Affluent families have particular need for advanced estate planning techniques. Failure to engage in high net worth estate planning means subjecting the estate to unnecessary taxes and financial burdens.
Three tools in particular are valuable for the protecting the estate of the high net worth individuals.
Irrevocable Life Insurance Trust
Life insurance is a wonderful estate planning tool but it has its flaws. Depending on how the proceeds are paid to the beneficiaries could subject the proceeds to estate taxes. If the named beneficiary is not kept up to date, the proceeds could end up as part of the estate. Further, the insurance proceeds are fully owned by the beneficiary, meaning it can be attached by creditors, your beneficiary’s ex-spouse, or the IRS.
An Irrevocable Life Insurance Trust (ILIT) is created for the specific purpose of holding the life insurance policy. Since the trust owns the policy and the proceeds, the proceeds are excluded from your estate. The proceeds can be used as directed by the trust, which includes paying taxes, paying debts, and provide income to your beneficiaries. The ILIT is also able to protect the proceeds from aggressive creditors or reckless spending. The proceeds could even be used to provide medical and education care for grandchildren and great grandchildren, even those who have yet to be born.
Qualified Personal Residence Trust
Our personal home is often our biggest and most valuable asset. A Qualified Personal Residence Trust (QRPT) allows you to give away your home at a great discount, freeze the value for estate tax purposes, and continue to live in the home until death.
The QRPT has the added benefit of protecting the home against creditors because the trust owns the home. So creditors are unable to attach or seize the home as part of their debt collection process.
Family Limited Partnerships
A Family Limited Partnership (FLP) is a limited partnership where the partners are members of the family. An FLP allows an estate and gift tax savings while retaining control over the assets placed in the FLP.
How and FLP works is that you place the assets you want to transfer into the ownership of the FLP. You then give gifts of ownership interests to your family members and beneficiaries. This accomplishes several goals simultaneously.
First, your estate is reduced by the amount of the gifted interest. The gifts are usual made based on the annual gift tax exclusion so it does not reduce your lifetime gift exclusion.
Second, the value of the transferred interests is far less than the value of the assets owned by the FLP. Since limited partners do not have the ability to manage or control the assets, a minority discount is applied to reduce the value of the interest being gifted. An additional discount can be applied for the inability to market the interest to non-family members. This allows you to transfer more ownership interest to your beneficiaries while remaining in control of the assets as the managing partner. Lastly, the FLP can protect the assets against creditors since the managing partner is typically not required to distribute assets owned by the FLP.
Yeager Law is dedicated to working with our clients to create customized estate plans for high net worth individuals using these and other planning devices. We will work with you, your financial advisers, and your CPAs to ensure you have the best estate plan possible for you.
Contact Yeager Law for any questions, concerns, or comments.