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Tax Relief Reconciliation Act of 2001

Estate Planning Updates (Prior Update Letters)

The following is a very brief and limited analysis and summary of  prior newsletters to our clients and posted at our web site, highlighting  important changes in the laws, including the most recent Tax Relief Reconciliation Act of 2001 ("Act") and its impact on elements of the Estate and Gift Tax, Defined Contribution Plans and IRA contributions.

Tax Relief Reconciliation Act of 2001 ("Act")

Foreign citizens typically are  subject to different rules, which are beyond the scope of this Memorandum.

Most client trusts prepared by Stephens & Kray will not require any modification or changes to benefit from the most significant provisions of the Act that remain in effect through December 31, 2009.  However, the Act does change other planning techniques previously used for estates and gifts that exceed the newly enacted exempt limitations, and for family owned businesses that have adopted  ownership transition plans.
 

I. Term and Expiration of the Act.

II.   Estate Tax Repeal and Reductions in Tax Rates Prior to Repeal.

III.  Carry-Over Basis Increases Capital Gains and Income Taxes after repeal.

IV.   Defined Contribution Pension Plan Contributions.

V.   IRA Contribution Changes.

I.   Term and Expiration of the Act:

The Tax Relief Reconciliation Act of 2001 ("Act") was enacted with a ''sunset'' clause that causes all provisions of the Act to expire after December 31, 2010.
 

SEC. 901. SUNSET OF PROVISIONS OF ACT.
(a) IN GENERAL.--All provisions of, and amendments made by, this Act shall not apply--
(1) to taxable, plan, or limitation years beginning after December 31, 2010, or
(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.

II.   Estate Tax Repeal and Reductions in Tax Rates Prior to Repeal:

The Act repeals the estate tax for decedents dying after December 31, 2009. (Absent any further action by congress and the President, only decedent's dying after December 31, 2009 and before December 31, 2010 will be exempt from estate taxes!)

Similarly, the Act specifies that the generation-skipping transfer (GST) tax is repealed for generation-skipping transfers made after December 31, 2009.  However the Act retains the gift tax, and the effective tax rate for gifts after December 31, 2009 will be 35%, that will be applied against a lifetime exemption amount for gift tax purposes equal to $1,000,000.  This was  adopted to prevent the transfer of appreciated property to lower tax bracket taxpayers who could then re-gift the property back to the grantor.  (Alternatively, this could support speculation that the Act will not last beyond the next Congress (or the Sunset provisions), and therefore was adopted to discourage ways to eliminate estate taxes in the interim.)  A transfer in trust will be treated as a §2503 taxable gift, unless an exception is  provided by regulations or  the entire trust is treated as a grantor trust for income tax purposes as to the donor or the donor's spouse (i.e. the effect and benefits of the trust are not conveyed to the beneficiary until the death of the grantor or his/her spouse).

Commencing on January 1, 2002 through December 31, 2009, for decedents dying between these years, the Act reduces the effective estate and gift tax that will be imposed upon their estates.  The reductions are authorized by an increase in the unified credit that is applied to exempt transfers within credit limits from transfer taxes (and that currently exempts gifts and estates up to $675,000 from tax), and a decrease in the maximum estate and gift tax rates (that currently reach 55%). 

As previously mentioned, the unified credit exemption equivalent for gifts will be limited to $1.0 million.  The unified credit exemption equivalent for estates will be: (i) $1,000,000 for estates of decedents dying in 2002-2003; (ii) $1,500,000 for estates of decedents dying in 2004-2005; (iii) $2,000,000 for estates of decedents dying in 2006-2008; and (iv) $3,500,000 for estates of decedents dying in 2009.  [A husband and wife estate that uses a traditional credit trust for both spouses, should be able to avoid estate taxation of between $2.0 million and $7.0 million, depending upon the years of death.]

The maximum estate and gift tax rates have been reduced. For decedents dying and gifts made in 2002, the Act eliminates the two highest rate brackets of 53% and 55%, makes the highest rate bracket 50% for transfers over $2,500,000.  Also eliminated is the 5% surtax applicable to transfers over $10 million (which under §2001(c)(2) phased out the benefits of graduated estate and gift tax rates in the larger estates).  For subsequent years, the Act specifies that the maximum rates for decedents dying and gifts made are: (i) 49% in 2003; (ii) 48% in 2004; (iii) 47% in 2005; (iv) 46% in 2006; and (v) 45% in 2007-2009.

