A. ILIT

An irrevocable life insurance trust (ILIT) places life insurance policies and the funds used to pay premiums, outside of your estate. There is a misnomer that life insurance is not taxable in one’s estate. This is false. Unless policies are held in a properly created and maintained trust the proceeds will be subject to estate taxes. This means that the proceeds won’t be subjected to estate taxes after a death. ILITs also insulate the insurance policy from a hostile creditor’s claim.

Here are some key points

• There is a prevalent fallacy that life insurance proceeds are not subject to Federal Estate Taxes. Though the proceeds acquired by your family members or other beneficiaries are free from any income taxes, they are computable as part of your taxable estate. As a consequence your loved ones can lose up to half of the life insurance proceeds as they add financial value to estate taxes.
• ILITs are created for the sole purpose of placing your life insurance policy outside of your estate. This protects the proceeds from being taxable to your estate. The proceeds from your insurance policy can then be used to provide your estate with the ability to pay estate taxes, pay off debts, pay final expenses and provide income to a surviving spouse or children.
• The ILIT becomes property of the policy owner and beneficiary. Once your trust is created, you make cash gifts to your trust through your annual gift tax exclusion. Your beneficiaries abstain from taking the present gift (in lieu of the future proceeds) and the trustee uses the remaining gift to pay the premium on the life insurance policy.
• When setting up your ILIT there are many options available to you. For instance, you can set up your ILIT to provide a steady income to your surviving spouse with the balance going to your children from a prior marriage. Though an ILIT you may also provide for an allotment of a limited amount of the insurance proceeds over a period of time to a financially careless child.

B. SPOUSAL LIFETIME ACCESS TRUST (SLAT)

A Spousal Limited Access Trust (SLAT) allows an individual to treat his or her spouse as an outside beneficiary so that assets can be removed from one’s estate, and grow outside of one’s estate, with a spouse retaining the right to access the trust if needed without causing a taxable event.

SLATs are completely protected from lawsuits and creditor problems that may arise from the Grantor, Trustee, and children. If such issues arise from the Grantor the Trust assets are protected because the Grantor is not a named beneficiary of the Trust.

Advantages of a SLAT:

• Minimizes estate taxes by “gifting” the maximum amount of annual gift exclusions to the Trust for all desired family members,
• Grants Trustee continued lifetime access to Trust assets for health, education, maintenance and support,
• Provides protection of the Trust assets for both spouses, children, grandchildren, and other named beneficiaries,
• Reduce liability to both spouses by permitting the Trust to compound free of income taxes,

Here is an example of how you can remove money from your taxable estate and still gain access to those funds through a SLAT: 

• Clients Brian and Sarah have a $4,000,000 estate, which continues to grow. They become concerned that the federal government will take one-half of this growth through estate taxes. They are 60 years old, and have four children (all of whom are married), and four grandchildren. Brian decides to establish a “Spousal Lifetime Access Trust” (SLAT) and gift the maximum amount in to the trust each year for the benefit of his spouse, children, children’s spouses, and grandchildren. In Year 1, Brian can contribute nearly $150,000 to the SLAT and eliminate estate taxes on that gifted amount. Though Brian cannot technically “take the money back”, Brian can grant Sarah a “lifetime access to the Trust” for needs such as health, education, maintenance and support. If Brian repeats these gifts for just 5 years (and assuming a 7% rate of growth inside the Trust), he can quickly remove over $1,000,00 from his taxable estate, and maintain control through the lifetime access granted to his spouse.

C. INTENTIONALLY DEFECTIVE GRANTOR TRUST (IDGT)

An IDGT is yet another tool used to reduce one’s estate for tax purposes. It is created as a grantor trust with an intentional flaw that guarantees that the grantor will continue to pay income taxes on the inheritance. Income tax laws do not recognize that assets have been transferred away from the individual even though assets have been removed from the estate.

• How it works: The grantor “sells” his or her assets to the trust in exchange for a promissory note for a specified period of time. The note will pay interest, but the underlying assets will clearly appreciate at a faster fate. In essence, an IDGIT freezes the grantor’s estate for tax purposes while still allowing it to grow. The named beneficiaries of an IDGT are usually children or grandchildren. They will receive the assets that have grown substantially without deductions for income taxes because the grantor has already paid for them.

