Law Offices of Mary P. Kulvinskas

Tricks of the Trade

This section discusses numerous techniques and strategies to help reduce the overall tax ramifications on an estate. Prior to doing such however, we begin with a fundamental discussion of the affect your revocable living trust may have on your estate. We believe it to be of the utmost importance to begin here, since many trusts out there simply will not carry out clients wishes as they had hoped.

1. Do I have the proper tax planning in my revocable living trust? Those with a taxable estate are perhaps affected the most by a good estate plan. Their living trust may effectively carry out all their wishes while eliminating estate taxation. But estate planning is not a static process. This is particularly true for those who completed estate planning prior to May 2001. If you fall into this category you need to break out those “old” trusts.

For example, in the 1990s, AB and ABC trusts were extremely popular. These are trusts that divide into separate trusts (bypass, exemption, and perhaps, marital trust) upon the death of a spouse based on the estate tax exemption amount then in effect. The reason to employ such a trust was to reduce estate taxes. Under current law however, if one were to pass away in 2009 for instance, the possibility exists under many trusts that the bypass portion of the trust will house 3.5 million dollars of the estate, leaving nothing or very little of the estate for the surviving spouse. On the other hand, perhaps the bypass trust will fail to be fully funded because the estate is less than 7 million dollars. That means that there will not be estate tax upon the death of the first spouse, but perhaps plenty of tax upon the death of the second spouse. Similarly in 2010, there is no estate tax whatsoever. Thus, in 2010, with some AB and ABC trusts, that means that one’s surviving spouse may inherit nothing. Conversely, it may leave a surviving spouse half the estate, only to be taxed in future years. Clearly, now more than ever is the time to review your estate plan. Your trust must address your particular needs and desires or there is a good chance that they will not be carried out.

2. What is an Irrevocable Life Insurance Trust? An irrevocable life insurance trust is an irrevocable trust that is utilized to purchase life insurance. It is also used to remove currently owned life insurance from your estate. There are several benefits to this type of trust. First, all the trust assets should pass income, gift, and estate tax free. Second, it allows those with a taxable estate to currently make gifts, thereby reducing the size of their estate. Another tangential benefit is that the trusts corpus remains untouchable by creditors. Once the insured passes away, the proceeds may be used to pay estate taxes, add liquidity for a family business, or simply increase the size of the estate left to loved ones. Oftentimes, people use this type of trust in conjunction with other estate planning devices.

3. What is a Family Limited Partnership? A family limited partnership is a limited partnership set up under California law that is owned by family members. Perhaps these entities are most commonly formed for a family business or rental real estate. The main reason a limited partnership is formed is to reduce the estate tax ramifications on an estate. Although this is a bit technical, the IRS allows discounts for these ownership interests that are “constrained”. For example, an interest may be “constrained” if that interest is a minority interest or lacks marketability, as is often the case with an interest owned by a single family member. Parents tend to really like these devices since they are able to retain control over the partnership while passing down interests in their estate, tax free to their children. The downside of a family limited partnership is that it is administratively burdensome to run and it requires an additional tax return. On the upside however, the family unit may save tens of thousands of dollars in estate tax.

4. What is a Charitable Remainder Trust? A charitable trust is an irrevocable trust utilized to house a gift to charity. For one who is charitably inclined, these devices are incredibly useful. It allows one to make a present interest gift and currently receive an income tax deduction. A highly appreciated asset may in turn be sold in the charitable trust tax free. The proceeds are then reinvested. With compounding, the assets in the trust will grow significantly larger than they otherwise would have outside the trust. Depending on the type of charitable trust, one may even be able to receive an income stream for life from the trust. Thus, these trusts allow for tax savings as well as retention of the benefits of the gifted assets, plus one is able to donate to their favorite charity.

Disclaimer - The information provided at this web site is advertising material and is for general information purposes only. Therefore, material on this site does not constitute legal advice. You should not act upon this information without first consulting an estate planning attorney in your area. No Attorney-Client relationship is formed unless agreed to in writing.