Berge & Berge, LLP Blog

Friday, October 6, 2017

Strategic Gifting Plans for High Net Worth Individuals

You have worked hard for many years, and now you want to make sure your loved ones get as much as possible from your estate, without the tax man getting greedy. There are ways to minimize your estate taxes, by using strategic gifting plans for high net worth individuals.

You have options for sheltering your assets from estate taxes, such as making the maximum allowed annual gifts to your loved ones, but if you have a sizeable estate, the annual gifting alone will not protect your estate assets on the scale that you may need. Talk to an estate-planning lawyer to determine if one or more of these three gifting plans may provide the level of tax reduction you are seeking.

Family Limited Partnership

A Family Limited Partnership (FLP) is a limited partnership whose members are your family. With an FLP, you can enjoy gift tax savings, estate tax savings and asset protection, and you can retain control over the transferred assets. After you transfer your assets to the FLP, you can gift interests in the FLP to your children and other beneficiaries.

As you give away “shares” of the FLP to your family members, the total value of your estate gets smaller, reducing the taxable estate. The FLP “shares” are gifted according to the amount of the annual gift tax exclusion, even though the corresponding value of the partnership assets is much higher than this number. This valuation strategy works because you retain control of the day-to-day-operation of the partnership. Since they do not have this control, you can assign a discount to the value of the shares of your beneficiaries.

Qualified Personal Residence Trust

A Qualified Personal Residence Trust (QPRT) lets you give away your home (either your principal residence or a vacation home) at a massive discount, but you can keep living in it. You have to transfer the title of the house to the QPRT while reserving the right to live in it for a specified time. Setting up a QPRT freezes the value of your residence. There are no additional taxes on either the home or any increase in value after the date of the transfer. At the end of the designated time, the property will transfer to your beneficiaries.

The trick is to select carefully the length of time you will remain in the house. If you live to the end of the designated time and keep residing in the house, you will have to pay rent to the beneficiaries who received the home, or California will include the value of the residence in your estate. Also, if you do not live to the end of the stated time, California will treat the house as being in your estate for taxation.

Irrevocable Life Insurance Trust

With an Irrevocable Life Insurance Trust (ILIT), the person who manages the trust (the trustee) buys an insurance policy for the individual who created the trust (grantor). The trust will own the policy, so it is not part of your taxable estate. The trustee pays the premiums with money the grantor transfers to the trustee.

You, as the grantor, transfer money to the trust in the amount of the annual gift tax exclusion. Instead of receiving this cash now, your beneficiaries will receive the life insurance proceeds one day. The trustee will distribute the proceeds when the policy is paid, after paying estate taxes, debts and final expenses, if that is how you arranged your trust.

With standard life insurance that is not part of an ILIT, although your beneficiaries do not have to pay any income taxes on the life insurance proceeds, the proceeds do count as part of your estate for tax purposes. In a high net worth estate, this could have a significant impact on the value of the assets your beneficiaries receive.

The laws that affect estate planning can change at any time, so contact the Law Offices of Berge & Berge today

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