and adequate estate planning techniques will minimize
or eliminate federal transfer taxes (gift, estate, and
generation-skipping taxes). Similarly, such planning will
minimize the income taxation of distributions from your
IRAs and qualified plans, and the income taxation of trusts
and your estate. Sophisticated estate planning will increase
the protection of your assets from creditors, and provide
for the appropriate management of your assets for the
benefit of your heirs. You should consider the following
estate planning techniques:
1. Bypass Trust Approach. Each person may transfer,
during lifetime or at death, the amount protected by the
applicable credit ($675,000 for the years 2000 and 2001).
It is important that each spouse take advantage of this
credit. Therefore, your wills or revocable trusts should
use the bypass trust approach. For example, for an estate
of $1,350,000, use of this approach will save $270,750
of federal estate taxes.
2. Revocable Trusts. The use of a revocable trust,
or a joint revocable trust for a married couple, provides
a number of non-tax benefits, including: avoiding probate,
dealing better with incapacity, maintaining privacy, and
organization of your assets. In addition, the use of a
joint revocable trust and the election of Alaska community
property status for some or all of your assets will often
substantially reduce income taxation when the surviving
spouse sells property.
3. Life Insurance Trusts. Life insurance proceeds
are taxed under the federal estate tax if the insured
spouse has any "incidents of ownership" in the policy,
or if the surviving spouse receives the proceeds of
the policy and owns these proceeds at death. The best
way to avoid these life insurance proceeds from being
taxed is to have the policies owned by an irrevocable
life insurance trust or another irrevocable trust.
4. Annual Exclusion Gifting. Each person may gift
up to $10,000 every year to as many persons as the donor
desires. In addition, these gifts may be made to various
kinds of trusts, if the trusts are appropriately drafted
and the gifts properly documented. Many of the techniques
described below are for the implementation of annual exclusion
5. Applicable Credit Gifting. In addition to the annual
exclusion gifting, each person may transfer an amount
protected by the applicable credit over the person's lifetime
or at the person's death. As discussed above, during the
years 2000 and 2001, this credit protects $675,000 of
transfers. There is a major advantage to using this credit
during your lifetime, rather than waiting until you die.
If you gift amounts during your lifetime, then the growth
of these amounts will not be included in your estate and
taxed at your death. This growth may be very substantial.
For example, if you gift $675,000 of assets to an irrevocable
trust today, and live for 20 years, and the assets grow
at 6% per year, you will remove $1,559,388 of growth from
your gross estate. At a 55% estate tax rate, this will
save $857,663 of estate taxes. Many of the techniques
described below may be used for the implementation of
applicable credit gifting.
6. Family Limited Liability Companies. These entities
are used for asset protection and discounted gifting.
Both annual exclusion gifting and applicable credit gifting
may be accomplished by gifts to a family limited liability
company. You may retain control of the assets by being
the manager of the FLLC.
7. Valuation Discount. Gifts or sales of partial interests
in property or minority interests in the ownership of
corporations, partnerships, and limited liability companies,
if properly structured, will often qualify for valuation
discount. That is, the value of these interests is substantially
reduced because the recipient does not have control and
receives an asset which is difficult to market. In order
to obtain these discounts, it is necessary to carefully
plan and structure the gift or sale, and to retain the
assistance of a qualified appraiser. Often these fractional
or minority interests are gifted or sold to the types
of trusts described in this checklist.
8. Children's Trusts and Grandchildren's Trusts. These
trusts are popular vehicles for annual exclusion gifting
and applicable credit gifting. They allow gifts to descendants,
while retaining substantial investment and distribution
9. Qualified Personal Residence Trusts. These trusts
are used for leveraged gifting of up to three family residences
while retaining the use of such residences for the period
you desire. Gifts to these trusts use a portion of your
applicable credit amount.
10. Grantor Retained Income Trusts. This type of trust
may be used for leveraged gifting of income producing
property to nieces and nephews and non-family members.
