Estate and Wealth Planning


Home Estate and Wealth Planning

Largest Transfer of Wealth in History

wealth transfer, passing the baton

2/3's of Wealth is 1st Generation.

It's estimated that within a generation, greater than $16 trillion will be passed down to inheritors - the biggest wealth transfer in history from one generation to the next. Yet wealth rarely endures long enough to create a legacy that lasts for multiple generations. Research shows that individuals have every intention of transferring their knowledge to the next generation. However, it turns out that approximately 75% of the families are delivering too little financial guidance too late.

Planning is Critical.

People are generally uncomfortable talking about generational planning and creating more wealth however, without adequate planning people could lose up to half of their fortunes through inheritance taxes. As self-made UHNW baby boomers start passing on their wealth to their children, the importance of passing an understanding the family business, entrepreneurship, and a solid financial plan to to protect, preserve and grow the wealth is paramount.

How people pass on their wealth to the next generation impacts whether a family legacy will last for a single generation or well beyond. It also has broader economic and societal implications. If the current generation is able to transfer its knowledge as well as its wealth effectively, it could increase the likelihood that future generations will be better prepared to preserve wealth, drive economic growth and give back to their communities. The act of passing on one's wealth is about much more than wealth preservation; it's about creating meaningful legacies that reflect one's values.

One generation's success at building wealth does not ensure the next generation's ability to manage wealth responsibly, or provide effective stewardship for the future. In fact, research underscores the critical importance of advance preparation and effective knowledge transfer in preserving, protecting and growing wealth.

Creating your wealth transfer strategy.

You enjoy your wealth. But you also want to use it to make differencefor your family, your community and the charities and causes that mean the most to you. Having a smart charitable giving plan can also make a difference in your financial life now and help you preserve more of your wealth for future generations.

Being creative about how you transfer your wealth to your family or charity can make more of it available to them. It starts with making clear decisions about your objectives.

Who, what, when and how.

Answering these questions can help you choose the right strategic path:

Who: Is the primary beneficiary of your wealth going to be, your family or charity?
What: Do you want to transfer all, or some of your wealth, or just future earnings and income?
When: Do you want to transfer your wealth only after you die, or would you want to give some away during your lifetime?
How: Do you want to make an outright gift and give up control, or set up a trust to keep some control over how your wealth and your estate is distributed and spent?

Creating your Estate strategy.

Estate planning is one of the most important steps any person can take to make sure that their final property and health care wishes are honored, and that loved ones are provided for in their absence.

Your estate is comprised of everything you ownyour car, home, other real estate, checking and savings accounts, investments, life insurance, furniture, personal possessions. No matter how large or how modest, everyone has an estate and something in commonyou can't take it with you when you die.

Taxation Drives Trusts and Estate Planning.


1. ESSENTIAL ESTATE PLANNING focuses on protecting you in the event of incapacity and getting your property to right people, deferring taxes as long as possible and avoiding probate.

This is accomplished via Revocable Trusts which manages the estate after death and generally divides property into multiple Trusts to accomplish Tax efficiency whereupon death it becomes irrevocable. A Pour Over Will transfers any assets that were not transferred to your Revocable Trust during your lifetime, to a Revocable Trust. This leaves nothing in Probate and the property will then enjoy all Tax reduction and Asset Protection of the Trust. A Marital Trust and Family Trust holds the remainder of property until the death of the surviving spouse where then estate taxes are due, subject to any exemptions. If the combined value of the Estate exceeds 40% GST Generation Skipping Tax Exemption, then the property is divided into either: 1. an Exempt Trust where it can be passed down for generations tax free; and 2. a NonExempt Trust where each generation is subject to Estate Taxes.

2. ESTATE TAX LIQUIDIDTY PLANNING focuses on determining your eventual estate tax liability and ensuring that you have enough to pay those taxes.

This requires an approximate knowledge of your current net worth and over time, your projected net worth of your entire estate. Many high net worth individuals are illiquid and a result, the work is to create liquidity in an illiquid estate. How do you create liquidity in an illiquid estate? Via BuySell agreements with business partners to purchase your share at time of death, deferral of Estate Taxes Attributable to a CloselyHeld Business for up to 5 years and via Life Insurances and Life Insurance Trusts the most common form of providing liquidity where at death, the Life Insurances are to pay for the estate taxes.

There are two basic types of Life Insurances Term and Permanent whole Life, variable whole life, universal whole life among other types. The definition of the Insurance Policy, ownership and placement of the Policy is critical and has a radical effect on taxation of the Policy death benefit. If the Grantor owns the policy in his/her name the entire benefit will be included in your estate. However, if you transfer Policy Ownership to an Irrevocable Life Insurance Trust ILIT, which requires a 3 year wait before policy is excluded from your taxable estate, the payout is tax free.

