The purpose of proper estate planning is to (1) insure the clients’ long term security; (2) share with family members their years of efforts in developing wealth; and (3) reduce estate tax which would otherwise total upwards of forty-six percent (46%) of the net value at the surviving spouse’s death. The cornerstone of a successful estate plan is through the use of a revocable living trust, pour over wills, advance healthcare directives, and durable powers of attorney for management to avoid probate and conservatorship proceedings.

A revocable living trust is used to avoid probate and to insure an orderly administration of the assets. All income is payable to the settlers of the trust during their lifetime, and thereafter to the surviving spouse for his or her lifetime. Upon the death of the surviving spouse the trust assets are distributed to the designated beneficiaries. The trust utilizes to the maximum extent possible the clients’ federal estate tax exemptions (presently $5,000,000.00 per individual).

A pour over will transfers all probate assets to the revocable trust to be administered as part of the trust estate. The will names executors and guardians for minor children.

A durable power of attorney for asset management avoids the need for a conservatorship and allows a person to name another person to act on their behalf should they be become incapacitated or disabled. The power operates as to assets held outside the revocable trust.


An advance healthcare directive enables the person to appoint another person to make healthcare decisions if they are unable to do so on their own. Although the above estate planning techniques are extremely important to properly utilize each spouse’s federal estate tax exemptions and to insure continuity of management without probate, the following techniques can further reduce the estate tax liability:

Substantial estate tax savings can be accomplished through lifetime asset transfers intended to “fractionalize” the taxable estate. Through valuation discounts for lack of marketability and control, a “family limited partnership” can substantially reduce estate and gift tax. Rather than owning an asset, such as an apartment building, outright at death, the decedent owns a partnership interest, which has certain restrictions which reduce its value for federal estate tax purposes. The rationale behind the discounts is that the fair market value of a gift, or of an asset owned by a person at his death, is determined by what a “willing buyer” would pay for that particular asset. A willing buyer would pay less for an interest in a partnership that owns the investment than he would for 100% of the assets.

This is an irrevocable trust created by the owner of a personal residence which is held for a number of years to allow the owner to have possession of the residence.  When the interest terminates at the end of the term selected, the property is distributed to family members. When the person puts the residence into the trust, it is a gift of a “future interest.”  The value of that gift is the excess of the value of the property transferred over the value of the interest retained. The advantage of a Qualified Personal Residence Trust (“QPRT”) is that it is possible to transfer assets of significant value to family members but to incur little or no gift tax.

A Grantor Retained Annuity Trust (“GRAT”) may be an effective means for a wealthy client to transfer wealth to family members if the assets transferred to the GRAT perform better than the Internal Revenue Service (“IRS”) rates. A GRAT is created by transferring high yield assets into an irrevocable trust and retaining the right to an annuity interest for a fixed term of years.  When the retention period ends, assets in the trust (including all appreciation) go to the remainder beneficiaries.  If the assets inside the GRAT out perform the IRS rates, the balance on hand after the payment of the annuity is transferred gift tax free to the family members.

An installment sale to a Intentionally Defective Grantor Trust (“IDGT”) may be an effective means for a wealthy client to transfer part of the future income or appreciation from a high income or rapidly appreciating asset with little or no gift or estate tax cost.

A Life Insurance Trust is an irrevocable trust which is used to purchase life insurance on the parents, or either one of them, so that the insurance proceeds will pass to the family members free of estate tax.  By using the parents’ annual exclusions of $12,000 each, the insurance premiums can be paid by the trustee of the trust on an annual basis.  Again, the insurance proceeds are not part of the taxable estate of the parents and significant estate tax savings can be obtained.

If a client is charitably inclined, gifts of low basis property can be made to a Charitable Remainder Trust so that the property can be sold without the imposition of capital gain tax.  Thereafter, the proceeds of sale are invested and an annuity is paid to the grantors for life with the remaining assets passing to a charity upon their death.  Income tax deductions are obtained by the gift to the Charitable Remainder Trust, as well as estate tax deductions because the property in the trust is not includible in the parent’s estate.