After December 31, 2009, there will be no estate tax, presuming the Act is not automatically repealed, and the gift tax rates will be set at 35%.

The Act also makes changes in the "Generation Skipping Transfer" ("GST")  tax.  The GST tax is a second estate and gift tax that is imposed when transfers of property are intended to "skip" or bypass a generation, i.e. a gift from parent to grandchild, or parent to child in trust and then to grandchild.   The GST tax is imposed at the highest tax bracket as if the property had in fact passed to the "skipped generation" and was fully taxable in their estates.   The current GST exemption exempts from GST taxes the first $1.0 million of these transfers, and this exemption amount will remain in effect through December 31, 2003.   For 2004-2009, the Act specifies that the GST exemption amount is the same amount as the unified credit exemption amount applicable to decedents' estates in those years.

III.  Carry-Over Basis Increases Capital Gains and Income Taxes after repeal:

Existing law provides that when property is passed by reason of death to the heirs of the decedent, the basis of the property will be "stepped-up" to the fair market value at the date of the decedent's death, eliminating or reducing capital gains taxes if and when the property is ultimately sold.  However, commencing with the repeal of estate taxes, recipients of such property will receive a basis equal to the lesser of the decedent's adjusted basis in the property or the fair market value of the property on the date of the decedent's death.  This means that the property may be subject to a capital gains tax upon ultimate sale.

The Act does however permit a decedent's estate to increase the basis of assets transferred, as determined on an asset-by-asset basis, by up to a total of $1.3 million, and also allowing increases to the  basis of assets by the amount of the decedent's unused capital losses, net operating losses, and certain built-in losses.  The Act permits an additional $3 million increase to the basis of property that passes to a surviving spouse, either outright or through as a  qualified terminable interest.   The basis of an asset however may not be adjusted above its fair market value.

IV.   Defined Contribution Pension Plan Contributions:

The $35,000 limit is increased for plan years beginning after December 31, 2001 to $40,000. In future years, this amount is indexed in $1,000 increments.  Beginning after December 31, 2001 the 25% of compensation limitation goes to 100%.

The 2001 Act increases the dollar limit on annual elective deferrals under §401(k) plans, §403(b) annuities and salary reduction SEPs to $11,000 in 2002. In 2003 and thereafter, the limits are increased in $1,000 annual increments until the limits reach $15,000 in 2006, with indexing in $500 increments thereafter. The Act increases the maximum annual elective deferrals that may be made to a SIMPLE plan to $7,000 in 2002. In 2003 and thereafter, the SIMPLE plan deferral limit is increased in $1,000 annual increments until the limit reaches $10,000 in 2005. Beginning after 2005, the $10,000 dollar limit is indexed in $500 increments.

Effective for plan years beginning after December 31, 2001 the annual limitation on the amount of deductible contributions to a profit-sharing or stock bonus plan is increased from 15% to 25% of compensation of the employees covered by the plan for the year. Finally, the 2001 Act provides that elective deferrals are not subject to the deduction limits and the application of a deduction limitation to any other employer contribution to a qualified retirement plan does not take into account elective deferral contributions.

V.   IRA Contribution Changes:

Beginning after December 31, 2001, the 2001 Act increases the maximum annual dollar contribution limit for traditional and Roth IRAs from $2,000 to $3,000 in 2002, $4,000 in 2003, and $5,000 in 2004. The limit is indexed in $500 increments in 2005 and thereafter. The current year phase-out rules continue to apply.  The maximum annual contribution that can be made to a Roth IRA is phased out for single individuals with AGI between $95,000 and $110,000, and for joint filers with AGI between $150,000 and $160,000.

After December 31, 2002, the 2001 Act provides that individuals who have attained age 50 may make additional “catch up” contributions” of $500 for 2002 through 2005, and $1,000 for 2006 and thereafter, but subject to the AGI phase-out limits.

