FREEZING
Many estates grow faster than the annual gift exclusions can address and as appreciation of assets increases the value of the estate the death tax problem compounds. “Freezing” refers to techniques that effectively transfer future asset appreciation to the younger generation. Thus, the assets best suited for this technique are those with the greatest chance for appreciation. Most freeze techniques revolve around “grantor” trusts; meaning the transferring party kept some benefit from the trust.

One of the more popular grantor trusts is the Grantor Retained Annuity Trust, which in essence, is the gift of an asset with the caveat that the grantor will retain an annuity (annual cash payment) for a set period of time. From a tax value perspective, the gift value isn’t the asset’s value but rather the value of receiving an asset in the future. This structure is also used to give the senior generation the benefit of continuing income.

Annuity amount and length of time are options – the longer the annuity and/or the greater the annuity, the smaller the value of the gift. However, the annuity period is critical to the technique working - if the grantor dies before the annuity period ends the gift unravels and it is treated as if no transfer occurred. 

To reduce mortality risk, shorter annuity periods can be used (while absorbing increased gift size). Another hedge technique is to break out the asset in several pieces and use staggered GRATs (i.e. 20% of limited partnership units in each of five separate GRATs) with varying time periods (a 1 year, a 3 year, a 5 year, a 7 year, and a 9 year). This can assist in the time versus taxable value balance.  

Another useful hedging technique is the “rolling GRAT”, in which a series of short term GRATs are created where one is the beneficiary of the next. The annuity payments are structured to be large enough so the tax value of the GRAT is zero. If there is appreciation, it was transferred; if not, we lost nothing. When used well, rolling GRATs can be a very effective freeze technique with almost no downside risk.

SALES
Once gifting and freezing options have been explored an often underutilized strategy is the structured sale of assets. As the term sale implies, assets are sold to younger generations in return for a stream of income. Since it is a sale for adequate value there is no gift and the assets are out of the taxable estate from day one.

For instance, a family owns an apartment building it generates income and is appreciating well. The value is too large to give away and the parents don’t wish to sacrifice the income. The family would like to keep the building in the family but none of the children have the financial wherewithal to purchase it. The private annuity sale can be a very nice tool for income producing assets. 

Mechanically, the building is sold to the younger generation in return for annual payments for the remainder of the parents’ lives (IRS tables are used to calculate life expectancy and payment amounts). While alive, the parents enjoy income to support their lifestyle and can even retain control. After the parents demise there are no death taxes as they do not own the building. 

Presuming the parents used the annuity payments for living expenses, there would be no other related asset to tax. Any unrecognized capital gain on the building is forgiven. The children needed no cash to buy the property – they used building cash flow to support the annuity payments.

CHARITABLE PLANNING
Many are charitably inclined but become much more so when charitable tools can integrate into estate planning and reduce actual cost to pennies on the dollar. When we give to a charity an income tax deduction reduces actual cost to about sixty cents on the dollar. Charitable planning exploits tax rules where actual cost of giving drops from sixty cents to ten cents or less; a tool to be considered when we seek to do well and do good.   

Most charitable tools use a trust structure where an asset is transferred to a trust, if non-income producing, the asset is sold by the charity without any taxes, the principal is invested and the income benefit and the future principal benefit are divided between the charity and the family. 

Charitable Lead Trusts (CLT), provide for income to the charity and, at a future point in time selected by the family, the remaining assets pass to the younger generation. The family gets a significant income tax deduction for the value of the income stream the charity receives and the value of the ultimate gift to younger generations is significantly discounted because it is delayed. The income tax deduction often cancels out the gift value resulting in an almost free gift to charity.

Charitable Remainder Trusts (CRT), operate in reverse – the family retains the income stream for a chosen period with the charity receiving the assets in the future at the end of the term. The family enjoys a significant income tax deduction for the value of the future gift, which significantly reduces the income taxes due on the annual trust income. The younger generation does not receive any asset (it passes to the charity) and this can be adjusted using a portion of the charitable income to fund a well structured life insurance plan which transfers wealth in an easy to divide form (money is easier to share amongst children than a building) and can avoid all income and estate taxes.

Private Foundations are charities operated by the family for its favorite charitable purposes. It provides a large degree of control and is an opportunity to mold and encourage younger generations with values important to the family. They can be used in combination with CRTs and CLTs to achieve benefits of both.

JURISDICTIONS
Many of techniques to achieve protection and tax reduction goals use entities – limited liability companies, family limited partnerships, trusts, international business companies, etc. Many times a family forms these entities in their home state presuming it is required or preferable. State laws vary.  A state is “good” when it limits rights of creditors, has consistent case law, offers flexible structures, and has reasonable fees.  Savvy advisors may use whichever state they along with the family choose and can change the domicile as they wish. Many times the use of multiple jurisdictions in concert permits the most benefit and should be part of the planning equation at inception.

CONTROL
Gifts, trusts, and other transfers often generate concerns that the family will lose control over their assets. This is not a requirement and well structured planning should maintain control with the family and preserve the right to be wrong. It is difficult to predict how assets will perform, when an emergency will arise, the actions of our children, or how relationships will change. A plan should have contingencies and an ability to modify. Many trusts that are irrevocable (typically insurance trusts and gifting trusts) lack any outs – what if the tax laws change? What if the parents need the assets returned? Any irrevocable technique should contain some safety valve, which can be achieved in most cases without jeopardizing tax benefits.