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Advanced Tax Planning Strategies for Large Estates

If your estate exceeds the Estate Tax Exemption, then you will likely be subject to estate tax. In order to avoid estate tax exposure, you should consider the following alternatives:

Irrevocable Life Insurance Trust

The goal of an Irrevocable Life Insurance Trust is to remove the proceeds of your life insurance policy from your estate. Rather than owning the policy yourself, the Irrevocable Life Insurance Trust owns the policy. To pay the life insurance policy premium, you “gift” money to the beneficiaries of the Irrevocable Life Insurance Trust.

The beneficiaries will have a right to withdraw the money but will not do so. Instead, the money will be used to pay the life insurance policy premium. Assuming you adhere to the required formalities in the administration of the Irrevocable Life Insurance Trust, the death benefit of the insurance policy will not be included in your estate for estate tax purposes. Further, the death benefit can be used to create liquid assets for payment of any estate tax due within 9 months of your death.

Qualified Personal Residence Trust

The goal of a Qualified Personal Residence Trust is to remove your principal residence or one other residence (i.e., a vacation home) from your estate. You can do so by creating a Qualified Personal Residence Trust, in which you transfer your residence to the Trust and lease it from the remainder beneficiaries for its fair rental value.

Charitable Remainder Annuity Trust

The goal of a Charitable Remainder Trust is to remove an appreciated asset from your estate. A Charitable Remainder Annuity Trust provides distributions of a fixed dollar amount each year to a beneficiary designated by you for a specified period. At the end of that period, the assets in the Charitable Remainder Annuity Trust are distributed to a charity. This vehicle is most often used if you have an appreciated asset that you want to sell, because the Charitable Remainder Trust does not pay current income tax on the sale.

Charitable Remainder Unitrust

The goal of a Charitable Remainder Trust is to remove an appreciated asset from your estate. A Charitable Remainder Unitrust provides that a fixed percentage of the value of the assets in the trust be distributed to a beneficiary designated by you for a specified period. At the end of that period, the assets in the Charitable Remainder Unitrust are distributed to a charity. This vehicle is most often used if you have an appreciated asset that you want to sell, because the Charitable Remainder Trust does not pay current income tax on the sale.

 

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