Gifts to these trusts use a portion of your applicable
11. A Perpetual Trust Plan. This new popular dispositive
plan provides creditor protection for your children, grandchildren,
and descendants, while avoiding future gift, estate, and
GST taxes on exempt assets. This plan provides your beneficiaries
with flexibility and substantial control. Perpetual
trusts are usually created during your lifetime. You
may make lifetime annual exclusion gifts and applicable
credit gifts to the trusts. Then at your death, all or
a portion of your remaining assets pourover to the perpetual
trust. Alaska law now allows perpetual trusts.
12. Alaska's New Self-Settled Discretionary Spendthrift
Trust. These new trusts were authorized by the Alaska
legislature beginning in 1997. They are designed to provide
both asset protection and federal gift and estate tax
savings. The goal of the law is to allow a settlor to
create a trust, contribute assets to it, be a discretionary
beneficiary, and yet protect the assets from the settlor's
creditors and not have the assets included and taxed in
the settlor's estate. Both annual exclusion gifts and
applicable credit gifts may be made to such trusts.
13. Electing Alaska Community Property. Through the
use of a community property trust or a joint revocable
trust, you can avoid unnecessary income taxes when property
is sold after the death of the first spouse. Alaska enacted
an elective community property system in 1998. Under this
new law, a surviving spouse will often be able to avoid
substantial capital gain taxes when property is sold.
You may elect to have some or all of your property treated
as Alaska community property by properly forming and funding
a community property trust or a joint revocable trust.
14. Qualified Family Owned Business Interests. If
your family owns more than 50% of a business entity which
will be continued after your death by family members,
then you may qualify for an additional estate tax deduction.
In the year 2000, this additional deduction may be as
large as $625,000. To qualify for this deduction, it is
important that certain additional provisions be added
to your wills or revocable trusts.
15. Buy-Sell Agreements. Often family members or the
family and unrelated persons will own business or investment
entities, such as corporations, partnerships, or limited
liability companies. Usually, it is very desirable to
have buy-sell agreements which limit the transfer of these
interests, and provide for fair and reasonable purchases
of interests upon specific events, such as death, incapacity,
insolvency, divorce, or similar changes in circumstances.
A well written buy-sell agreement will often avoid lengthy
and costly litigation.
16. Living Wills and Health Care Proxies. Many people
desire to indicate their intention regarding their health
care if, in the future, they suffer from a terminal
17. IRA and Qualified Plan Interests. These pension
plans are often very significant family assets. It is
important to carefully determine who should be the "designated
beneficiaries" of these plans. This choice will often
determine how long the assets can grow tax-free before
having to be distributed. Various "designated beneficiary"
choices need to be analyzed: surviving spouse, bypass
trust, marital trust, children, grandchildren, or charities.
Careful drafting of the beneficiary choices and the implementation
of distributions needs to be accomplished if this substantial
income tax benefit is to be maximized.
18. Estate Freeze Techniques. Various techniques are
available to "freeze" the value of family business interests
which you own, so that most of the growth of these interests
goes to the next generation. These techniques include:
Retained Annuity Trusts
to a Grantor Trust
19. Charitable Giving Approaches. The Federal Gift
and Estate Taxes both provide for a 100% deduction for
charitable contributions. In addition, charitable contributions
during your lifetime will often qualify for a significant
federal income tax deduction. There are various methods
for accomplishing these contributions.
these Donor Advised Funds are set up with a community
foundation. Alaska now has its new Alaska Community Foundation
which has been formed to promote and assist charitable
giving in our state.
Contributions to the charity involved.
Remainder Trusts. A method for you to obtain a
larger amount of annual income from the sale of appreciated
assets. For example, you contribute appreciated assets
(e.g., stock) to this tax-exempt trust. The trustee
sells the stock, and then pays you income for life,
with the remainder going to the charity of your choice.
Lead Trusts. A method to transfer significant
assets to your children or grandchildren for a very
small gift amount, by first providing for annual distributions
to charities for a period of time.
