From the October 2009 issue of Investment Advisor • Subscribe!

October 1, 2009

Consider These

Sidebar to the feature article "Wealth Matters"

More On Tax Planning

from The Advisor's Professional Library
  • Long Term Care Insurance: Premiums While premiums for qualified long-term-care insurance may be deductible as medical expenses there are exceptions to this general rule. Learn how to avoid unnecessary tax liabilities.
  • Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.

In addition to thinking about using grantor retained annuity trusts (GRATs) for clients in the current atmosphere to help preserve wealth, the California Society of CPAs also suggests using intentionally defective grantor trusts (IDGT) and charitable lead trusts (CLT), both of which are irrevocable trusts. Under the first, the individual sells assets to the trust in return for an installment note, with interest calculated based on the current AFR. There is no gift tax because it is a "sale" of the assets, but because the grantor and the trust are considered the same taxpayer, no gain is recognized on the sale and the interest received under the note is not considered taxable income. The grantor would pay tax on the trust income, which in turn would further reduce the value of the estate. According to the CPAs, tax savings are achieved because, theoretically, the value of the assets leaving the estate from the sale will exceed the value returned by the note.

A CLT has both charitable and non-charitable beneficiaries. It's called a lead trust because it is the charity that is entitled to the first or lead interest from the property. After the term of the trust expires, the remaining property passes either back to the grantor or to another specified non-charitable beneficiary. At the time assets are placed into the CLT, your client received a current gift tax deduction equal to the present value of the income stream that will be going to the charity. As with a GRAT or IDGT, it is hoped that the CLT assets will appreciate beyond the IRS's 7520 rate, allowing the excess to pass to the beneficiary tax-free.

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