Paying for the Irrevocable Life Insurance Trust ILIT requires special care. Your Trust must make the Payment. Therefore you must make a Gift (the premium amount) to the Trust from where then Trust makes payment to the ILIT. The Gift can be the annual Gift exclusion amount to anybody and Trust, is excluded moreover a common technique to pay for the Insurance ILIT premium is to place assets in the Trust that throw off cash flow ( Commercial Real Estate / Rentals etc.) via a Dynasty / Grantor Retained Annuity Trust GRAT a financial instrument used in estate planning to minimize taxes on large financial gifts to family members where the GRAT transfers as a nontaxable event.

3. ESTATE TAX REDUCTION focuses on reducing the size of your estate tax liability through a variety of sophisticated wealth transfer tax planning strategies.

The first goal in Level 3 is to reduce the value of your taxable estate. The second goal of Level 3 is to freeze the value of your taxable estate, so that any future appreciation in your assets occurs on a taxfree basis and to accomplish this, a combination of Valuation Discounts, Charitable Giving and Family Giving is required.

Valuation Discounts: Less than a majority ownership creates a value discount for several reasons. 1. Lack of marketability, it is very hard to sell minority interests. Therefore value is generally discounted. 2. Lack of Control, if an asset is subject to control of another person it is hard to pay Full Market Value. 3. Blockage, if it is unreasonable or unlawful to sell an asset in one piece such as a controlling interest, said asset may qualify for a Discounted Value. Discounted value is a great way for the parents to retain controlling interests with their children owning minority shares or percentages.

Family Limited Partnerships FLP's or Family LLC FLLC's are the most common methodology to reduce value. Property is contributed to the FLLC and hold any type of property however, it should not be a primary home, or personal vehicles. ( can be vacation home and vacation vehicles etc. ). The interests in the FLLC can be gifted or sold to your Family members to the Trust for the Family benefit. For tax reporting purposes, the appraised value of the Gift will need to be reported on your tax return. This enables you to gift up to 99% of the economic value without losing control and you are allowed to serve as the manager of the FLLC, enabling further control.

Charitable Trusts are designed to reduce the Estate through Charitable Giving structures and for those that qualify, charitable structures can also reduce Income Taxes. Among the different Methods of Charitable Giving, the most simple way to give, and reduce tax liability is just zero out the Gift Tax Exemption via direct giving. Split-Interest trusts involves charitable giving through an Irrevocable Trust where the goals are to reduce taxes while providing for the surviving family. Private Foundations non profit business ( non-profit company, Trust ) Tax exempt. Donor Advised funds Similar to an investment account that is set aside for charitable gifts and which charities will be involved.

Charitable Split Interest Giving Trusts:

CRAT Charitable Remainder Trust Saves Income Taxes and removes remainder interest from taxable estate.
CRUT Charitable Remainder Unit Trust Provides Income stream to family with eventual gift to Charity and removes remainder interest from taxable estate. Draw back requires annual appraisals).
CLAT Charitable Lead Annuity Trust Charity receives annuity payments and Family receives remainder. Effective for pushing value out of estate while preserving the asset. Drawback qualifies for only a 1 time upfront Income Tax deduction.
CLUT Charitable Lead Unit Trust Charity receives payments equal to or greater than the annuity amount or a % of the value of the Trust and Family receives remainder. Effective for pushing value out of estate while preserving the asset. Draw back requires annual appraisals.

The CRAT, CRUT, CLAT and CLUT are effective means of Asset Protection: as an outright gift to Family; are effectively used in a Family LLC's; and to keep charitable giving in the family where every lifetime dollar given away reduces taxes. However, these are all limited by the Lifetime Gift Exclusion Exemption. The key is to gift assets with high appreciation but are no longer needed.

Dynasty Trusts

Dynasty Trusts are very long-term irrevocable Trusts created to pass wealth from generation to generation without incurring transfer taxes, such as the gift tax, estate tax, or generation-skipping transfer tax GSTT, for as long as assets remain in the trust. Dynasty Trusts enable tax free transactions without triggering Income Taxes and the result is dramatic Tax Free income growth of the Trust.

Dynasty Trust Key Advantages:

You pay Income Taxes for the Dynasty Trust, which allows the property in the Trust to grow Income Tax free. At the same time, your taxable estate is reduced by the amount of the taxes that you pay on behalf of the Dynasty Trust. You will have received an allocation of GST tax exemption equal to value of Trust.
You and the Dynasty Trust are treated as one taxpayer, allows you to sell property to the trust without triggering capital gains and there is no interest income if the sale uses a promissory note. Income Tax attributable to the Trusts Income (remember Grantor Trust is your income).
You can create a private annuity with the trust, and no portion of the annuity payments made by the trust are taxable.
You can toggle off the grantor trust status at any time.

Dynasty Trust Sales Advantages Income Tax free transactions

Example: You purchased an asset for $100K, and sell it for $1M, there is a $900K profit and $135K Cap Gains Tax due. If this was done within a Dynasty/Grantor Trust there is no tax due.
You and the Dynasty Trust are treated as one taxpayer, allows you to sell property to the trust without triggering capital gains and there is no interest income if the sale uses a promissory note. Income Tax attributable to the Trusts Income (remember Grantor Trust is your income).
Example: Suppose you put $1M into the Trust, You then sell additional property with a $9M value to the Trust in exchange for a $9M Note with 10 year Terms. No taxes are due.
Example: You transfer the asset to a Trust in exchange for a promissory note to pay annual annuity payments over next 5 years. At the end of 5 years, you have received back the entire value of your note with %.