The primary purpose of this update Memorandum is to alert you to important changes that have occurred in the law that may require changes to your estate planning documents or changes in the way that you want your assets administered at death or while living.

We have prepared a standard form "Amendment to Trust" that will easily accommodate most Stephens & Kray "Revocable Trusts". 
 

• While these amendments may not be necessary in all client matters, the changes are generally harmless even if not required, and they have been incorporated into all of our standard form documents.

• If after reviewing the discussion below, you believe that you may be a good candidate for the amendment, please contact us to authorize the amendment.

• If you are unsure but prefer to have our most current language, please contact us.

We also urge you to review our December, 1997 Update Memorandum, as it summarizes many of the sophisticated estate planning solutions that we currently use and is more fully described in other articles at our web site, The December, 1997 Update  appears immediately following this Update.

Retirement Plan, Pension and IRA Distributions and Benefits: This area of planning in particular the designation of beneficiaries of these "Plan Benefits", has undergone the most amount of change, and may require one or more amendments to your Trust and estate planning documents that we have included in our standard form Amendment to Trust.

Valuation Discounts: This area of planning has seen favorable taxpayer Court decisions, as the Court and the IRS have been acknowledging valuation discounts.  However, the IRS has poised their challenges to the form and substance of these transactions, and have had some success in these areas.  This area of change requires a re-evaluation of planning opportunities, and has not been incorporated into our standard form Amendment to Trust.

Discussion.

Recent changes in California's Community Property Laws, coupled with aggressive tax positions taken by the Internal Revenue Service ("IRS"), faulty reasoning by the Tax Court, IRS pronouncements and recent private letter rulings, and new Treasury Regulations ("Regulations") that offer guidance for taxpayer elections to receive distributions from Plan Benefits and designating beneficiaries, have made this a new and very important area that may require additional consultation with your tax advisor and/or amendment to your estate planning documents.

Important Issues for Husband and Wife Community Property Estates/Trusts that have Plan Benefits that exceed 25% of their community property interests.  If a material portion of your husband and wife estate (consisting generally of 25% or more) consists of Plan Benefits, and you believe your total estate is able to avoid estate tax because of the unified credit that will be exempting up to $2.0 million of husband and wife estates you may not be eligible to use the full unified credit.

The Tax Court has not fully recognized the validity of community property laws when dealing with Plan Benefits at a death.  As a result, the IRS does not have to recognize the community property interest of the non-participant spouse to Plan Benefits upon a death, notwithstanding the fact that California law requires that this asset be shared equally among spouses under community property laws, and the existence of Internal Revenue Code provisions that apply California law in dissolutions of marriage.  The Tax Court has refused to treat death in the same way that a dissolution of marriage is treated.

What this means is that the IRS (and Tax Court) will not allow the first spouses to die to  use the full value of their unified credit against estate taxes (currently at  $1.0 million for each spouse) if the community property asset consists primarily of  Plan Benefits.  Short of entering into a divorce prior to the death of a spouse, there are creative solutions that we have incorporated into our standard form trusts and our proposed Amendment to Trust. None of these solutions have been fully approved by the IRS or the courts. 

While our husband and wife "living trusts" have always had language that enables us to argue that the full unified credit is always available, recent changes in California law and court cases have provided further guidance for us to "fine tune" our language, and provide greater chances of success in the event of audit (and before Congress chooses to intercede in the same way they did in dissolutions of marriage).  California recently enacted authority to "aggregate" and allocate community property in the manner previously authorized by our Trusts.   The IRS however with the support of the Tax Court has taken aggressive positions to undermine this remedial legislation and therefore we have re-written our Trusts with new language that hopefully avoids the pitfalls of Tax Court cases that favor the IRS positions.

IRA Elections and Payouts.   If you have been keeping up on the types of property that gets hit the hardest for estate and income taxes, you presumably know that most Plan Benefits (IRAs and qualified retirement plan benefits) are among them.  The area includes employee stock and options.  Both of these areas are quite complicated, and I will reserve employee stock and options for another article.  However, in the case of Plan Benefits, there are two potential sources of savings. 

