Sophisticated Estate Planning Techniques

 
 

Life Insurance Trust (ILIT)

In order for life insurance to be an effective estate planning tool, it should be owned by an irrevocable life insurance trust (commonly referred to as an “ILIT”), not by the insured or the insured's spouse.  If a life insurance policy is owned by an ILIT, the entire policy proceeds payable at the insured's death are typically excluded from the taxable estates of both the grantor and the grantor’s spouse, and, thus, escape estate taxation upon both of their deaths.  This transfer tax savings translates into an enormous increase in the amount of policy proceeds passing to the grantor’s heirs. 

When used in the estate planning context, life insurance can provide a means of leveraging annual exclusion gifts into a significant wealth transfer to younger generations.  (An annual exclusion gift is a gift that qualifies for the annual exclusion from federal gift taxes.  Each individual may use his or her annual exclusion to gift up to $15,000 per recipient to an unlimited number of people each year, gift tax-free.)  Relatively small annual exclusion gifts may be used to pay the premium cost on a life insurance policy held by an ILIT, which will ultimately result in a significant death benefit to a grantor’s spouse, children and/or grandchildren, typically while avoiding both gift and estate taxation. 

LIFE INSURANCE IN THE ESTATE PLANNING CONTEXT

Life insurance can offer solutions to address certain estate planning needs, including:

  • Providing estate liquidity for expenses and taxes.  Estates facing estate taxes must pay the liability in cash, generally nine months after the decedent’s death.  Both taxable and non-taxable estates have numerous expenses, including funeral costs, outstanding medical expenses and family support.  Further, seemingly liquid estates can become essentially illiquid if marketable assets are at significant lows due to unfavorable market conditions at death.  Ensuring sufficient liquidity to pay taxes and expenses can minimize conflict, reduce the family’s stress and avoid “fire-sales” of estate assets to generate cash.

  • Equalizing amounts passing to beneficiaries.  Life insurance can equalize otherwise disproportionate asset distributions by balancing, for instance, bequests of real estate or closely-held business interests to certain family members with distributions to other heirs of cash from life insurance proceeds.

  • Planning for blended families.  For individuals with “blended families,” life insurance can minimize conflict by providing for children from prior marriages while also leaving separate assets to the surviving spouse as needed to maintain his or her current lifestyle.

  • Equalizing wealth of the spouses.  Often, spouses may not have equal assets in their individual names, particularly if one spouse is younger.  Acquiring life insurance on a less wealthy spouse can be a simple and cost-effective solution for increasing that spouse’s estate.

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ADVANTAGES OF THE LIFE INSURANCE TRUST

An irrevocable life insurance trust is one in which the grantor completely renounces all rights in the life insurance property and any other assets transferred to the trust, and retains no rights to revoke, terminate or modify the trust in any material way.  Typically, these trusts are used in estate planning to accomplish these primary objectives: 

• Avoid estate taxation of the death proceeds;

• Provide financial security for the grantor's survivors who may be minors, spendthrifts or financially irresponsible;

• Avoid probate costs on the life insurance proceeds and any other assets passing via the trust; 

• Maintain privacy and confidentiality, as the trust provisions are not a matter of public record, as they are with a will; and

• Protect assets in the trust at the grantor's death from the claims of creditors. 

Spousal Lifetime Access Trust (SLAT)

Currently, in 2020, the lifetime federal gift and estate tax exemption is $11,580,000 per person.  Never before have individuals had the opportunity to transfer so much wealth out of their taxable estates during their lives.  However, this increased exemption is scheduled to expire at the end of 2025 (if not sooner, if a new administration comes into office in 2020), when the exemption amount will be reduced to $5,000,000 per person (indexed for inflation).   Accordingly, given this short-term window, time is of the essence for planning utilizing this tremendous opportunity for wealth transfer and estate tax reduction.  Nonetheless, given the uncertain financial environment and inability to predict future financial needs, many clients are apprehensive about parting with ownership and control of their assets.  A spousal lifetime access trust (SLAT) is an ideal planning strategy that balances a donor's desire to use this increased lifetime exemption with the need to retain adequate funds to support future unforeseen financial needs.  


The SLAT is a lifetime irrevocable trust created for the benefit of the donor’s spouse and other beneficiaries, such as descendants, which allows the donor to take advantage of his or her current $11.58 million gift tax exemption.  This gift of the lifetime exemption amount allows the donor to reduce future estate tax liability by removing the asset and its income and appreciation from the donor's taxable estate.  By having the donor's spouse as a beneficiary of the SLAT, he or she can receive distributions from the trust, thereby allowing the donor to indirectly benefit from these distributions, as well, should the need arise.  


