Last Will and Testament
Revocable Living Trust (RLT)
Health Care Documents
Irrevocable Life Insurance Trust (ILIT)
Grantor Retained Annuity Trust (GRAT)
Qualified Personal Residency Trust (QPRT)
Children’s Trusts
Family Limited Partnership (FLP)
Private Foundation
Lifetime Credit Shelter Trusts
Last Will and Testament
Estate Concerns
The Last Wills and Testaments that we prepare include a structure that resolves the ever-changing estate tax law and, in particular, the current legislative uncertainty and ongoing discrepancy between the New York, New Jersey, Connecticut and federal estate tax credits.
These Wills allow the surviving spouse the flexibility to choose the most tax-efficient election at the time of the first spouse’s death, based on the size of the client’s estate and the law at that time, through the use of tax-planning trusts.
Guardianship
Parents with minor children must prepare a Last Will and Testament to identify guardians for the children. Without such direction, the children’s guardians will be appointed by a court and not chosen by the client.
We will assist our clients in developing a comprehensive plan and path in place that sets forth their intentions for the manner in which they wish for their children to be raised and their expectations of the guardians in the event that both parents pass away while their children are young.
These instructions may include alternatives to the primary guardians if they pass away or divorce, an advisory group to assist the guardians in making decisions and understanding the parents’ objectives, and guidance regarding the priorities for the children’s education, medical treatment, religious and spiritual upbringing.
Asset Protection Concerns
After both parents have passed away, it is important to implement lifetime trusts for the benefit of the children.
These lifetime trusts will allow for the inheritance that the client has left the children to be protected against any reversals (i.e. divorce, bankruptcy, creditors, and law suits, etc.) that the children may encounter, while adequately providing for their various health, education, and quality of life needs.
These trusts will also ensure that, when a child passes away, any remaining assets are directed to that child’s children (the grandchildren) and not to any unintended beneficiaries.
At certain ages, the children can be appointed to serve as co-Trustee, and later sole Trustee, of their own trusts. This ensures that they will be able to control these assets at the appropriate time and make the decisions as to how the assets may be invested, managed, and distributed.
Revocable Living Trust (RLT)
Individuals and families residing in Connecticut or owning property in multiple states must consider a RLT as an alternative to a traditional Last Will and Testament.
Trusts created under a Last Will and Testament in Connecticut are subject to Connecticut income in perpetuity, regardless of where the beneficiaries and Trustees live.
If property is owned in a state in addition to the one in which a person resides, they must go through probate in both states, dramatically increasing the fees associated with the estate administration.
The RLT resolves the issues unique to Connecticut residency and also causes the property transferred to it during a person’s lifetime to be exempt from probate proceedings. As Trustee of the RLT, the individual has the power to manage all property as if it remained in his or her name individually.
The RLT is also a valuable planning structure for those who suffer from a prolonged inability to manage their affairs. Upon incapacity, the RLT provides for a succession of alternate Trustees to allow for continuity in the management of the assets in the trust. The appointment of these Trustees is preferable to relying on the agents named under the Durable General Power of Attorney because the Power of Attorney is primarily designed to provide solutions for a temporary incapacity, and are not an adequate long-term remedy.
After an individual passes away, the RLT takes the place of the Will by directing how assets should be distributed and addressing the important aforementioned estate tax and asset protection concerns.
Health Care Documents
The purpose of the Health Care Proxies and Living Wills are to appoint trusted family members and friends with a broad list of powers to make medical decisions on an individual’s behalf.
These documents will provide guidelines to those individuals with respect to the individual’s wishes and intentions for health care including the type of treatment the client wants to receive, the maintenance of the client’s quality of life, and a timeline for the removal of life support if the client has a terminal condition or is in a coma.
Authorization for Release of Protected Health Information
Due to changes in the law, hospitals and/or physicians will not release any medical information to anyone other than the patient, unless an official HIPAA release document is signed.
Without an Authorization for Release of Protected Health Information, in an emergency or if an individual is incapacitated, the named health care agents will be unable to access his or her medical records if they need to transfer him or her from one care facility to another, obtain a second opinion, or establish a medical history.
Durable Power of Attorney
The Durable Power of Attorney permits trusted family members and friends the authority to take action on an individual’s behalf with respect to an array of financial, legal, and personal matters (other than health care).