The first potential area of savings is that you are allowed to deduct from the income taxes payable on distributions of Plan Benefits, a portion of the estate tax that was paid on those assets, as the benefits are distributed and the income is reported.  This is far from a dollar for dollar savings, but does offer some help.

The second potential area of savings, and possibly a more valuable savings, is that if you properly name your beneficiaries upon a death, they can defer taxable distributions of Plan Benefits and therefore funds retained in the retirement plan will continue to accumulate tax deferred, until distribution.  A benefits distribution schedule could then be adopted that can run until the beneficiary's actuarial life expectancy, payable in the manner that minimum distribution schedules are adopted by plan participants who attain age 70 ½, but these distributions will start by December 31 of the year following the participant's death.  By deferring these distributions, the beneficiary can get the benefit of tax free investment accumulations of the account, that may substantially increase the long term tax savings and benefits.  If the beneficiary designation is not properly made, then the income tax must be paid by December 31 of the year that is 5 years after the death of the participant.

Naming Beneficiaries Under Proposed Regulations.  These rules are very complicated, and are different if the Plan Benefits beneficiary dies before making elections at age 70 ½ (which must be made by the April 1 immediately following attainment of age 70 ½ ), or if the participant dies after receiving the mandatory minimum distributions at age 70 ½.  In both cases, the participant must have selected a "Designated Beneficiary" or "DB", whose life will be used to determine the payout term.  Once the participant begins withdrawing benefits after age 70 ½, the DB cannot technically be changed.  The DB can however be changed at any time prior to age 70 ½ mandatory distributions (April 1 following attainment of age 70 ½).   It should be noted that the DB once selected, and if non-modifiable, does not have to be an actual beneficiary, as the participant can change who is entitled to receive the Plan Benefits upon his or her death, or provide for a "contingent beneficiary" if the DB predeceases.  The deferred benefits payout in the case of a change only, but not in the case of a prior death of the DB, will however be based upon the shorter life of the DB or the new beneficiary.  If no DB has been selected, then the longer term payout and tax deferral is not available, and five year rule to recognize income will apply.

There are benefits to selecting a surviving spouse as the DB and beneficiary.  Upon his or her death, he or she can take over ownership of the Plan Benefits, and therefore is allowed to make elections for a new DB, regardless of his or her age at the time he or she takes over the Plan Benefits.

Naming Living Trusts as Beneficiaries.  Living trusts, but never "estates" can be named as beneficiaries of Plan Benefits without losing these valuable income tax deferral benefits; provided that the Trust contain special language to prevent uses of these benefits for any other tax, trust or estate purposes.  If a benefits plan has not been divided up into multiple plans with multiple DBs, the oldest beneficiary among any class is used to determine the actuarial life of the DB. 

We recommend that you not use your trust as the beneficiary of your Plan Benefits, however, in cases of minor children or the need for "spendthrift" trusts, these new Regulations and changes to your Trust may be worth considering.  We have therefore modified our standard form trusts to accommodate these types of gifts, and included these amendments into our proposed standard form Amendment to Trust.

New uses for the QTIP Trust for Valuation Discounts.  The QTIP Trust (also known as the qualified marital trust or the qualified terminable property provision trust), was enacted into the law to enable a husband and wife to leave their entire estate to the survivor of them and not incur any estate taxes at the first death, yet prohibit the surviving spouse from leaving the property to anyone other than the children or heirs of the first to die.  The QTIP was primarily used by spouses who had children from a prior marriage, or in cases wherein the husband and wife wanted greater asset protection over the assets left to their heirs. Recent court cases now recognize QTIP trusts as different property owners, separate and independent from the surviving spouse (even when the surviving spouse is the trustee), and therefore entitled to valuation discounts on the assets that are partially owned by the QTIP trusts.  As a result, the QTIP trust is becoming an inexpensive way to do sophisticated estate planning and obtain moderate valuation discounts on co-owned properties.  Generally, each dollar of discount results in a tax savings equal to the applicable federal estate tax bracket, that quickly increases to 50%, and at that bracket, will save your heirs $0.50 for each dollar of discount.  If you have not undertaken transition planning that maximizes valuation discounts, you may want to consider use of a QTIP trust. 