Additionally, in states, such as New York, that do not impose gift taxes but still impose estate taxes, a lifetime gift to a SLAT can result in reduced state estate tax exposure.  In addition, the trust can purchase life insurance on the donor’s life, while avoiding income taxes on the growth within the policy and allowing policy death benefit proceeds to pass free of income and estate taxes.  


As an irrevocable trust, the SLAT can also protect trust assets from the donor's and beneficiaries’ creditors, and avoid probate.  Further, if the donor allocates his or her generation-skipping transfer tax exemption to the gifts to the SLAT, the donor can structure the SLAT as a dynasty trust that benefits multiple generations of his or her descendants without the imposition of additional transfer taxes. 

Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) can be one of the most effective estate planning techniques available to wealthy families.  A QPRT allows an individual to make greater use of his or her $11,580,000 lifetime exemption from gift and estate tax.  It is a particularly attractive technique for individuals who are already maximizing their $15,000 annual exclusion gifts to family members.  Moreover, with a QPRT, an individual may make a significant gift to his or her loved ones without adversely affecting his or her income. 

Using a QPRT, an individual may put a primary residence or vacation home in trust for the benefit of a beneficiary (his or her children or a loved one), while retaining the right to use the residence for a specific term of years.  Each individual may create up to two QPRTs.  For gift tax purposes, the value of the beneficiary’s remainder interest is determined after subtracting the value of the grantor's right to use the residence for the term of years.  This valuation procedure allows a grantor to substantially discount the value of the gift made to the beneficiary, and also removes all post-gift appreciation in the value of the residence from the grantor’s estate.  Assuming that the grantor survives the trust term, the residence either passes outright to the beneficiaries of the trust or can remain in trust for their benefit.  Essentially, a successful QPRT allows a grantor to reduce the gift or estate tax cost of transferring a residence by leveraging the $11,580,000 lifetime gift and estate tax exemption.

The length of the grantor’s term interest in the trust is not limited and the longer the term interest, the lower the value of the beneficiary's remainder interest (and, hence, the lower the gift tax).  The term interest should be kept short of the grantor’s life expectancy, since if the grantor dies before the termination of the term interest, the full value of the residence would be included in the grantor’s estate for estate tax purposes, while the earlier taxable gift is removed (thereby defeating the purpose of the trust).  Essentially, though, a QPRT is an estate planning technique with virtually no downside estate planning risk.

Although the QPRT is irrevocable once created, the trustee retains the power to sell the residence and to purchase a new one.  Accordingly, the grantor's ability to change residences is not hampered by the use of a QPRT.  If the residence is indeed sold during the trust term, the sale proceeds must be reinvested in a new residence within two years, or the QPRT will either have to (i) terminate and distribute assets to the grantor or (ii) convert to a grantor retained annuity trust (GRAT).


If, at the end of the grantor's term of years, the grantor desires to remain in the residence, the QPRT may give the grantor an option to lease the residence for the rest of his or her life.  The lease payments must be a fair market rental, but the lease payments themselves present an additional estate planning benefit, especially if the beneficiary’s marginal income tax bracket is lower than the grantor’s marginal estate tax bracket.  Thus, further assets are removed from the grantor’s estate, at a lower tax cost.


For income tax purposes, the grantor is treated as the owner of the residence for the stated trust term.  Accordingly, he or she is eligible to deduct real estate taxes and the interest portion of any mortgage.  A sale of the residence during the trust term may also qualify for the home sale exclusion of gain if the applicable home sale ownership rules are satisfied.  Because a QPRT transfer is treated as a gift, the beneficiary's basis is generally equal to the grantor's basis.  Therefore, the potential income taxes due on sale by the beneficiaries must be weighed against the potential estate tax savings.


It should be noted that, while an individual can transfer a residence with a mortgage to a QPRT, it does complicate the tax benefits significantly.  Where a residence subject to a mortgage is transferred to a QPRT, the grantor has made a gift of only the equity in the property and not the full market value.  As subsequent principal payments are made on the mortgage, the grantor would be treated as making additional taxable gifts that would be measured by a specific calculation method.  The interest portion should remain deductible, in most cases, under income tax rules.  Nonetheless, in order to alleviate the future gift tax consequences, it is generally best to transfer a non-mortgaged residence to a QPRT.

