Advanced Estate Planning

We commonly see clients with high-net worth estates and complicated family dynamics frequently require extra attention to the preservation and distribution of their assets. For these types of clients, our California estate planning lawyers at Botti & Morison offer advanced estate planning. An advanced estate plan provides greater asset protection as it requires a multi-layered approach.

We Have Estate Planning Offices Throughout Southern and Central California

Botti & Morison Estate Planning Attorneys have offices in Ventura, Westlake Village, Santa Barbara, Valencia, Bakersfield, and San Luis Obispo. Call today at (877) 585-1885 to set up your first consultation free of charge.

Advanced Estate Planning Services | Proudly Serving Ventura County, Los Angeles County and Central California

Irrevocable Life Insurance Trust

An irrevocable life insurance trust (“ILIT”) is an irrevocable trust created for the principal purpose of owning life insurance policies. As with any other trust, the insurance trust is a contract between a grantor (creator) and a trustee to administer certain property, in this case an insurance contract, for the benefit of designated beneficiaries. The insurance trust, like other irrevocable trusts, cannot be rescinded, amended, or modified in any way after it is created. Once the grantor contributes property to the trust, they cannot later reclaim ownership of the property or change the terms of the trust. The principal reason for establishing a life insurance trust is estate tax planning. When an ILIT is properly structured, the death benefits paid to the trust will be free from inclusion in the gross estate of the insured. In addition, the ILIT may also be structured so that the trust provides benefits to the insured’s surviving spouse without inclusion in the surviving spouse’s gross estate.

Qualified Personal Residence Trust

A Qualified Personal Residence Trust (“QPRT”) provides the ability to remove one’s personal residence or vacation home from their taxable estate, while continuing to use and enjoy it. The QPRT has the potential to save heirs significant Federal Estate Taxes. This trust may also protect a primary residence and/or vacation home against potential lawsuits and/or creditors.

Family Limited Partnership (“FLP”)/ Limited Liability Company

The Family Limited Partnership (“FLP”) can achieve significant Federal Gift & Estate Tax savings by leveraging one’s lifetime exemption (currently set at $5,250,000) and $14,000 per person annual Gift Tax exclusion. By using the technique known as “minority discounting” the IRS allows significant discounts in the gift/estate tax values of investment assets passing through an FLP. The FLP allows one to make continued annual gifts, while retaining control. It also provides proper succession management of real estate or other investment assets. Additionally, the FLP may provide asset protection. Depending on circumstances however, an LLC can be a better option than an FLP, especially if asset protection is your primary concern.

Charitable Remainder Trust

A Charitable Remainder Trust (“CRT”) is a planning vehicle that can be used to avoid the payment of Capital Gains Taxes upon the sale of appreciated property such as real estate, stocks and mutual funds. Transferring the assets to the CRT and selling them from the CRT allows one to receive a lifetime income payment, when properly structured.

Irrevocable Trust

An irrevocable Trust can be an effective way to fund education or otherwise provide for the support of beneficiaries, while controlling and protecting the assets gifted. The Trust can be structured to receive ongoing annual gifts, tax-free.

Special Needs Trust

If you have a family member with a disability who will not be completely independent as an adult, you will need to consider a Special Needs Trust to provide the resources to fund a lifetime of care. Preparing for their future is important because the alternative is total dependence on the government programs – which may or may not be available in the future.

Planning with Retirement Plan Assets/IRA Trust

Beneficiary designations can create major tax and estate planning issues upon your death. Retirement plan assets (including IRAs other than Roth IRAs, pension and profit sharing plans, 401(k) plans, and non-qualified deferred compensation arrangements), are assets which have never been subjected to federal or state income taxes. These assets can be subject to estate tax on the participant’s death (unless left to a spouse or charity), and will be subject to income tax when the assets are withdrawn from the plan by the beneficiary. The combined estate and income tax burden can be 75% of the plan assets! Where the plan assets are left to individuals other than a spouse, it is imperative to try to arrange for cash to be available to the beneficiaries from other sources so they are able to pay the estate taxes, while deferring the time for withdrawing the funds from the retirement plan. With proper planning though the use of an IRA Trust, the funds may well be withdrawn from the plan over the life expectancy of the beneficiary, which may be a significant period. In the interim, the funds that remain in the plan can continue to grow on a tax-deferred basis, so that even with withdrawals each year the total fund balance may increase for many years.