The primary purpose of this update letter is to alert you to changes that have occurred in the law that may require changes to your estate planning documents or changes in the way that you are administering your estate plan.  A second purpose is to reacquaint you with the scope of our estate and financial planning services and additional planning ideas under current law.

Our typical husband and wife Trust Agreement has been drafted to achieve a -0- estate tax and simplified administration of the estate at the first spouse's death and incorporates our  basic formulas to take advantage of the Unified Credit.  The economic benefits of using our basic formulas enables most of our clients to obtain a husband and wife living trust at a most reasonable price.  From time to time we update and modify our basic formulas, to take into account changes in the law and other areas of tax savings that will apply in most situations. 

However, there are several other types of formulas that may work better than the basic formulas used for husband and wife estates that consist of rapidly and "highly appreciating" properties and  values that exceed Unified Credit amounts.  The adoption of these formulas requires a more in-depth analysis that includes projections of the total value of your estate, the types of assets it will hold at the first death of a spouse, the anticipated timing of the administration of an estate, and the benefits of paying some additional estate or income taxes at the first death.

Clients utilizing these other formulas would have expressed concerns that any potential delay in the first death administration of a husband and wife Trust estate could cause the estate to lose additional benefits of the Unified Credit that would be available if Trust properties rapidly appreciate within the 6 to 18 month period following the first death.  The great majority of Trusts that contain our basic formulas do take into account aspects of  this complex form of analysis.

However, because our basic formulas and Trust Agreement use standardized mechanisms to reduce "over-all" estate and income tax liabilities, they may not produce the greatest possible tax savings for short-term and rapidly appreciating estate property that exceeds the Unified Credit.

It is therefore our recommendation that if (i) the composition of husband and wife estate assets (such as  pension plan assets, IRAs and highly appreciating assets) has changed, or (ii) the current value or the size of the husband and wife estate has changed, or (iii) if you feel you want a more thorough and tailored analysis of how your Trust utilizes the Unified Credit, in light of those factors discussed in this update letter, or (iv) your Trust is more than 5 years old, or (v) you merely want to adopt our current formulas into your Trust,  your estate plan should be reviewed to determine if it continues to achieve your objectives.

Assuming no changes are recommended, the review can require as little as one (1) hour of billable time.  Assuming modest changes to adopt our current formula language, the charge can be as little as two (2) hours of billable time. In most cases a complete restatement of your current documents with our latest document can cost between $1,250 and $1,500.   A more in-depth review will require hourly charges commensurate with the amount of analysis desired. 

I  have outlined in our web page at: , in my Article: Estate Planning, a brief discussion on the current status of estate planning as it has been impacted by recent legislative changes.
 

2. Life Insurance Trusts, where one Spouse is a Trustee and/or Beneficiary 

Most clients who utilize these form of trusts are periodically partitioning community property into separate property under Pro-Forma Marital Property Agreements.  The spouse who created the trust is then contributing his or her separate property interest to the life insurance trust and the other spouse is saving and investing his or her separate property, or spending it or using it for his or her own benefit.  All of you who have this these types of trusts were previously alerted to the risks of further IRS scrutiny.

The IRS has attempted to clamp down on Crummey Trusts used to remove life insurance from the taxable estates of both a husband and wife.  Although their recent efforts, discussed below, will have little impact on most life insurance trusts prepared by this office, the mere fact that they are still attempting to find ways to deny taxpayers the benefits of the Crummey Trust is a cause for concern.

I am therefore recommending that the Pro-Forma Marital Property Agreement be used to provide a more significant and longer lasting economic effect by causing a partition of a larger sum of property, more than is needed for the annual insurance policy premium, to enable both spouses to accumulate separate property, independent of the other.  This accumulation, if substantial enough and invested wisely, may eliminate the need to annually partition community property.  The greater the economic integrity of the partition, the less likely the IRS will be able to assert that the partition was merely a device designed to avoid paying estate taxes.

While our current recommendations may be "overly cautions and conservative," if you are in the financial position that you can observe them, and your estate is of a size that the imposition of an estate tax on the insurance proceeds held in your life insurance trust, could result in a serious financial loss, I recommend that you follow these new guidelines.

If you have any questions, or require any assistance filling in the blanks on the Pro-Forma Marital Property Agreement form, please contact me.
 

