Advanced Estate Planning Tools

There are a number of other estate planning tools that can be used in a large estate plan. We wanted to mention a few but did not want to take space on a website to fully explain them. Therefore, we will list several other tools below with a cursory explanation of what they are so you can know the topics exist and the lingo when talking with someone at our firm about your estate plan.

Intentionally Defective Grantor Trust (IDGT)

IDGT is again very complicated; but like the GRAT (see below), an IDGT is used to pass wealth to your heirs and avoid estate taxes. The IDGT freezes the value of an appreciating asset for estate tax purposes, which can be important in a closely held business appreciating quickly.

For many affluent clients, an IDGT is a common estate planning tool to shift wealth outside of the estate. Many times an IDGT is used in conjunction with discounted FLP or LLC structures to supercharge its benefit. IDGTs are not the simplest tool in the world so sometimes they may not be properly utilized. If you have an estate net worth in excess of $10 million, the chances are good that an IDGT might be a viable planning tool for your estate plan.

“Freeze” Partnerships

This is not a well-known tool in the estate planning community, but it is one of our favorites. A freeze partnership seeks to obtain the same benefits of a GRAT (see below) but with more flexibility. A classic freeze partnership is used with a highly appreciating asset in a manner to shift the appreciation of the asset to the next generation without gift or estate taxes. It is ideal for appreciating stocks or real estate.

A freeze partnership can also be used to significantly increase the discounts on a limited partnership. In fact, when done properly, the total discount on certain structures (both on the interest and assets in the structure) can reach 90%. This is tremendously powerful when trying to shift millions of dollars out of an estate in a short period of time.

Grantor Retained Annuity Trust (GRAT)

A GRAT is an irrevocable trust (you gift money to the GRAT) from which the grantor retains the right to receive an annuity payment for a specified period of time. The concept relies on discounts in the value of the asset in the GRAT and several other factors including when the client dies (which is not a factor in our control).

The GRAT concept is very complicated. It can be a viable planning tool to shift highly appreciating assets out of an estate at a discount; but due to the complexities of the structure, we simply wanted to bring it to your attention and not go into detail on how it works.

Qualified Personal Residence Trusts (QPRT)

A QPRT is another freeze technique to pass an appreciating asset to the children with a lower estate tax value at some time in the future. Typically, a parent transfers a personal residence (the home) into a QPRT for the benefit of the children (but retains the right to use the home for a specified term of years). For gift tax purposes, the value of the remainder interest of the children is determined after subtracting the value of the parents’ right to use the residence for the term of years.

This valuation procedure allows a parent to discount substantially the value of the gift made to the children and also removes from the parents’ estate all post-gift appreciation in the value of the residence.

Summary

The above is not an exhaustive list. There are several other advanced estate planning tools that advisors should know about in order to give their “best” estate planning advice to affluent clients.

Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.