Effective Estate Reduction Techniques

Introduction

Estate taxes (sometimes referred to as "inheritance taxes") are the Federal and State taxes imposed on transferring property at death. Some property transfers, such as property transferred to a surviving spouse, or property transferred to a charity, are not subject to estate tax. In addition, some transfers of property at death are not taxable because of a government policy intended to exempt from estate taxes the transfer of property by deceased individuals who have less than a minimum amount of net worth. Generally, however, the estate of an individual whose net worth, including life insurance benefits, exceeds $1,000,000, will be subject to estate taxes if the net worth is inherited by children or beneficiaries other than a surviving spouse or charities. For these individuals, estate taxes are a major concern because the estate tax rates will start at approximately 41% and quickly accelerate to 50% or 55% of the inheritance in excess of $1,000,000 which goes to children or beneficiaries other than a spouse or charity. When the tax rates become this severe, individuals become concerned with the loss their net worth will suffer before it can be transferred to their children or their beneficiaries. The estate tax which will be payable to the government is an obvious loss. But there can be additional shrinkage in net worth, over and above the estate tax loss, due to the fact that the estate tax generally must be paid in full within nine months after an individual dies. Often times when the estate is forced to sell assets quickly in order to generate the cash to pay the estate tax, the assets end up being sold at substantial discounts. Once a person realizes this, the obvious question is whether anything can be done to eliminate or minimize the estate taxes.

Transfer Techniques

Fortunately, there are many techniques that allow people who accumulate large illiquid estates to reduce the tax burden upon death. Through a variety of strategies such as gifting, estate freezing and discounting, federal estate taxes can be reduced or even eliminated. Minimizing gift taxes and estate taxes require lifetime planning. Often, effective strategies involve choosing an efficient ownership structure, determining whether it is necessary to maintain control of the assets and obtaining valuation discounts to maximize asset transfers using the annual exclusion (you can give up to $11,000 per person per year). Because there are many different techniques, it is necessary to consider the following factors in determining the correct strategy for estate reduction:

• Age ;
• Cash;
• Creditor Protection;
• Asset Types;
• Health;
• Descendents; and
• Charitable Giving.

Depending on the above-listed factors, a trusted legal advisor can determine the most effective way to make lifetime transfers.

Transfers to Family Members

Although there are several estate reduction techniques, one of the most common techniques for larger estates is the family limited partnership, especially when business interests are involved. A partnership is simply an entity created under state law to hold assets. A limited partnership has at least one general partner and at least one limited partner. Typically, the senior family members (parents/grandparents) will hold the general partnership interests and, over a period of several years, will gift away the limited partnership units to children and grandchildren. Assets contributed to a partnership are nontaxable exchanges. The general partners are responsible for the management of partnership assets, while the limited partners generally have no say in the management of the partnership affairs. Because the limited partnership interests have no control over the management of the assets, they are usually eligible for a valuation discount of up to 40% depending on the asset types in the partnership. Thus, a gift of $100,000 could potentially be reduced to $60,000. Senior family members would gift limited partnership interests to children and grandchildren, thereby maximizing annual exclusion amounts (up to $11,000 per child). If the partnership generates income, the senior family member will have the control to determine how much, if any of the income will be distributed to each person holding a partnership interest (both general and limited partners.

GRAT's

Another discounting technique is the Grantor Retained Annuity Trust (GRAT). This technique is most effective for highly appreciating assets when a person would like to retain all or most of the income and transfer the asset with minimal gift tax. When the GRAT is set up, the grantor retains an income interest for a specified number of years, and, after the specified number of years, the beneficiary of the GRAT receives a remainder interest. For example, a father can set up a GRAT for 10 years, maintain an annuity interest from the trust,then at the end of the 10-year period, the son will receive the remaining assets. Any income and appreciation in excess of the amount the trust is required to pay, in the form of an annuity, over the term of the GRAT will accumulate for the benefit of the remainder beneficiary. Therefore, depending on the appreciation rate of the assets in the trust and the interest rate used in the calculation, you may be able to transfer assets to your children at a substantial discount.

Charitable Strategies

A rewarding approach to estate reduction is charitable planning. A charitable contribution is merely a gift of property to a charitable, religious, scientific, educational or other qualified organization. By giving an interest to a charitable organization, such as a church, you may be accomplishing dual goals of estate reduction while creating income tax deductions. A gift can either be outright or the donor can retain an interest in the assets being transferred. For example, a charitable remainder trust allows you to contribute property to a trust, and receive an annual cash payment from the trust for a period of years. At the end of the term of years, the remainder interest will pass to the charity. The remainder interest will determine the amount of your charitable deduction. You will generally be eligible for an immediate income tax deduction.

A Charitable Lead Annuity Trust (CLAT) is an effective estate discounting technique to assist removing assets from your taxable estate. By setting up a CLAT, you are eligible for an immediate income tax deduction. As the charity receives the income over the term of the CLAT, you will include it in your taxable income. At the end of the term, your beneficiary will receive the assets in the CLAT. A CLAT can be established during your lifetime or upon death. A primary advantage is that you can get a large deduction in a year in which you may have an unusually high income.

Estate Planning and Reduction Techniques in Colorado

The extent to which any of the strategies above will produce the intended tax savings or the extent to which these strategies will avoid producing unwanted non-tax consequences, depends, in part, upon state law. Fortunately for individuals living in Colorado, the state laws are very favorable. For example, the size of the discount available in determining the taxable value of gifted interests in a family partnership depends in part on state statutes which determine the rights of limited partners and the ability of the partnership to continue in the event of the death of a partner. Colorado's laws in these areas favor family partnerships and therefore justify greater valuation discounts in determining the taxable value of gifted interests in the partnership. Colorado laws are also favorable in non-tax areas. For example, the use of family partnerships in Colorado can provide some creditor protection with respect to the assets transferred to the family partnership.

Conclusion

By gifting, managing the ownership structure of your assets and leveraging the different techniques discussed above you can reduce and possibly even avoid losing a large portion of your estate to taxes. With the help of an experienced estate-planning attorney, you can be proactive in managing your estate during your lifetime to avoid unnecessary taxation.

PREEO SILVERMAN GREEN & EGLE, P.C. AND OUR EXPERIENCE WITH ESTATE PLANNING

Estate planning constitutes a major portion of our law practice. We regularly assist our clients in implementing the strategies discussed above, as well as numerous other strategies intended to minimize or eliminate estate taxes. We know from experience, however, that in estate planning and estate tax planning, every situation is different, and every planning technique has its own set of advantages and disadvantages. We take pride in the fact that we do not recommend any planning strategy to a client without having first learned all the client's objectives and analyzed the client's particular situation. Once this is completed, we recommend the strategy we feel is most appropriate, and the recommendation includes a complete explanation of the strategies. The attorneys who practice in this area are:

Robert L. Preeo - Email Me - (303) 296-4440
Martin J. Green - Email Me - (303) 296-4440
Timothy K. Jordan - Email Me - (303) 296-4440
Mark T. Berger - Email Me - (303) 296-4440
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