Crummey Trusts and Intentionally Defective Trusts

A Crummey Trust is one where the beneficiary has the right to withdraw a certain amount from contributions made to the trust that year. If the beneficiary doesn’t withdraw the permitted amount within a certain period of time (typically 30 – 40 days after the gift is made), then the beneficiary cannot demand withdrawal at a later date, and the assets remain in the trust and will be distributed at the times called for under the trust. It is also possible to create a Trust that is a “grantor trust” for income tax purposes. (This kind of trust is called “Intentionally Defective”, but that means that it was designed to have the income taxed to the person who gave the assets to the trust.) By creating a Trust of this nature, one may, during their lifetime, be saddled with the income tax liability on the income earned by the Trust. This has the effect of further depleting your estate (which will be subject to estate tax on your death), and at the same time, increasing the assets in the Trust (which will not be subject to estate tax on the creator’s death).

Generation Skipping Trusts (“Dynasty Trusts”)

A trust may be set up to be fully distributed to the recipient during the recipient’s lifetime. For example, it can be set up so that the assets are distributed in thirds, when the recipient reaches ages 30, 35 and 40. Alternatively, a trust can be set up so that the assets will continue in trust for the beneficiary’s entire lifetime, and then pass on to the beneficiary’s descendants. Such a “generation skipping trust” or “Dynasty Trust” can give the beneficiary the right to benefit from the assets, but provide two important benefits which an outright gift can’t provide:
(a) The funds in the trust are exempt from the claims of most of the beneficiary’s creditors; and
(b) The funds in the trust may avoid estate taxes when the beneficiary dies.

It is possible to set up a Dynasty Trust to be extremely flexible and to give the beneficiary a great deal of power and control, or to limit the rights and power of the beneficiary. Where a beneficiary is trustworthy and a savvy financial manager, the beneficiary may be granted rights as broad as the following:

The right to all interest and dividends of the trust;
The right to withdraw principal; and
The right to determine who will inherit the assets of the trust when the beneficiary dies.

This power can be unlimited (so that the beneficiary can direct the funds in favor of anyone other than the beneficiary’s estate, the beneficiary’s creditors, or the creditors of the beneficiary’s estate.) Alternatively, the power may be limited so that the funds can be distributed only to their descendants, or possibly the spouse of a descendant.

A Dynasty Trust also makes sense where you are trying to protect a child from himself or herself. For example, a Dynasty Trust is a viable option if a child has problems with spouses, creditors, or substance abuse, or is susceptible to manipulation by unscrupulous individuals or organizations, or is developmentally disabled, or is a “spendthrift” or bad money manager.

Grantor Retained Trusts

There are various types of Grantor Retained Trusts (“GRITs”, “GRATs”, “GRUTs”). A GRIT is used when the remaining beneficiaries are not related to you; the other techniques are used when the remainder beneficiaries are related to you. All of these techniques “freeze” the value of the assets transferred to the Trust for gift and estate tax purposes (although a GRUT does so only to a limited extent), so future appreciation will inure to the benefit of the remainder beneficiaries; and also discount the value of the gift for gift tax purposes.

All of these techniques are based on the same idea: with a Grantor Retained Trust, one retains the right to benefit from an irrevocable trust for a fixed number of years, after which the trust assets are either distributed to other beneficiaries, or remain held in trust solely for other beneficiaries. A taxable gift (for gift tax purposes) is made when one transfers assets to the Trust; but because of the retained right to benefit from the Trust, the value of the gift (for gift tax purposes) received by the remainder beneficiaries is a fraction of the value of the assets transferred to the Trust. The percentage of the value of the assets transferred which constitutes the taxable gift will be based on the type of Grantor Retained Trust; the amount you will receive from the trust, interest rates in the economy when you transfer assets to the trust, and the length of time you will benefit from the Trust.

If you die while you are entitled to receive benefits from the Trust, then the entire value of the assets in the Trust will be taxed as part of your estate for estate tax purposes the benefits of having made a gift will be lost. Thus, it is not prudent to pick too long a term for the Trust, taking into account age and/or health considerations. In every Grantor Retained Trust, you are subject to income tax on some or all of the trust income, even if you don’t receive it, at least while you benefit from the Trust (and sometimes thereafter.) In other words, a Grantor Retained Trust is a grantor trust for income tax purposes.

Grantor Retained Income Trust (“GRIT”)
A GRIT may be used only where the remainder beneficiary is not related to you. Thus, a GRIT could be used to benefit a friend or a non-marital partner (for example, a member of a same-sex couple.) You would reserve the right to receive whatever ordinary income (generally, interest and dividends) is earned by the Trust. If the GRIT holds a home, you may reserve the right to live in the home for a period of years, including the right to repurchase the home from the trust before the trust ends.

Grantor Retained Annuity Trust (“GRAT”) and Grantor Retained Unitrust (“GRUT”)
These Trusts distribute proceeds to you each month. In the GRAT, this is a fixed percentage of the initial contribution and in the GRUT, this is a fixed percentage of the assets in the Trust each year.

This technique will work well for an asset that has a likelihood of appreciating in value, or for a partial interest in an asset where the value of the initial contribution is lowered using the partial interest discounts discussed above. It can be used where you want to leverage your lifetime exemption gift or get a large amount out of your estate using only a small portion of your exemption.