Because a QPRT does not adversely impact a grantor’s income, it is frequently a favored vehicle for intra-family transfers.  A QPRT is ideal for vacation or second home transfers and affords significant upside from a wealth transfer perspective, with virtually no downside risk.

Gifts to Minors

The annual federal gift tax exclusion allows an individual to gift up to $15,000 (or $30,000 if spouses elect to split gifts) in 2020 to as many people as he or she wishes, without those gifts counting against the $11.58 million lifetime gift tax exemption.  As a result, depending upon the size of their families, parents and grandparents can make annual gifts to their children and grandchildren that may easily exceed $100,000 per year, without incurring a gift tax or reducing the lifetime gift tax exemption amount.  Over time, annual gifting can effectively reduce the donor's gross estate by removing the value of the gifts, as well as all the future appreciation associated with those gifts.


When making these annual gifts, the donor must decide whether or not to make an outright gift.  However, when gifting to a minor, an outright gift of any substantial size is almost never advisable.  Accordingly, the donor should consider alternative methods that offer continued control in order to preserve the gift and allow it to appreciate for the benefit of the minor.  


The 2503(c) trust and the Crummey trust are two of the most commonly utilized methods for making annual exclusion gifts to minors.

LLC and FLP

Limited liability companies (LLCs) and family limited partnerships (FLPs) are entities commonly used in the estate planning context, with ownership generally limited to members of one family.  An LLC or FLP can provide important tax and non-tax benefits.  From a non-tax standpoint, these entities are important in that they can provide a vehicle for managing family assets, and can protect from liabilities arising in connection with the assets held in the FLP or LLC.  They can also provide asset protection, in that a creditor who seizes the partnership interest from the interest holder will succeed only to the interest holder's rights, and may not be able to force a liquidation of the partnership or LLC (making it a much less attractive asset to seize.)  Thus, an FLP or LLC is an excellent way to own buildings or an unincorporated business.  From an income tax standpoint, an FLP or LLC can be superior to a corporation because they are treated as pass-through entities.  From a gift and estate tax planning standpoint, an FLP or LLC can give rise to significant valuation discounts.  


More specifically, a limited partnership, if used properly, can be an excellent asset protection tool that operates in a manner comparable to that of an LLC.  A limited partnership consists of one or more general partners and one or more limited partners. The general partners have management power in the partnership, with no liability protection. The limited partners have no management power in the partnership, but they do have liability protection.  A typical limited partnership will have a general partner with a 1% membership interest in the company, and all the other partners will usually be limited partners, who collectively hold the remaining 99% interest in the company. 


A family limited partnership is essentially a limited partnership with family members as the partners.  The children are usually the limited partners, and a parent, trust or other business entity is usually the general partner.  FLPs are generally used for estate planning and asset protection purposes.  With an FLP, assets are typically gifted from the general partner to the limited partners, using the donor's annual exclusion and/or lifetime exclusion from gift tax. 


In many respects, a limited partnership works like an LLC.  Limited partnerships benefit from pass-through taxation, and in most states, creditors are only entitled to distributions from the partnership, without being able to seize the partnership’s assets or gain a partnership or management interest in the limited partnership. 


In an LLC or FLP, control of the company can be, and frequently is, divorced from equity.  An LLC is controlled by a manager or managers, who may or may not be members.  An FLP is controlled by its general partner(s).  Managers and general partners do not have to be elected by a majority of members or limited partners; they can be named in the operating agreement or limited partnership agreement.  An LLC member may own 99% of the equity, yet have no control over the LLC because he or she is not a manager.  Likewise, a limited partner in an FLP may own 99% of the equity and have no control because he or she is not a general partner.  This inherent separation of control from equity ownership makes an LLC or FLP an ideal gifting vehicle.  These types of entities allow a donor to gift away almost all of the equity value that would be included in his or her taxable estate, without relinquishing control of the underlying assets.


As referenced above, LLCs and FLPs lend themselves in estate planning to taking advantage of valuation discounts.  Thus, when gifting away the equity value that would otherwise be includible in a donor's estate, the value of the gift of LLC or FLP interests may be discounted for one of the following inherent reasons:


  • Lack of Marketability.  An interest in an entity that is not registered and readily tradable (e.g. stock in a publicly traded company) cannot be easily sold and converted to cash because there is no market for the interest.


