Protect Your Assets/Protect Your Estate Plan

Regular readers of my articles know that I encourage my clients to avoid Federal Estate Taxes at their death. These taxes can be 50% of assets over the Applicable Credit (currently $1 Million but scheduled to increase to $3.5 Million in 2009; then decrease to $1 Million again in 2011).However, I do not want my clients to jeopardize their financial comfort just to save taxes after their death. Fortunately, there are some tax savings techniques that are convenient and easy for the taxpayer to implement.

A Credit Shelter Trust in your Will. Allows a couple to protect two times the Applicable Credit (totaling $2 Million currently) of their assets from Federal Estate Taxes. While the couple is alive, they do not have to divest assets or fund this trust. This Trust is funded only after one spouse dies. It is a very flexible trust and the trust monies can be used for the surviving spouse. This Trust can save about $500,000.00 in taxes if the couple has a $2 Million total estate.

A Life Insurance Trust is a fairly simple device which will protect the life insurance proceeds from Federal Estate Taxes. (There is a common misconception that life insurance proceeds are not taxable. In fact, life insurance proceeds are taxable for Federal Estate Tax purposes; not income tax purposes.) The Trust would own and be the beneficiary of the policy.

You create the trust so you decide when your family members will receive the money from the Trust. Again, these monies can be used for the surviving spouse.

There are some administrative and notice requirements to protect and maximize the tax savings benefit but these requirements are well worth it and can save hundreds of thousands of dollars in taxes.

Family Limited Liability Companies (“Family LLC”) is another valuable estate planning tool that is extremely effective in saving Federal Estate Taxes. This is a special device that is available to families that have family businesses, investment properties or rental properties.

The parents can create a Family LLC that will own the business. The parents can retain certain controls over the LLC (and business) by serving as managing members of the LLC and by structuring the Operating Agreement to limit the children’s rights. The parents then gift percentages of the Family LLC to the children each year. This technique provides an added benefit that the parent can give more than $11,000.00 Fair Market Value of the Family LLC and still claim an $11,000.00 annual gift tax exclusion. (There are discount factors available to apply to the gift because the children have limited rights and a minority interest.)
These are only three of many estate planning tools to save taxes. These can save great amounts of taxes. However, you must be careful. The IRS does not like these techniques because of the tax savings so the IRS looks to disallow the technique. The techniques are sound, so the IRS scrutinizes the administration of the techniques.

Frequently the parents do not treat the Credit Shelter Trust, Insurance Trust or Family LLC as a separate entity. The parents treat these as extensions of their personal assets or the parents impose too many restrictions on the children. This can be fatal to the tax savings.

We at Wells, Jaworski & Liebman can prepare the appropriate documents for your estate and instruct you in the proper administration thereof.

Kimberly A. Paton, is a Partner at WJ&L, who practices in the Estate Planning, Probate and Elder Law areas of our practice.