Estate Planning for High Net Worth Families

You've worked hard your whole life to provide for your family and make your loved ones more secure.  Without advanced estate planning strategies, many of your hard earned assets may end up with the IRS and state taxing authorities.

Our firm regularly assists affluent families with such sophisticated planning strategies as Family Limited Partnerships or Limited Liability Companies, Qualified Personal Residence Trusts, Irrevocable Life Insurance Trusts and a wide range of charitable gifting techniques to reduce federal estate taxes, gift taxes and generation skipping transfer taxes.

Family Limited Partnerships

A Family Limited Partnership (FLP) is a limited partnership among members of a family.  Assuming the FLP meets certain requirements, such as being formed for a significant, non-tax (i.e., business) purpose, the FLP can involve estate and gift tax savings.  In addition, a FLP can be structured to provide asset protection.  
Once the FLP is established and your assets are transferred to it, you can make gifts of limited partner interests to your children or other beneficiaries.  This accomplishes several different estate planning objectives simultaneously.

First, the value of each limited partner interest that you gift decreases the value of your taxable estate and, consequently, any estate tax incurred upon your death.  If properly structured, the gifts can be made using the annual gift tax exclusion (you are entitled to give $16,000 to each of your donees in 2022), so depending on its value, you may not have to pay any gift tax on the transfer.

Second, the value of the limited partner interests transferred to your beneficiaries is far less than the corresponding value of the assets in the FLP.  limited partners do not have the ability to direct or control the day-to-day operation of the partnership, a minority discount can be applied to reduce the value of the limited partner interests which you are gifting.  In addition,  because the FLP is a closely-held entity and not publicly-traded, a discount can be applied based upon the lack of marketability of the limited partner interest.  This allows you to leverage the FLP as a vehicle to transfer more wealth to your beneficiaries.  Furthermore, a properly-structured FLP can have creditor protection characteristics because the general partners are not obligated to distribute FLP earnings or assets.
Qualified Personal Residence Trusts

Our homes are often our most valuable assets and hence one of the largest components of our taxable estates. A Qualified Personal Residence Trust (QPRT) allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it. Here is how it works: You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years. If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes. After the end of the specified period, you may continue to live in the home but you must pay rent to your family or designated beneficiary to avoid inclusion of the residence in your estate. This may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family. If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT. An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established and your residence is transferred to the QPRT.

Irrevocable Life Insurance Trusts

There is a common misconception that life insurance proceeds are not subject to Federal estate taxes.  While the proceeds are received by your designated beneficiaries are free of any income taxes, they are included as part of your taxable estate and subject to estate taxes if the value of your entire estate exceeds the exemption amount.  
An Irrevocable Life Insurance Trust (ILIT) is created specifically for the purpose of owning your life insurance policy. A properly established and administered trust holds the policy outside of your estate and keeps the proceeds from being taxable to your estate. The proceeds from the insurance policy can then be used to provide your estate with the liquidity to pay estate taxes, pay off debts, pay final expenses and provide income to a surviving spouse or children. The ILIT will be the policy owner and beneficiary.  Once your ILIT is established, you can use your annual gift tax exclusion to make cash gifts to your trust by giving the trust beneficiaries withdrawal powers (commonly referred to as Crummey powers).  The withdrawal powers give each trust beneficiary upon notice of a trust contribution the right to withdraw a portion of each contribution up to the annual exclsuion amount.  Assuming your beneficiaries forgo exercising the withdrawal powers, the trustee uses the contributed funds to pay the premium on the life insurance policy.

There are many options available when setting up an ILIT.  For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage.  You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.

Our firm is dedicated to helping clients make educated, informed decisions about their assets and will work with you and your team of financial advisors, including your CPA and insurance agent, to implement a highly sophisticated and effective estate plan that allows for the maximum transfer of assets to your loved ones.

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17 Watchung Avenue, Suite 204, Chatham, NJ 07928
| Phone: 973-701-9300

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