3. Life Insurance Trusts, with more than one Child as a Trust Beneficiary, that provide for a loss of benefits if the Trust Beneficiary exercises a Crummey Right of Withdrawal

 The traditional form of this trust is one that was created before 1997, as single irrevocable trust document to acquire life insurance, that was created by the husband and/or wife as the Settlor/Trustor, with more than one child, as the Trust Beneficiary and a withdrawal right to demand distribution of any gift to the trust valued at $10,000 or less.

The IRS has attempted to deny the validity of trusts that have trust beneficiaries solely for the purpose of increasing the amount of the annual gifts that a grantor can make to the trust.  In other words, they are looking into situations where there are "bogus" trust beneficiaries.  Very few, if any, of our trusts have situations where one can identify a "bogus" beneficiary.  However,  the IRS has issued warnings about any trusts that "penalize" a trust beneficiary for exercise of their Crummey power to withdraw.  There is a valid business reason to deny insurance benefits to a child who exercises the Crummey power to withdraw and denies the other trust beneficiaries of the ability for the trust to pay annual life insurance premiums.

It is uncertain whether or not the IRS will attempt to challenge these situations.  Privately, one of their head agents, Chuck Morris, has told me that they are not a problem.  Nevertheless, we have changed our documents, and I feel that it is important to advise you, in case you want to make any changes in your estate planning documents.

I have always recommended that you do not fund life insurance trusts with assets other than life insurance policies, further justifying the business and economic reason for the termination of a Trust Beneficiary's interest if he or she exercise a withdrawal.  Depending upon your situation, the cash surrender value in your policy and the ages of your children, it may make sense to stay on the safe side in this matter, and contact me to discuss how to reorganize your estate planning to eliminate this potential risk.
 

4. Use of Family Limited Partnerships and Valuation Discounts for Gifts and Bequests, which discounts solely exist because of the terms of the Family Limited Partnership

Valuation discounts for minority positions and lack of marketability are well embedded in the law.  However, the IRS has initiated court battles in clear situations where they see abuses.  Out of those cases they have developed legal arguments to pursue challenges to valuation discounts and other estate planning techniques currently supported by case law.  Their new approach focuses on the use of the family partnership as a device to avoid estate taxes, especially in those situations when there is little evidence that it is being used as a means to allow for a meaningful and organized transition of a family business or family owned properties to family members.

Our Family Limited Partnerships authorize the appointment of an Advisory Committee, who can be composed of Limited Partners, acting in a non-managerial capacity.  We continue to urge that you formalize these Advisory Committees with your children, maintain annual minutes of meetings and undertake activities that help the children become aware of the properties and the business of the Family Limited Partnership.  We have now included as part of our year end mailing for corporate update letters, our recommendation for annual minutes for your limited partnerships. 
 

5. Changes in Durable Power of Attorney for Health Care

The original Durable Powers of Attorney for Health Care were limited to a five (5) year term.  At page 1, Paragraph F of the Durable Power of Attorney, there is a bolded paragraph that should set out whether or not it is limited in duration, or is unlimited.

If your Durable Power of Attorney for Health Care is more than five (5) years old, it is recommended that you review it to confirm that it is for an unlimited duration.
 

1. Selection of Appropriate Planning Techniques

As a general rule, the size of the estate will determine the amount of planning and sophistication of planning that you should pursue.  The current Unified Credit is  $1,000,000.  As a result, a husband and wife through properly drafted documents can avoid estate taxes on estates of $2.0 million.  You must keep in mind that life insurance on the life of any person, or spouse, is part of the taxable estate, unless either (i) an irrevocable life insurance trust was properly adopted, or (ii) the life insurance is owned by children with no incidents of ownership held by the insured or his/her spouse.
 

