The Six Levels of Estate Planning:

• A. Circumstances
  
  • Outdated or inadequate estate planning. Estate less than exemption amount.
• B. Goals
  • 1. Defer all estate taxes until the death of the surviving spouse.
    
  • 2. Avoid federal estate taxation on the first $2,000,000 of gross estate; potential savings of more than $400,000 (or more as exemption increases each year until 2009).
    
  • 3. Avoid the delays, publicity and cost of probate.
    
  • 4. Make certain that your assets go to whom you want, when you want and how you want.
    
  • 5. Avoid intentional or unintentional disinheritance of children and grandchildren by surviving spouse.
    
  • 6. Protect heirs from their financial shortcomings, their disability and their creditors.
    
  • 7. Select manager of estate (i.e. personal representatives, trustees, attorneys-in-fact, etc.) and person responsible for the distribution of your assets.
    
  • 8. Designate a health-care agent and state your intent regarding level of medical treatment.
    
• C. Methods
  • 1. Revocable Living Trust.
    
  • 2. Pour Over Will(s).
    
  • 3. Durable Power(s) of Attorney for Financial Matters.
    
  • 4. Durable Power(s) of Attorney for Health Care/Living Wills.
    
• D. Drawbacks
  • As grantor maintains control over his/her assets and all documents are amendable and revocable, there are no drawbacks.  Under current law, the estate tax is eliminated in 2010, and is reinstated in 2011.  It is expected that the law will be amended prior to 2010 in a manner unknown today.  The uncertainty requires greater attention to the estate planning process to anyone with an estate in excess of $1,000,000.

• A. Circumstances
  • Estate exceeds anticipated financial requirements of grantor(s) and exceeds exemption amount, which is increasing gradually until 2009, to $3,500,00 for unmarried persons and $7,000,000 for married couples.
• B. Goals
  • 1. Reduce estate to reduce estate taxation.
  • 2. Benefit while alive favored children, other relatives and beneficiaries.
  • 3. Use the annual gift tax exclusion, currently a maximum $11,000 per donee ($22,000 for married couples).
  • 4. Control the use of the gifted funds until the donee is sufficiently mature to manage them.
  • 5. Take advantage of gift tax rates which are less expensive than estate tax rates (exclusion v. inclusion).
  • 6. Move future asset appreciation outside of the estate.
• C. Methods
  • 1. Irrevocable trust for children and/or other beneficiaries.
  • 2. Direct gifts if control and management issues are not present.
  • 3. Exempt lifetime gifts in excess of the annual exclusion amount are limited to $1,000,000 per person.
• D. Drawbacks
  • 1. Trust is irrevocable and cannot be amended or revoked.
  • 2. Donees lose stepped-up basis at death on appreciated property.
  • 3. Donor loses access to assets transferred.
  • 4. See Drawbacks - Level One Planning.

• A. Circumstances
  • Estate is projected to be over $1,000,000 for an unmarried person or $2,000,000 for married couples at time of death. The 2001 Tax Law increases these amounts gradually to $3,500,000 and $7,000,000 over the next several years, then eliminates the estate tax for one year, but reinstates it thereafter with the current exemption amounts.
• B. Goals
  • 1. Avoid taxation of life insurance proceeds by removing insurance policy from the insured's gross estate while still providing benefits to the surviving spouse, children and other heirs.
    
  • 2. Use the $11,000 ($22,000 for married couples) annual gift tax exclusion per donee.
    
  • 3. Leverage the annual gift tax exclusion through the purchase of life insurance, particularly second-to-die life insurance.
    
  • 4. Use non-taxable dollars (i.e. life insurance proceeds) to replace funds used to pay estate taxes.
    
• C. Methods
  • 1. Irrevocable life insurance trusts.
  • 2. Irrevocable life insurance trusts with generation skipping tax provisions (so-called Dynasty Trusts).
• D. Drawbacks
  • 1. Grantor-insured cannot act as the trustee of an irrevocable trust.
    
  • 2. Trust is irrevocable and cannot be amended or revoked.
    
