Broker Check

Estate Planning

Reducing the Burden of Estate Taxes

Estate taxes can claim up to one half of everything you own. Proper planning is a necessity. It is an important way to assure that you minimize estate settlement costs and maximize the size of the estate you preserve for your family. We provide advice on issues such as property ownership, distribution strategies and estate tax reduction techniques. We also identify and analyze potential liquidity and equalization issues. Some of the tax reduction strategies we regularly consider include multi-trust arrangements, revocable trusts, irrevocable trusts, various gifting strategies and charitable planning techniques. We can work with your legal and tax advisors to coordinate your estate planning strategy.


A will is a basic estate planning document that permits a person to transfer personally owned property to whomever they wish, rather than as provided under state intestacy laws. A typical simple will, for a married person, contains the following provisions:

  • Payment of just debts and expenses;
  • Appointment of an executor;
  • Specific bequests;
  • Transfer of the entire estate to the surviving spouse;
  • If no spouse, then transfer of estate to children or other heirs;
  • Appointment of a guardian for any minor children.

Credit Trust Will

This type of will or trust structure is sometimes referred to as a bypass or credit shelter trust. The technique is designed to take advantage of the federal credit exemption equivalent. For a married couple, the plan takes full advantage of the marital deduction except for the credit exemption equivalent (which is placed in trust following the death of the first spouse). The tax savings arise at the death of the surviving spouse, since the credit trust is not included in that estate — even though the surviving spouse may have been an income beneficiary of that trust.

Revocable Trusts

A revocable trust is created during the life-time of the grantor. A trustee (often the grantor) initially holds property for the benefit of the grantor. It is not used to avoid income, gift or estate taxation. However, it is utilized in the following situations:

  • Where the grantor, during lifetime, wishes to provide for management responsibility over property;
  • Where the grantor wishes to assure continuity of management and income flow of assets in the event of death or disability;
  • Where a grantor desires privacy in the handling and administration of his assets during lifetime and at death;
  • Where the grantor wishes to minimize estate administration costs and delays at death;
  • Where the grantor wishes to avoid ancillary administration of assets situated in other states by placing title in the trust.


Making a lifetime gift is often the most effective way to reduce estate taxation. However, this technique is often overlooked. Economic necessity will temper one's willingness or ability to make significant lifetime transfers of wealth. It is common practice in the design of a financial plan to model the asset base and cash flow requirements of a potential donor before making significant gifts. This is a simple, but practical step used to assure the donor that he or she can afford to give up control of the assets.

Gifts can be made outright or in trust. Many of the techniques that follow involve some form of gifting. The basic benefits of gifting include:

  • Shifting the income and growth of an asset out of a higher income tax bracket;
  • Shifting growth out of a high estate tax bracket; and
  • Tax leverage. Even though the estate and gift tax rates are the same, the calculation process favors lifetime transfers (see the table below).

Comparison of Gift and Estate Taxes
Total value of assets available: $6,000,000

Gift Tax*  
Tax base: net value of assets transferred $4,000,000
Gift tax: (tax rate) X (tax base) $2,000,000
Net transfer to donee: (total assets) — (tax) $4,000,000
Estate Tax*  
Tax base: total value of assets available $6,000,000
Estate tax: (tax rate) X (tax base) $3,000,000
Net transfer to heirs:(total assets) — (tax) $3,000,000
*Assume Gift/Estate Tax Rate of 50%  

Irrevocable Trusts

The irrevocable trust can be used to obtain certain income and estate tax savings not available to revocable trusts. The following goals may be accomplished through the use of an irrevocable trust:

  • Allowing insurance on the grantor's life to be available for family members estate tax-free;
  • Providing trust management for gifts to minors, without losing the benefit of the annual gift tax exclusion;
  • Avoiding one or two generations of estate taxes, all while providing management for family assets; and
  • Using the trust as a coordinating recipient of gifts and bequests for beneficiaries.