2. Annual Gifts 

3. IRA and Pension Plan Issues

4. Estates That Will Exceed Unified Credits 

Favored sophisticated estate planning techniques include the use of:
 

1. Qualified Personal Residence Trusts - used to eliminate from a taxable estate the value and appreciation of a personal residence, without the parents having to give up use and current possession of the residence; 
2. Family Limited Partnerships - used to assist in the transition of family owned businesses and property, at favorable tax rates, because of available discounts that can be taken on the value of Units or Shares gifted;
3. Insuring that transfers to children can avoid an estate or gift tax at their deaths, by use of Generation Skipping Transfers that comply with the Internal Revenue Code; and 
4. Gifts of cash, stock or limited partnership or limited liability units to trusts for children and grandchildren or directly to children and grandchildren. 

Other sophisticated estate planning techniques will attempt to utilize other aspects of Trust taxation and valuation techniques, in addition to other types and forms of doing business, buying and selling businesses, and general contract rights, royalties, etc.  These types of plans require special tailoring for each client situation and objective and further evaluation of both estate and income tax issues, including social security and medicare taxes.  Generally included in this category of estate planning are Charitable Remainder Trusts, Business Trusts, Family Annuities, and Grantor Annuity Trusts (GRUTS and GRATS), Installment Sales Transactions, Defective Trusts, Dynasty and Generation Skipping Trusts, Foreign Annuities,  among others.

Anyone interested in reviewing their existing estate plan to determine whether or not sophisticated estate planning techniques or more exotic estate planning techniques are best suited for them and their families, should contact me.  Keep in mind that these estate planning techniques revolve around reducing and eliminating estate taxes for the benefit of children and grandchildren.  The costs of implementation are in direct proportion to the degree of control desired to be retained by the grantor of property, and the sophistication of the planning techniques.
 

Because of the litigious nature of our society, Asset Protection has become a significant factor in designing estate plans.  More than 80% of all sophisticated estate plans incorporate elements of Asset Protection.  I refer you to my article on Asset Protection at our web page, located at: for a more in-depth look at the subject.  Briefly, there are five (5) primary areas that Asset Protection will focus upon.  In the order of simplicity and least expense, they are as follows:
 

1. Statutory Exemptions: Homestead, IRAs and Retirement Plans 

If there is any concerns over risks posed by creditors the safest approach is to homestead your home and maximize your use of IRAs and Retirement Plans that by statute can avoid the reach of creditors.  Corporate plans are better protected than IRAs which do not protect funds in excess of what is  deemed adequate to provide for your retirement.
 
1. Gifts to Children and Others 

If gifts can be made that do not render the Grantor insolvent or otherwise unable to pay his or her creditors, gifts can be very effective to move assets out of an estate.  However, once given they are gone, and unless more sophisticated gifting techniques are used to retain control over property, the Grantor departs with all rights of income, control and principal.

3. Incorporation or Formation of a Limited Liability Entity

A very basic step involves the operating of any trade or business in a corporate form of doing business, or use of other limited liability entities, such as limited partnerships, limited liability companies, or business trusts.  The proper operation of most businesses as a limited liability entity, with certain exceptions, is intended to protect all property held outside of the business entity, from the reach of business creditors.

4. Marital Property Divisions 

The general rule is that the separate property of one spouse is not liable for the debts of the other spouse.  Although community property is liable for the debts of both spouses, separate property is only liable for the debt of the debtor spouse.  These rules are designed to protect inheritance, personal injury awards, and property generally acquired before the marriage, or by contract segregated from the marriage's community property.

5. Family Co-Ownership

This involves the most sophisticated forms of property ownership and creation of contract rights through agreements and includes the use of sophisticated estate planning techniques.  It offers an ability to retain both the financial benefits and control in a variety of situations including the pursuit of business objectives, yet it prevents creditors of non-voting ownership units or shares from penetrating into the business activity and taking the business property.  Most any form of business entity is a candidate to achieve asset protection objectives The family limited partnership is touted as an excellent candidate, because of established case law limiting the remedies of any creditor of a partner to a charging order, entitling that creditor with only the property that will be made distributable to the debtor partner.  However, other entities, such as business trusts, corporations and limited liability companies are available.  The planning becomes complicated because all other traditional  issues must still be addressed, from income taxes to estate planning, to employee compensation and benefits.  This is because businesses generally operate pursuant arms-length agreements, that are entered into for "fair consideration" and with a reasonable business purpose, and by statute, any transfers for less than fair consideration will be deemed fraudulent when made to avoid payment to creditors.

 

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