Beneficiary Controlled Trust

A Beneficiary Controlled Trust is fast becoming a favorite estate planning tool as rising real estate prices push up the value of middle class estates.

In a Beneficiary Controlled Trust, BCT the primary beneficiary acts as co-trustee and exercises nearly all of the rights, benefits, and control over trust property that a person would have over that same property with outright ownership but without the normal exposure to creditors, lawsuits, divorce courts, or the IRS. Example: Child could be beneficiary. Child pays taxes on behalf of Trust - using portion of Grantor's Life Time Gift Tax Exclusion. Child serves as Trustee. Child sells the property to the Trust at no tax. In time, child can switch off paying taxes, and force Trust to pay taxes.

Qualified Personal Residence Trusts

QPERT Qualified Personal Residence Trusts: A QPERT is a specific type of irrevocable trust that allows its creator to remove a personal home from his or her estate for the purpose of reducing the amount of Gift Tax that is incurred when transferring assets to a beneficiary.
You transfer the home to a Trust at a discounted value as you are living there and not selling it. Home appreciates over time.
Use the In exchange for the right to live there for a certain number if year say 30 years. At the end of the QPERT, the home passed to the child tax free.
However, the home is transferred at the discounted rate and can use the LTGTE to make the the transfer tax free.
How it works: Jane owns a piece of vacation property worth $1M that she wants to keep in the family. She forms a QPRT, and transfers the home to the QPRT. She reserves the right to live in the home for a certain number of years. From an accounting perspective, the total value of the home is divided between the right reserved by Jane (i.e. to live in the home for a certain number of years), and the right of the beneficiaries to live in the house at the termination of Jane's interest. It works out that the value of Jane's retained interest is $600K, while the value of the remainder interest is $400k. When the gift is made, Jane uses $400k of her lifetime gift tax exemption to transfer the house to the trust. Once Jane's time for living in the home has expired, the trust owns the entire home free and clear. In short, Jane was able to transfer an asset worth $1M while only using $400k worth of lifetime gift tax exemption.

Creating Trusts and Irrevocable Trusts and transferring assets therein involves complex financial, legal, tax, and other considerations. Please consult with tax and legal counsel before proceeding. In addition, Irrevocable Trusts cannot be changed or revoked by the grantor after it is created. That said, Trusts as oultined herein enable significant strategic benefits in reducing taxes.

Offshoring Provides Privacy and Protection.

Offshore LLC offer Privacy and Protection. First, there is no difference in the level of protection offered by an offshore corporation or an offshore LLC. They are equal in the eyes of the law. Offshore jurisdictions have always afforded them the same high levels of deference, and U.S. courts have generally maintained that a corporation is equivalent to an LLC for asset protection purposes. However, asset protection, privacy and taxation is in particular superior offshore. It is much more difficult to adjudicate offshore and for creditors it is nearly impossible. Moreover, there are taxation effeciciencies as in the case of Nevis, among others, it is exempt from all local taxes including Income Tax and Capital Gain Tax. Set up and operating is easy as in the case of Nevis, , among others, there are no statutory requirements for accountingaudit, no annual Board Meeting, General Metting, or reporitng requirements. While we have discussed the advantages for asset protection in Nevis, it is goodto reiterate that it is most difficult to pierce the LLC shell by a creditor and the like. Nevis is a great option for an offshore LLC.

Foundations: The Private Interest Foundation (PIF) finds its roots in the Principality of Liechtenstein, which in 1926 passed the law on Family Foundations for members of one or more families; and the law for Mixed Foundations, for family members, third parties and institutions.The principal difference between a private foundation and an offshore company is that a foundation, generally speaking, cannot engage directly in commercial business activity, although it can own investments such as real estate, shares, bonds etc. Private Interest Foundations can be useful for people who wish to control and maintain ownership of foreign corporations, Trusts, International Business Company (IBC) and LLC's but do not wish to have direct ownership of the corporation in order to avoid Controlled Foreign Corporation (CFC) rules in their home countries. High taxed countries such as the UK, Canada, USA, Australia, New Zealand, France, Italy, Spain, China, Taiwan, etc. have CFC rules that require citizens to disclose or report to the tax authorities any shares or interests they hold in foreign corporations. Thus, the PIF creats a vehicle that boasts both tax deferral and asset protection capabilities.

Time to Take Action.

Navigating wealth transfer, the Esate Tax spectrum and evaluating Onshore and Offshoring, even with clearly defined goals, is rarely simple. It takes a thoughtful plan and a smart strategy to manage it.

One generation's success at building wealth does not ensure the next generation's ability to manage wealth responsibly, or provide effective stewardship for the future. In fact, research underscores the critical importance of advance preparation and effective knowledge transfer in preserving, protecting and growing wealth. We are happy to help in all of these matters. Feel free to contact us.

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