For families and individuals with very specific needs, there are more sophisticated planning options. This includes families who own a private business or assets like shares in a high-appreciation startup, for instance.
- Family limited partnerships (FLPs). An FLP or an LLC structure can be an advantageous structure particularly for families income or appreciation to other family members, or to a trust for their benefit, at a discounted value.
- Grantor retained annuity trusts (GRATs). In this structure, a grantor contributes a high-appreciation asset, such as stocks, to the trust and pays tax at the time of contribution. The grantor receives back an annuity at a rate determined by the IRS, the 7520 rate. The GRAT has a fixed term, and after its expiration, the value of the trust tool is effective for passing appreciation to heirs without triggering estate taxes.
- Qualified personal residence trusts (QPRTs). A similar tool to the GRAT, the QPRT, is specifically for primary or vacation homes. After the term of the QPRT expires, ownership of the property passes to heirs free of gift or estate tax, though the grantor is typically required to pay market rent to the QPRT if he continues to reside on the property.
- Private loan to trust. This is one way to fund a trust, often an ILIT, without gifting. Instead, you can make a loan to the trust, which pays interest at an IRS-determined rate, and uses the loan proceeds to purchase an insurance policy or other appreciating asset. At the end of the term, the loan is repaid to the grantor, and the appreciation is left in the trust, outside of the estate value.
- Sale to an intentionally defective grantor trust. This is another mechanism that allows you to put a high-appreciation asset in a trust. The grantor typically funds the trust with a “seed” gift, then “sells” a high-appreciation asset to the trust with a financing arrangement including paid interest. At the end of the financing term, the original loan amount is repaid to the grantor, but the asset appreciation remains in the trust, outside the estate.
What's Right For You
Essentially everyone should do basic estate planning but many families and individuals would benefit from intermediate or even sophisticated planning tools.
Ultimately, you’ll need a team of trusted advisors to help you decide what’s right for you. Your family attorney, financial advisor, and tax expert are the first partners to consult when deciding what tools are appropriate for your situation. You may also choose to use an outside trustee, depending on your circumstances.
Fortunately, the process of establishing an estate plan can be fairly straightforward. By laying the foundation for yourself and your family, you’ll have peace of mind both today and in the future.