  • Lack of Transferability.  Even if there were a market for the interest, a member of an LLC or partner in an FLP cannot readily transfer his or her interest because admitting a new member or partner requires the approval of the other members or partners under state law.  Additional restrictions on transfer are often imposed in the LLC operating agreement or FLP partnership agreement.


  • Lack of Control.  An interest holder in an LLC or FLP cannot compel the entity to liquidate and pay out the value of the holder's interest.


Discounting can be a very useful tool in designing a gifting program using the annual exclusion and/or lifetime exclusion from gift tax.  Discounting takes maximum advantage of the annual exclusion and lifetime exclusion by allowing more interests to be transferred. In order to determine and value the discounts that may be taken, it is important that the donee obtain a written appraisal of the LLC or FLP interests from a qualified appraiser.

Grantor Retained Annuity Trust (GRAT)

A grantor retained annuity trust (GRAT) is a highly effective estate planning tool to be used with assets likely to appreciate in value.  A GRAT is an irrevocable trust from which the grantor retains the right to receive annuity payments for a specified term of years.  At the end of this retained term, assets contained in the trust pass to other remainder beneficiaries.  The annuity payments made to the grantor during the term dramatically reduce the value of the gift of the remainder interest when the GRAT is established, so that only the net present value of the remainder interest is subject to gift tax.  A GRAT produces estate and gift tax savings if the assets placed in the GRAT produce a total net return (net income and appreciation) in excess of the assumed discount rate under the Internal Revenue Code.


The annuity payments may be set sufficiently high so as to create a "zeroed-out" GRAT.  With a zeroed-out GRAT, the net present value of the retained annuity payment stream equals 100% of the value of the assets placed in the trust.  If the assets in the GRAT appreciate in value beyond the amount necessary to produce the retained annuity payments, then the value of the trust remaining at the end of the term of the trust will pass to the designated beneficiaries free of gift and estate taxes.


There is virtually no downside to creating a GRAT.  If the grantor dies before the expiration of the term of the GRAT, the assets remaining in the trust will be included in the grantor's taxable estate, with an appropriate credit being given for any gift tax paid when the trust was created.  Similarly, if the trust assets decrease in value, so that there is nothing remaining in the trust at the expiration of the term, the grantor is returned to the same position as he or she was in prior to creation of the GRAT, with no tax costs having been incurred.  In both instances, the grantor's loss is limited solely to the costs associated with establishing the GRAT.


A zeroed-out GRAT is an excellent estate planning tool for an individual who has exhausted his or her applicable exclusion amount under the federal estate and gift tax laws and who is already maximizing annual exclusion gifts.  The GRAT presents a way to pass excess growth and appreciation in assets to children without incurring gift or estate tax.  While such a technique works only if the assets placed in trust appreciate beyond the applicable federal discount rate, the grantor is generally able to identify which assets are likely to do so.  A GRAT generates the greatest transfer tax benefit in a low interest rate climate because it is more likely that the return on assets held by the GRAT will exceed the low interest rate.

Sale to Defective Grantor Trust (IDGT)

Where a grantor has income producing assets (for instance, commercial real estate subject to a long-term lease) that the grantor expects to appreciate significantly in value, a sale of that property to an income tax defective grantor trust is an attractive estate planning technique.  Such a trust is deemed defective for income tax purposes because the grantor is considered to be the owner of the trust for income tax purposes, such that the grantor and the trust are deemed to be the same person with respect to income tax issues.  Consequently, the sale of assets to the trust by the grantor does not result in any taxable capital gain.  While the grantor is deemed the owner of the trust for income tax purposes, the trust is designed so that the trust assets are not includable in the grantor's taxable estate for estate tax purposes.


Typically, such a transaction takes the form of an installment sale over an extended term, with the trust's payment obligation to the grantor being evidenced by a promissory note.  For tax reasons, the term of the note should not exceed the grantor's actuarial life expectancy.  However, the note may contain a provision providing for the termination of the repayment obligation in the event the grantor dies prematurely.  This provision presents the opportunity for a windfall to the grantor's beneficiaries in the event of an untimely death.  However, the use of this provision requires that a premium be attached to the promissory note, either in the form of an increased principal amount or above-market interest rate.


This estate planning technique is useful where the property being sold will generate enough income to offset the promissory note payments.  It is often wise to combine such a sale with a concurrent gift of other assets to the trust, in order to give the trust other means of repaying the note.


The benefit of this technique is that it presents the opportunity to transfer property at no gift or estate tax cost to the beneficiaries, while having the asset pay for its own transfer by applying the income stream to the promissory note payments.  Moreover, since all of the income produced by the asset is taxed to the grantor, the grantor's payment of that income tax liability is, essentially, an additional tax-free gift to the beneficiaries of the trust.