The Power of Attorney is absolutely essential if the client is incapacitated or otherwise unable to manage his or her own affairs.
Without an executed Power of Attorney, no one (not even a spouse) may provide this type of assistance in a time of urgent need without court approval.
The Power of Attorney also includes important provisions that will give the children’s guardians the authority to assist in caring for them if both parents suffer from a long-term incapacity.
Health Care Proxy and Authorization for Release of Protected Health Information for Minor Children
In the event that both parents are unavailable (for example, because one may be travelling, unreachable at work, or in an accident) and their children require medical care, a hospital or doctor’s office will reject the treatment that they need, unless there is a clear risk of death.
In the past, care providers have been sued for wrongly treating children without the consent of the parents and now mandate formal written permission from a child’s parents if they are not present or cannot be contacted.
In order to assure that a client’s children are treated properly and immediately, their Health Care Proxy and Authorization for Release of Protected Health Information will name representatives who will be able to (i) receive their critical medical information; and (ii) make medical decisions for them if the parents cannot do so.
Irrevocable Life Insurance Trust (ILIT)
The ILIT is a valuable estate planning instrument in which a trust purchases the ownership of life insurance policies during the insured’s lifetime. The ILIT will also be the named beneficiary of the policies after the insured passes away.
The successful transfer of life insurance policies into an ILIT will effectively eliminate estate taxation of the death benefit and proceeds of the life insurance.
For any policies currently owned by the insured, a precondition to the exclusion of the insurance proceeds from the estate is that he or she must survive the transfer of ownership by three (3) years. Therefore, it is absolutely essential that the ILIT is put in place in a timely manner to ensure that the effective transfer of the insurance occurs as soon as possible in order to minimize the risk that the insured may pass away before the 3-year “look back” is complete.
The ILIT will continue after the client’s death for the benefit of the surviving spouse and children. This strategy will serve as the means for protecting the assets for their use and enjoyment. The ILIT will provide guidelines for the management and distribution of the assets similar to the trusts created under a Will or RLT.
The ILIT singularly has the most profound impact on estate tax savings to an individual’s heirs, without surrendering control of assets that he or she needs to live off of today.
Grantor Retained Annuity Trust (GRAT)
The purpose of the GRAT is for an individual to effectively make a loan to his or her children (or other beneficiaries) where they will benefit from any growth above the initial contribution plus a very modest rate of interest.
To be valid, the loan must be paid back (with the interest) in installments, or annuities, over a fixed period of years and the client must outlive the final repayment.
Any assets remaining in the GRAT (after all annuities have been paid back to the client) will pass to the named beneficiaries. Since the GRAT is deemed a loan and not a gift, no gift or estate tax is due on the GRAT assets that the children will receive.
Qualified Personal Residency Trust (QPRT)
The QPRT is a tax-favored manner of making use of the lifetime gift tax exemption by transferring a residence into trusts created by an individual for a specified timeline (the “Initial Term”).
In transferring the residence to the QPRTs, three (3) factors help to significantly decrease the value of the property for gift tax purposes:
(i) the present weakness in the real estate market and the general illiquidity of real estate that allows the residence to be undervalued;
(ii) by transferring 50% of the residence into one QPRT and the other 50% into another, the value of the residence enjoys a manufactured discount based on the additional illiquidity of each fractional interest;
(iii) because the QPRTs exist for a period of years, the IRS allows a substantial discount based on the duration of the Initial Terms and the individual’s current age.
Even though the residence is held in the QPRTs, the individual maintains control as the Trustee during the Initial Term and lives in the house rent-free. During the Initial Term, he or she may also improve or sell the property, and purchase a new house using the QPRTs.
In order for the QPRTs to be successful and the residence excluded from the individual’s estate, he or she must outlive the Initial Term of the QPRT. Therefore, the selection of the Initial Terms must follow careful consideration that balances the client’s life expectancy with the desire to minimize the use of the lifetime gift exemption.
After the Initial Term, the residence will remain in trust for the benefit of the children. The trust will provide that the residence may not be sold while the individual occupies it, and he or she will be required to pay rent as a tenant. The rent payment will serve to assist the children (through the trust) in paying expenses they incur in managing and maintaining the property.