  • 3. Grantor cannot withdraw insurance policy cash values (i.e. trust property) during lifetime. However, the trustee can use cash values for the benefit of the grantor's spouse and descendants during grantor's lifetime. Grantor can also give certain individuals (i.e. spouse, selected child, brother, sister, etc.) the power to appoint trust property back to grantor.
  • 4. See Drawbacks - First Level Planning.
    

• A. Circumstances
  • The estate tax liability is projected to exceed the life insurance purchased by irrevocable trusts.
• B. Goals
  • 1. Use annual exclusion and the exemption amount (currently $1,000,000/$2,000,000) to make lifetime gifts. Gifts can be of real estate, closey-held stock, or publicly traded stocks and bonds. Thus, the future appreciation on the gifted property is removed from the estate.
    
  • 2. Use valuation discounts of up to 40% so that $2,000,000 of gifted assets can be "reduced" to $1,200,000 for gift tax purposes.
    
  • 3. Maintain total control over the gifted property in the hands of the donor.
    
  • 4. Shift income taxes to children and/or grandchildren who may be in lower income tax brackets.
    
• C. Methods
  • 1. Family limited partnerships or limited liability companies.
    
  • 2. Minority interest and lack of marketability discounts.
    
• D. Drawbacks
  • 1. Transfers to family limited partnerships or limited liability compaies are irrevocable.
    
  • 2. Donor loses the income allocated to the donee(s) - limited partner(s) or LLC member(s).
  • 3. Donor's heirs lose stepped-up basis at death on appreciated property transferred to the partnership or LLC
  • 4. Annual  valuation of assets being transferred highly recommended.
  • 5. See Drawbacks - First Level Planning.

• A. Circumstances
  • The need to make further gifts when the exemption amount has been used with respect to other transfers.
• B. Goals
  • 1. Remove property given to a trust from the grantor's estate.
    
  • 2. Permit grantor (and grantor's spouse) to continue using the property or the property's income for a fixed term.
    
  • 3. Make substantial gifts at little or no gift tax cost.
    
  • 4. Freeze the value of the property transferred to the trust.
    
  • 5. Permit the grantor to act as trustee of the trust thereby maintaining control over the property during the fixed term.
    
• C. Methods
  • 1. Qualified Personal Residence Trust ("GRIT").
    
  • 2. Grantor Retained Annuity Trust ("GRAT").
    
• D. Drawbacks
  • 1. Transfer to GRITs and GRATs are irrevocable.
    
  • 2. Grantor loses free access to property at the end of fixed term.
    
  • 3. Heirs lose stepped-up basis at death on appreciated property.
    
  • 4. If grantor dies during the fixed term, the property in trust is included in the grantor's estate.
    

• A. Circumstances
  • Desire to pay no estate tax.
• B. Goals
  • 1. Avoid being an involuntary philanthropist (i.e. paying estate taxes), and instead become a voluntary philanthropist (i.e. make estate tax free charitable gifts).
    
  • 2. Make entire estate available to surviving spouse during his or her lifetime.
    
  • 3. Provide the children and grandchildren with a desired minimum inheritance.
    
• C. Methods
  • 1. Use an irrevocable life insurance trust funded with a second-to-die life insurance policy to provide children and grandchildren with desired inheritance - income and estate tax free.
  • 2. Use Living Trust (with QTIP provisions) to provide for surviving spouse.
  • 3. Upon death of surviving spouse, that portion of the estate over the $2,000,000 exemption passes to a private (family) foundation or donor-advised fund, or directly to one or more charities - estate tax free! The grantor's heirs will manage the foundation or donor-advised fund, and can receive reasonable compensation from the foundation, or can direct the charitable use of the assets.
• D. Drawbacks
  • 1. Grantor-insured cannot act as the trustee of an irrevocable trust.
  • 2. Transfers to charities, private foundations or donor-advised fund are irrevocable.
  • 3. Grantor cannot withdraw insurance policy cash values (i.e. trust property) during lifetime. However, the trustee can use cash values for the benefit of the grantor's descendants during grantor's lifetime. Grantor can give certain individuals (i.e. selected child, brother, sister, etc.) the power to appoint trust property back to grantor.
  • 4. See Drawbacks - First Level Planning.