Buy-Sell Agreement

An excellent way to safeguard a business is to create and execute a buy-sell agreement.  A buy-sell agreement is a contractual document that outlines what happens if a business owner needs to transfer his or her interest in the company.  A comprehensive buy-sell agreement will cover when a business owner can no longer be involved in the business for any reason, including death, divorce, bankruptcy or retirement.  A buy-sell agreement can also protect the business from loss of revenue and cover the expense of finding and training a replacement.  A buy-sell agreement can be put into place at any time, but it often makes sense to do so when a business is formed or when a new partner is brought in.


KEY FEATURES OF A BUY-SELL AGREEMENT

Contingency Planning

Buy-sell agreements outline how the remaining partners of a business will purchase the shares of another owner who dies or simply wants to sell.  Typically, business owners would need to have a large amount of cash on hand to make this purchase, which is often unrealistic.  As a result, many businesses fund their buy-sell agreement through insurance, especially in the case of a death.


Insurance

As mentioned above, buy-sell agreements can be funded through insurance.  Another insurance policy that small businesses might want to investigate is “key person” insurance.  This policy insures against a potential loss of revenue that could result if one of the partners dies due to unforeseen circumstances.  The insurance payout can help the business train and hire a new person to take the partners place.


Protection

The buy-sell agreement clearly lays out a succession plan for departing members, reducing the chance of misunderstandings or infighting that might result.  A succession plan might include transferring an owner's assets directly to a family member or having it go through a living trust.


Outline Triggering Events

There can be any number of events that trigger the implementation of the buy-sell agreement. Some of the more common triggers include:

  • Disability: If an owner has become disabled or can no longer perform his or her duties, they may need to be bought out to preserve the integrity of the business.

  • Divorce: In the case that one of the owners gets a divorce, it might be within the organization’s best interest to simply buy the owner out.  This prevents the business from being used as collateral or an asset during the divorce proceedings.

  • Debt: In a substantial number of situations, small business owners are the personal guarantors for business loans or debt.  If the owner defaults on a loan, even a personal one, it can compromise the business.  In a partnership, since one's ownership stake in the company could be liquidated to pay off bad debts, it would be prudent to include a clause that deals with this possibility.

  • Conflict: If a dispute cannot be settled between the owners, the subsequent tension and non-communication can severely limit the business’ performance.  How a buyout should proceed in the case of such a dispute should be included in the agreement.

  • Retirement: In the case of retirement, the departing owner can still receive a payout for the shares he or she owns, but the remaining owners should also be able to reclaim that owner’s interest in the company.

  • Death: In the case of an owner’s death, the buy-sell agreement—as well as individual life insurance policies—will cover the large buyout that will be due to the surviving family members as the death benefit.


TYPES OF BUY-SELL AGREEMENTS

There are two main types of buy-sell agreements commonly utilized by businesses:


Cross-Purchase Agreement.  In a cross-purchase agreement, key employees have the opportunity to buy the ownership interest of a deceased or disabled key employee.  Each key employee typically takes out an insurance policy on each of the other key employees.  Cross-purchase agreements tend to be used in smaller companies where there are not too many key employees to insure.


Stock-Redemption Agreement.  Stock-redemption agreements are formal agreements between each of the key employees—and the business itself—under which the business agrees to purchase the stock of deceased, retired or disabled key employees.  Key employees agree to sell their shares to the company, often in exchange for a cash value.


Both of these types of buy-sell agreements establish a market value for a key employee’s share of the company.


FUNDING A BUY-SELL AGREEMENT

There are several options for funding a buy-sell agreement:


Set Aside Funds.  Money for a buy-sell agreement can be set aside, as long as it is easily accessible.  These funds must be kept up for the life of the company, and may present a temptation during fiscally tough times.  The business owners must determine the appropriate amount needed to cover the cost of a buy-out.


Borrow the Needed Amount.  A company can borrow enough to buy out a withdrawing key employee at the time of his or her death or upon another triggering event.  However, the loss of the employee can often affect a company’s ability to secure a loan, and the payments become an added stress on the business during an already difficult time.


Life Insurance.  Purchasing a life and/or disability policy in order to fund a buy-sell agreement is an option when preparing for the future.  Using life insurance enables a buy-sell agreement to be funded with premium payments and attempts to ensure that funds will be available when they are needed.

