David G. Shaftel 2000.
All rights reserved.
A Summary Provided by the: Law Offices of David G. Shaftel, PC

Competent 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 gifting.

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 control.

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 credit amount.

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 illness.

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:
  • Grantor Retained Annuity Trusts
  • Sales to a Grantor Trust
  • Private Annuities
  • Self-Canceling Installment Notes

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.
  • Outright Contributions to the charity involved.
  • Charitable 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.
  • Charitable 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.
  • Donor 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.
Often 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.

Many 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.
We 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.