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This article discusses the strategies that clients may wish to consider to provide a more orderly transfer of assets during life and at death, as well as reduce the potential estate taxes by removing assets from the taxable estate.

When it becomes apparent through the fact-finding process that your clients either have or will have a substantial estate, it may be helpful to consider the following planning techniques that can greatly reduce estate costs.

1. Gifts. Outright gifts could effectively pass control to another family member and reduce the clients estate. Minority and/or lack of marketability discounts may leverage the value of the property gifted. Use of annual gift tax exclusions and/or unified credit amounts can minimize (or possibly make tax-free) any gift taxes owed by the client upon transfer.

An example of an asset that can be transferred as an outright gift is stock. Another example is a life insurance policy, currently owned by the client. A transfer of the policy by gifting to a child, or an irrevocable life insurance trust can remove the death proceeds from the clients estate and pass the proceeds income and estate tax free to the child.

2. Installment Sale. Transferring amounts out of the estate that exceed the unified credit amount or the annual exclusion amount can be done by using an installment note. An installment sale allows the transfer of an asset to another person in exchange for a promise to pay the value of that asset to the client in installment payments. An installment sale provides the client with a stream of income as the payments are received.

If the note is not paid off at the clients death, the balance of the note due would be included in the clients estate unless the note was a SCIN (self-canceling installment note). In order to make the note a SCIN, a greater purchase price or higher interest rate on the installments must be paid. However, this would result in an increased return to the client which would somewhat offset the estate reduction.

An alternative to the SCIN is to use part of the payments to purchase life insurance in an irrevocable trust especially for the remaining payoff that would be due the estate and would complete the transfer of the asset to the desired family member.

3. Private Annuity. A private annuity provides another means of removing property from the clients estate. Current assets can be transferred to a child in exchange for the childs promise to pay a fixed annuity to the client for the remainder of the clients life (or possibly the joint lives of the client and spouse). The present value of the annuity must be the exact value of the asset transferred.

4. Family Limited Partnership (FLP) or Limited Liability Company (LLC). The key feature of the FLP or LLC is the ability for the entity to transfer substantial wealth to other family members using relatively deep discounting (using both minority and lack of marketability discounts where appropriate) while retaining control of the entity.

In the FLP, this is accomplished by transferring the assets from the client’s estate into the FLP using discounts. The client is usually the general partner. The FLP units are then gifted to other family members, possibly again at a discount. Other benefits include the possibility of shifting income to a lower tax bracket family member, creditor protection (especially with an LLC), the ability to control the distribution of the units, avoidance of probate for out of state property (especially real estate), and flexibility of design. There is an estate tax consequence to the client who is the general partner. Whatever percentage of ownership the client keeps as general partner (usually 1%-2%) is also the value of the FLP that remains in the clients estate. An FLP or LLC can own life insurance for this purpose.

5. Grantor Retained Annuity or Unitrust (GRAT or GRUT). Using the GRAT or GRUT, the client transfers assets to a trust that provides the client with an income interest for a specified term of years. At the end of the term, the assets officially pass to the beneficiaries of the trust (usually other family members). The advantage of using a GRAT or GRUT is that the gift made upon the transfer into the trust is valued based upon the “future interest” to the beneficiary or the “remainder value.”

The future interest is usually only a fraction of the value of the asset transferred, which substantially lowers the gift tax. The transferred assets may also qualify for the same minority and/or lack of marketability discounts as the FLP. There is a potential estate tax consequence to using this technique. If the client dies during the “term” of the GRAT or GRUT, the asset is included in his estate. Matching the client and the term of years therefore becomes critical so that it is likely that the client will survive the term and the assets will be out of the estate.

Term life insurance protection could assist in payment of any amounts due should the client die during the term.

6. Charitable Lead Trust (CLT). Using a CLT provides a charity with an immediate benefit and retains a future benefit for other family members. The client transfers assets to the CLT, giving the charity an annuity or unitrust interest for a term of years.

At the end of the term, the assets pass to the family members. Again, the value of the gift is only the future interest or remainder and is a fraction of the full value of the asset transferred.

The charitys annuity or unitrust interest is a non-taxable charitable gift and may be taken as an income tax deduction by the client if the client is willing to report the annual trust income on the clients own tax return. Most clients prefer not to take the deduction and not to report income either. And again, discounts may be available.

Replacing the full value of the asset transferred can be done through the purchase of a life policy in an irrevocable trust outside the estate with the children as trust beneficiaries.

7. Charitable Remainder Trust (CRT). Transferring highly appreciated assets from the clients estate to a CRT affords the client an income stream and the avoidance of capital gains tax upon the sale of the asset. The CRT sells the asset and provides either a stated amount or a stated percentage of the value of the trust to the client for a term of years (not to exceed 20) or for life.

The remainder in this case goes to a charity, which at the time of transfer must be receiving at least 10% of the value of the asset. The charity that receives the remainder could be a private foundation, run by the clients children. The asset transferred to the CRT can be replaced in value to the children by using some of the income stream to buy a life insurance policy in an irrevocable trust with the children as beneficiaries.

, Esq. is director advanced planning at Sun Life Financial, Wellesley Hills, Mass. She is responsible for advanced

planning and technical support to the field, advisors, and to the home office. She may be reached via e-mail at jane_warner@sunlife.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.