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Planning Ideas for 2008

UTILIZING FAMILY LIMITED PARTNERSHIPSMany clients have taken advantage of family limited partnerships (FLPs) to help reduce the value of the assets owned by a client at the time of death. Lack of control and lack of marketability justify discounts. When the value of the asset owned at death is reduced, the estate tax is also reduced. FLPs have been used in a similar fashion to reduce the value of gifts made during life. The IRS has targeted the use of FLPs and attacked them with a vengeance in a series of cases over the past several years. In some cases, the IRS was successful in having the FLP ignored for estate and gift tax purposes. If the FLP is ignored, the discount is unavailable; and, therefore the tax savings which a client hopes for is not achieved.The IRS has targeted discounts inside a FLP where a taxpayer could not demonstrate a “significant, non-tax business reason” for the partnership. Therefore, when undertaking any entity planning, it is important that a client document the significant, nontax business reasons for creating an FLP. It is also important to operate the FLP with business formalities.In much the same manner, the IRS has had success in eliminating FLP discounts where a taxpayer transferred all of one’s assets to the FLP such that he or she could not survive unless they had an understanding with the general partner that the taxpayer could have access to the FLP assets to provide for his or her support. Therefore, no one should ever put all of their assets into an FLP if they hope to have the FLP withstand scrutiny.We believe that FLPs remain a viable and important estate planning tool for use in appropriate circumstances. However, we do recommend the taxpayers be sure to leave enough assets outside the FLP to provide for a taxpayer’s support, including enough to pay estate taxes when the taxpayer dies.GIFTING A RESIDENCE OR VACATION HOME USING A QUALIFIED PERSONAL RESIDENCE TRUSTA discounted and leveraged gift of a residence is possible utilizing a special type of trust known as a Qualified Personal Residence Trust (QPRT). After the gift, the donor can continue to reside in the residence until the QPRT ends, and, with proper planning thereafter. This planning is most effective when the value of the residence to be gifted is low and the interest rates are high. As housing prices continue to drop across the country, the economic environment for QPRT planning is becoming more favorable. As a result, the gift of a QPRT is an important alternative to consider for the right client.ESTABLISH AN IRREVOCABLE LIFE INSURANCE TRUST TO OWN YOUR LIFE INSURANCEMost people who own life insurance are the owners of their policies. Since life insurance is subject to estate tax when the insured dies, when the insured has an incident of ownership in a policy, the entire proceeds of the policy are included in the taxable estate of the deceased owner of the life insurance.Transferring a life insurance policy to an Irrevocable Life Insurance Trust (ILIT) can separate the insured from the ownership in a way that avoids estate tax inclusion when the insured dies. The establishment of an ILIT for an existing policy must be carefully crafted. There are also gift tax consequences in transferring a policy to a trust. And, in making a gift of monies to a trust, there are certain technical requirements that must be carried out in order to make those gifts (which are used to pay the life insurance premiums) excluded for gift tax purposes.If an existing policy is transferred to a trust, the insured must live three years to avoid estate tax on the proceeds. The use of an ILIT is often a cost effective tool in the estate planner’s kit.If any of these techniques are of interest to you, please feel free to give us a call to see if any of these ideas would benefit you or your family.