on the capital gain.  The full proceeds would then be available for use in providing the annuity to you.

If the asset transferred into the Charitable Remainder Trust was highly appreciated and yet producing little or no income to you, the increased income from the trust may enable you to not only have higher income for your retirement years but also a sufficient additional amount of income to pay the premiums on a life insurance policy (held in an irrevocable life insurance trust often referred to as a "wealth replacement trust") which would be payable to your heirs at the time of your death and thus replace the asset which was given to charity.


You may give any asset, i.e. stocks, bonds, real property (other than your home) life insurance, cash, to a Family Limited Partnership, retain control during your lifetime as general partner, and give limited partnership interests to your children.


  1. As general partner you would continue to be in control of the distributable cash flow of the partnership.
  2. Consolidation of family assets into the partnership may result in reduction in operational costs.
  3. Simplify annual giving to your children by giving limited partnership interests rather than fractional interests in real property.
  4. Keep family interests in the partnership.
  5. Provide some protection of the family assets from future creditors.
  6. Provide some protection of family assets against failed marriages.
  7. There is flexibility since the Partnership Agreement is a contract which can be amended or terminated generally without adverse tax consequences.
  8. Generally broader flexibility in making investments of partnership assets at least as compared to trust assets.
  9. Disputes can be resolved through arbitration rather than litigation.
  10. Frivolous lawsuits can be eliminated as between family members.
  11. Provides opportunity for teaching children about investments and financial management.
  12. Can avoid costs of probating out of state property.
  13. There may be significant tax advantages because by fractionalizing your estate, the taxable value of your estate may be substantially reduced by the use of valuation discounts, thus saving federal estate taxes.

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