D. CHARITABLE REMAINDER TRUSTS FOR PLANNED GIVING

Through estate planning you can provide for organizations or causes that have had a significant meaning to you, either after your death or during your lifetime. This type of planning may let you receive a stream of income for your life, earn higher investment yield, or reduce your capital gains or estate taxes depending on how you set up your planned giving.

E. FAMILY LIMITED PARTNERSHIPS AND FAMILY LIMITED LIABILITY COMPANIES

Family Limited Partnerships (FLPs) are a form of partnership created among family members. Forming and funding an FLP not only protects your assets but also saves your family money on estate and gift taxes. FLPs allow you to retain control over the transferred assets, while growing assets outside of your estate and protecting these assets from creditors of individual family members.

FLPs accomplish several goals:

First, the value of each limited partnership interest you give away reduces the value of your taxable estate and, subsequently, any tax your heirs would have had to pay upon your death. In addition to this, you do not have to pay any gift tax on the transfers because the gifts are made using the annual gift tax exclusion.

Second, the corresponding value of the assets in the partnership is far more than the value of the partnership interests transferred to your beneficiaries. A minority discount can be applied to reduce the value of the limited partnership interests because limited partners do not have the ability to direct or control the day-to-day operation of the partnership. Also, because the partnership is not publicly traded and is instead a closely-held entity, a discount can be applied based on the lack of marketability of the limited partnership interest. This allows you to retain control of your underlying assets, while you can leverage the FLP as a mode to transfer more wealth to your beneficiaries.

Lastly, an extensive FLP can offer extensive creditor protection because the general partners are not obligated to allocate the earnings of the partnership.

F. QUALIFIED PERSONAL RESIDENCE TRUSTS (QPRT)

One’s home is frequently the most valuable assets and for that reason one of the largest elements of one’s taxable estate. A Qualified Personal Residence Trust or a QPRT allows you to give away your house or vacation home at a great reduction in cost, freeze its value for estate tax purposes, and still continue to live in it.

Here is how it works: The title of your house is transferred to the QPRT (generally to benefit your family members), and you reserve the right to live in the house for a stated number of years. At the end of the period, if you are alive, the house and any appreciation in value since the first transfer, then transfers to your children or any other beneficiaries you have chosen and is free from further estate or gift taxes. You may continue to live in the home after the specified period but to avoid inclusion of the home in your estate, you have to pay rent to your family or other chosen beneficiaries. Although the rent income does have income tax consequences for your family, it may be an additional benefit as it serves to further reduce the value of your taxable estate. If for some reason you die before the end of the stated number of years, the full value of your home will be included in your estate for tax purposes, but in most cases you are no worse off than if you had never created a QPRT. Another advantage of establishing a QPRT is that since technically you no longer own the property once the trust is established and your residence is transferred to the QPRT it can protect your assets against creditors and predators.

G. ADVANCED ESTATE PLANNING IN MARYLAND

In the absence of advanced estate planning strategies and techniques it is likely that a significant portion of the wealth you have accumulated during your lifetime will be taken by the IRS and the Maryland Department of Revenue. Maryland Estate tax is currently over 15% of all you have over one million dollars. Your loved ones might even face a forced sale of your treasured assets (e.g., the family business, home, or heirlooms).

The Osborne Firm regularly advises families in Maryland on the formation and maintenance of an array of intricate planning approaches such as Family Limited Partnerships (FLP), Family Limited Liability Companies (FLLC), Qualified Residence Trusts (QPRT), Irrevocable Life Insurance Trusts (ILIT), CRT’s, and SLATs. We also discuss a wide range of tactics to reduce Federal Estate Taxes, Gift Taxes and Generation Skipping Transfer Taxes.

H. DELAWARE ASSET PROTECTION TRUST

Delaware is one of the few states that allows an individual to set up their own trust in a manner that shields the assets from potential creditors and predators. Delaware Asset Protection Trust are effective tools in preserving assets for those engaged in high-risk services, such as medicine, corporate, and legal professionals. These trust are complicated, but very effective, and need to be designed and implemented by a Delaware attorney. The Osborne Firm can be of much assistance in establishing a trust of this type to preserve and protect your nest-egg from potential claims.