Installment Sales

Another way of freezing the value of an asset for estate tax purposes is to sell the asset to a family member, or to a trust for family members, on the installment basis of income tax reporting. Generally, an income tax is payable on interest received on the note, as well as on any capital gains as principal payments are received. This could be combined with a discounting technique referred to above.

Sale to an Intentionally Defective Irrevocable Trust

An appreciated asset can be “sold” to a trust which is treated as a grantor trust for income tax purposes, but which is treated as an irrevocable trust for gift and estate tax purposes (an Intentionally Defective Irrevocable Trust, or “IDIT”.) Once more, this freezes (at current value) the value of the asset being sold.

Unlike a regular installment sale, one does not report gain for income tax purposes on the sale to the Trust. Such a sale defers gain on the sale until the asset is sold by the Trustee of the Trust to a third party, or until your death (whichever occurs first.) If the asset is sold during your lifetime, then you would pay (from personal assets) any capital gains tax generated such sale. As reflected above, the payment of income taxes probably is not treated as a gift for gift tax purposes. As a variant of this method, you could have the Trust borrow money from a third party (such as a bank), and pay the cash to you (removing the need for an installment note); but again you would not report taxable income on the sale until the asset is sold to a third party or until your death.

Self-Canceling Installment Notes (SCINs)

Another technique involves lending money to someone (such as a child), or selling an asset to someone, in exchange for a promissory note that provides for the payment of interest and principal over a specified term, but which also mandates that if you die before the note is repaid in full, the balance will be cancelled and forgiven. Because your child may benefit by not having to repay the balance if you die while the note is outstanding, your child must pay you either a higher rate of interest than would normally be required, or a bonus must be added to the principal amount of the note. The amount of the interest or principal bonus must be calculated by an actuary. The term of the note must be set so that it will be repaid during your actuarial life expectancy. The interest you receive is taxable as ordinary income. If you lend money to the other party, the principal repayments generally are tax free; but if you sell an asset to the other person, the principal repayments will be partially a return of your investment (basis) and partially capital gain.

Private Annuities

A private annuity is a promise by someone (such as a child) to pay a fixed amount of money to you every year for the rest of your life. You buy this annuity by paying money, or selling an asset, to the person who has promised to make the payments to you. This is in contrast with a commercial annuity, which is payable by an insurance company, or with a charitable gift annuity, which is payable by a charity. The amount of the payment is based on IRS tables which take into account IRS life expectancy tables and an IRS determined interest rate, as well as the amount you paid for the annuity promise. The promise must be unsecured, so you are relying on the creditworthiness of the person making the promise. The payments you receive are partially ordinary income, with the balance either a tax-free return of your investment (basis) or capital gain. The person making the payments will invest the money you’ve transferred to him or her (so generally that means the person will be paying income tax on the income), but doesn’t get a deduction for the payments made to you. Thus, effectively, the income earned on the money you’ve transferred is taxed twice (once to the person making the payments and again to you.) Generally, a private annuity makes financial sense only if you die within a few years after buying the annuity; on the other hand, if you are suffering from an illness expected to kill you within a year (or in some cases, two years), the IRS tables can’t be used but rather your actual life expectancy must be used to set the amount of the payments. (Generally, it doesn’t make sense to fund a private annuity with appreciated assets.)

Advanced Estate Planning, Wills, Living Trust Services in Ventura County, Los Angeles County and Central California

Our estate planning attorneys have decades of experience helping individuals and families set up advanced estate plans and can do the same for you. Call today at (877) 585-1885 to set up your first consultation free of charge. Botti & Morison accepts clients throughout California and has offices in Ventura County, San Luis Obispo County, Los Angeles County, Kern County, and Santa Barbara County.

Advanced Estate Planning Attorneys in California

Our estate planning lawyers have decades of experience helping individuals and families set up tailored estate plans. Call today at (877) 585-1885 to set up your first consultation free of charge.

Botti & Morison accepts clients throughout California and has offices in Ventura County, San Luis Obispo County, Los Angeles County, Kern County, and Santa Barbara County.

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Free 2-Hour Estate Planning Workshop – Camarillo, CA

Tuesday, September 17, 2024
10:00 am
- 12:00 pm

Botti & Morison Estate Planning Workshop

Free 2-Hour Estate Planning Workshop – Camarillo, CA

Tuesday, September 17, 2024
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Botti & Morison Estate Planning Workshop

Free 2-Hour Estate Planning Workshop – Camarillo, CA

Saturday, September 21, 2024
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Botti & Morison Estate Planning Workshop

Free 2-Hour Estate Planning Workshop – Camarillo, CA

Wednesday, September 25, 2024
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