Life Insurance

Life insurance is a practical and popular planning tool to provide liquidity for any type of estate. The reasons for this relate to the basic mechanics of an insurance policy. Premiums are priced relative to policy proceeds. For a married couple, it is common to use second-to-die coverage for estate liquidity needs. But, if the insured owns the coverage or has incidents of ownership, the proceeds are subject to estate tax. Therefore, it may be wise to consider positioning life insurance outside of the estate in order to avoid inclusion of the proceeds for tax purposes. Placing life insurance in an irrevocable trust is one such way to accomplish this.

Grantor Retained Interests (GRAT, GRUT)

A grantor retained annuity trust (GRAT) and grantor retained unitrust (GRUT) may be utilized to increase the benefit of gifts made to those in other generations. Typically, the donor makes a current gift to his children of the right to the trust assets at a specific date in the future and the donor retains the right, for a term of years, to receive the annuity or unitrust payments from the trust. If the donor survives the term of the trust, significant tax as well as other transfer cost reductions may be realized. For example, the assets in the trust may be excluded from the value of the donor's estate.

Another type of grantor retained interest is a Qualified Personal Residence Trust (QPRT). Generally, a donor transfers an interest in his personal residence to an irrevocable trust in which he retains the right to use the property for residential purposes for a term of years. After the term of years expires, the residence passes to the remaindermen of the trust, typically a child or children. If the donor survives the trust's term, the residence may not be included in the value of his or her estate.

Each of these techniques often takes advantage of the credit available during an individual's lifetime. The value of the gift is equal to the value of remainder interest. For example, a $1,000,000 house placed in a QPRT for 15 years by a parent age 65, assuming a 6% interest rate, will cause the donor to be treated as making a $247,070 gift. But no immediate tax would be due, since this is less than the credit exemption equivalent of $1,000,000 (in 2002).

Charitable Transfers

There are a variety of techniques involving charitable transfers that may be used to accomplish specific objectives. To totally eliminate the federal estate tax burden for any size estate, the decedent only needs to leave all property to a qualified charity. Most people feel they cannot afford to do this because of family obligations. It is possible to benefit a charity and family, while reducing estate taxes, using a charitable remainder trust.

Private Annuities

A private annuity may be effectively used in family situations where a parent wants to transfer an asset, such as a business interest, to the next generation, free of estate taxes. Typically, the parent sells the asset to his child. In return, the child promises to pay the parent an income for life. This is a legally enforceable contract right, but unsecured.Since the payments to the parent terminate at death, the annuity generally has no value, and therefore, is not included in the parent's estate. To be successful, the present value of the annuity payments has to be equal to the fair market value of the asset being sold. The child takes the risk of the parent living past life expectancy. The parent takes the risk that the child will not meet the current payment schedule. For example, at age 65, the parent has approximately a 20-year life expectancy. Assuming a federal discount rate of 5.8%, the annual annuity generated by property worth $100,000 is $10,129.

Self-Cancelling Installment Notes (SCIN)

An SCIN is an installment debt obligation that, by its terms, is extinguished at the death of the seller. It is similar to a private annuity in that an asset is sold to the child on an installment basis. However, with an SCIN, the installments are shorter than the seller's life expectancy and the child usually would pay a "risk premium" in the form of an above-market interest rate to the parent as consideration for the cancellation provision. Generally, nothing will be included in the seller's gross estate, but any deferred gain on the installment obligation will be reported on the seller's estate income tax return.

Family Partnerships

A family partnership may be used to shift both the income tax burden and the appreciation of assets from parents to children or other family members. However, the benefit of income shifting to children under age 14 is limited, since unearned income in excess of $1,850 (as indexed for 2002) generally will be taxed at the parents' income tax rate. A parent may transfer a business interest to his children and retain control of the business through his general partnership interest. Upon transferring the interest, the parent may receive a discount for gift tax purposes if it is a minority interest or because of lack of marketability, and any appreciation on that interest should not be included in his or her estate, assuming a valid partnership has been established.