Family Limited Partnership (FLP)
A FLP is a business entity that provides federal gift and estate tax benefits and protection of the assets that have been transferred to the FLP.
Certain portions of a family’s investment assets may be ideal for the funding of the FLP in order to consolidate the management of such assets.
The parents may consider selling their partnership interest to their children’s trusts (described below) in exchange for a promissory note for 100% of the value of the units.
The note will be paid off over a term of years from the income derived from the growth of these assets, thus allowing the parent a supplementary stream of support. If necessary, the payments on the note may be accelerated to reduce the debt and increase equity of the children’s trusts.
Furthermore, any appreciation in the investment assets over time passes entirely to the children’s trusts because the trusts are “intentionally defective”, meaning that the parents cover the trusts’ income tax liability from their personal funds.
Children’s Trusts
During a parent’s lifetime, trusts created for the benefit of the children serve the purpose of protecting and managing assets that are sold or gifted to them.
During the children’s lifetimes, the assets in the trust may provide for their health, education, maintenance, and support needs.
Upon the establishment of each trust, (or if the children are too young, at a certain age), each child will be able to serve as Trustee and will be responsible for administering the trust assets and determining when distributions may be made.
As is the case with each of these types of trusts, the assets are insulated from vulnerability to invasion from outside sources.
The trusts also allow the parent to take advantage of each of his or her thirteen thousand dollar ($13,000.00) annual gift exemption. Once contributed to the trust, these tax-free gifts will continue to grow in value outside of the parent’s estate, and therefore will not be subject to estate tax when he or she passes away.
The trusts will be “intentionally defective” and the parent will have the responsibility of paying the trusts’ income tax each year. At any time, the parent may remove the defective nature of the trust and thereafter the Trustee of each trust would pay the income tax from the trusts’ assets.
Private Foundation
A private foundation is both an income tax planning strategy and an estate tax planning strategy. The private foundation is a tax-exempt charitable entity created by a family that is operated as a not-for-profit corporation under state and federal law. The foundation’s purpose is to receive gifts and make disbursements of those gifts to charities.
Income tax benefits are derived when a person contributes cash or appreciated stock into the foundation because he or she will then enjoy a full charitable deduction for the amount contributed (up to 33% of adjusted gross income). Thereafter, the obligation of the foundation is to contribute 5% of the principal on an annual basis to the public charities of the client’s choice.
From an estate tax perspective, the person’s estate would be entitled to receive a charitable deduction for any portion of the assets passing under his or her Last Will and Testament that have been earmarked as a gift to the private foundation.
The foundation is comprised of at least three (3) individuals who are designated as Trustees. Each of the Trustees would manage the assets in the foundation and then distribute the required 5% of principal to public charities on an annual basis.
The foundation’s continued existence beyond the lifetimes of the family members will help to ensure that their wishes to assist worthy charitable causes and programs will occur through the effort of their descendants.
Lifetime Credit Shelter Trusts
In December of 2010, the estate tax exemption amount and lifetime gift exemption amount were each increased to $5.0MM per person for the next 2 years.
This compels both spouses to make an effort to allocate $5.0MM in each of their individual names to ensure that the estate tax exemptions are fully utilized if either spouse passes away.
However, depending on the action that Congress takes, beyond 2013, one may not have the opportunity to each leave $5.0MM to one’s children free of federal estate tax after death. In 2013, the exemptions are scheduled to return to $1.0MM.
A possible resolution is that either spouse or both spouses can use all or a significant portion of their lifetime gift exemption using trusts.
The spouse and children would be the beneficiaries of each trust and distributions may be made at any time for each beneficiary’s needs.
This initial contribution into the trust and the growth and appreciation of these assets over time will occur without the imposition of gift tax now or estate tax after both spouses have passed away.
For purposes of comparison, an identical gift of $5.0MM made in 2010 would have required the payment of a gift tax to the federal government of $1.4MM.
Even if Congress takes action before 2013, it is extremely unlikely that both the estate and gift tax exemptions will remain at this relatively high level. The significance of a decrease in these exemptions may result in a missed opportunity to reduce estate taxes and the corresponding failure to maximize the amount of assets that are ultimately received by the following generations.
Individuals may wish to use their residences in connection with this strategy knowing that it is illiquid and is not an asset which will be used to support their lifestyle during retirement.
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