Advised Funds. Your own "private foundation,"
without all of the administrative technicalities and
expenses. This popular technique allows you to create
a family fund at a public charity. Your family recommends
the annual distributions to be made from the fund
to the charities which you desire to support.
of you have already adopted some of the estate planning
techniques discussed above. These techniques require adequate
maintenance to ensure that you will receive the benefits
which the techniques are designed to provide. It is equally
important to consider the need for changes in the managers
of your estate plan (personal representatives and trustees)
and changes in your dispositive plan. Each person's or
family's estate planning needs to be separately evaluated
by a professional to determine if adequate maintenance
and implementation is being accomplished. The following
list is intended to remind you of some of these matters.
1. Approximate Equal Division of Assets Between Spouses. This division of assets maximizes your ability to take
advantage of both spouses' applicable credit amounts (presently
$675,000), GST exclusion amounts (presently $1,030,000),
and the progressive tax rates. Sometimes, business or
other reasons override such equalization.
2. Funding of Revocable Trusts. To obtain the non-tax
benefits of a joint or individual revocable trust, it
is necessary to transfer all of your assets to the trust.
3. Proper Implementation of Annual Exclusion Gifting. Many of you have formed life insurance trusts,
children's trusts, grandchildren's trusts, perpetual trusts,
or other types of trusts to which you make annual gifts.
Often these trusts are designed so that annual exclusion
gifts ($10,000 or less) to the trusts qualify as tax-free
for gift tax purposes. However, certain steps need to
be accomplished in order to qualify for this tax-free
gifting. For example, gift letters need to be signed,
contributions need to be held in the trust's accounts
for approximately 45 days, and notice letters need to
be signed by beneficiaries.
4. Life Insurance and Life Insurance Trusts. In order
to avoid taxation of life insurance proceeds, both the
ownership of a policy and the beneficiary designation
must be changed to the trust. Has this been accomplished?
5. Managerial Changes. Perhaps one of the most important
decisions which you make in accomplishing your estate
planning is your choice of personal representatives who will manage the probate process, trustees who will manage the trusts which will be created, and guardians who will raise your children. As time
passes, you will want to reevaluate these choices. Should
there be changes?
6. Dispositive Changes. Have you reviewed your dispositive
plan for your children and grandchildren? Is it still
appropriate? Have you considered using the new perpetual
trust approach which has proven to be very popular?
7. Dealing With Incapacity. Your durable powers of
attorney should be kept "fresh." This means they should
be renewed approximately every two years.
8. Gift Tax Returns. Many of our clients have used
estate planning techniques which have produced gifts greater
than annual exclusion amounts ($10,000 per donee). This
gifting requires the filing of appropriate federal gift
tax returns by April 15th of the following year. Such
filing satisfies your reporting requirements, and also,
if done appropriately, begins the three year statute of
limitations period during which the IRS may challenge
the value of the gift. If you have done such gifting,
have you directed that such returns be prepared and filed?
9. Generation-Skipping Transfer Tax Exemption Allocation. The Federal GST Tax applies when you make gifts
or create trusts which skip a generation. For example,
gifts to trusts for the benefit for your grandchildren
or great-grandchildren. When this GST tax applies, it
is at a 55% rate. Each person may exempt such gifts
from taxation up to a total amount of $1,030,000. However,
in order to accomplish such exemption for gifts to trusts,
it is often necessary to file a Federal Gift Tax return
which expressly allocates a portion of your exemption
amount to the trust. If you have made such gifts to
trusts, have you directed that Federal Gift Tax returns
be prepared and GST Exemption be allocated?
As mentioned above, each person's and family's estate
planning requires different maintenance and implementation.
The above discussion is not intended to be all-inclusive.
We encourage you to review with our staff the status of
your estate planning so that it may be fully implemented
and kept up-to-date.
are available to discuss any of the above estate planning
approaches with you. When you so desire, our office will
assist you in implementing appropriate techniques to accomplish
your family's planning and tax saving goals.