UPDATING BUY-SELL AGREEMENTS

It is best to keep the buy-sell agreement up-to-date by revising it every three to five years.  In that time, growth or devaluation of the company could result in the parameters needing to be changed. It is especially important for organizations that experience rapid growth to revise their buy-sell agreement, as business owners do not want to be bound by an outdated agreement that neglects to reflect changes in the state of the company.

Charitable Lead Trust (CLT)

A Charitable Lead Trust (CLT) gives a charity the right to receive funds for a fixed number of years, after which the funds pass to family members.  The charity can be a private family foundation.  The amount payable to charity can be either a fixed dollar amount each year (charitable lead annuity trust or CLAT), or a percentage of the value of the assets as redetermined each year (charitable lead unitrust or CLUT).  Usually, a CLT is used to pass assets to family members at a reduced gift tax cost, while benefitting a charity.


A CLT can be set up during the donor's lifetime, or on the donor's death.  If the CLT is set up during the donor's life as a grantor trust for income tax purposes (so the donor is taxed on the income earned by the trust each year), then the donor can claim an income tax deduction when the trust is funded, but the donor will not get an income tax deduction as distributions are made to charity.  If the trust is not set up as a grantor trust for income tax purposes, then the donor gets no income tax deduction when the trust is funded, but distributions to charity from the trust will be deductible against the trust's income.


More frequently, a CLT is set up under a revocable living trust or Will.  The decedent's estate gets an estate tax deduction for a portion of the assets going into the trust.  The amount of the deduction will depend on what kind of CLT (unitrust or annuity trust) is used, the payout rate, interest rates when the trust is funded and the length of the charitable term.  A CLT works well if the donor has assets which are likely to increase in value far faster than the IRS assumed rate of interest, or if valuation discounts can be claimed to reduce the value of the assets going into the CLT. 

Charitable Remainder Trust (CRT)

A charitable remainder trust is an irrevocable trust by which a donor makes a deferred charitable gift.  A charitable remainder trust may take the form of either a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT).  The donor retains the right to an annual annuity amount (a fixed dollar amount that does not change from year to year) or a unitrust payment (a fixed percentage of the value of the trust, paid each year, that can change as the value of the trust increases or decreases) for the donor’s lifetime (or the combined lifetime of the donor and his or her spouse), and the charity receives the remainder of the trust following the expiration of the income interest.  The donor receives an income tax deduction in the year the trust is established and funded, and the assets are no longer subject to estate tax upon the donor's death.  


The use of a charitable remainder trust is particularly beneficial where the donor has appreciated property, with a very low basis, which is producing little or no income.  The charitable remainder trust may sell this property free of capital gains tax and invest the proceeds in high income producing assets, thereby providing the donor with an increased income stream without reducing the investment assets through the payment of capital gains tax.


Often, a charitable remainder trust is paired with an annual exclusion gifting program.  With such a program, the donor would utilize a portion of the stream of income received from the trust to fund annual exclusion gifts to children or other family members.  Such gifts may take the form of the acquisition of a life insurance policy in an irrevocable life insurance trust, sometimes called a "wealth replacement trust" because it provides the children with funds to offset the loss of the assets passing to the charity.

Trust Decanting

Many families use irrevocable trusts to make gifts to their children and loved ones, as these trusts offer certain income and estate tax advantages.  However, historically, it was very difficult and costly (sometimes even impossible) to alter the terms of irrevocable trusts. Trust decanting, on the other hand, has become a popular way to allow the terms of an irrevocable trust to be modified.  Trust decanting is the process of distributing assets from one trust to a new trust with different terms for one or more beneficiaries of the first trust.  Similar to the way in which wine is decanted by pouring it from its original container into another container, leaving the unwanted sediment behind, the assets from an existing trust are figuratively poured into a new trust, thereby leaving the undesirable terms in the original trust.


New York State has a decanting statute (the first of its kind) that enables the terms of an irrevocable trust to be modified by having the trustee distribute the trust assets into a new irrevocable trust for one or more beneficiaries of the initial trust.   


Trust decanting is an important tool used to reform the terms of an irrevocable trust.  Frequently, with the passage of time, the terms of an irrevocable trust no longer conform to tax, financial or family circumstances.

When a grantor first creates a trust, he or she makes certain forecasts regarding these various circumstances, and has the trust terms drafted accordingly.   However, these predictions may ultimately turn out to be wrong. Decanting the old trust into a new trust can be an effective response to such a change in circumstances.

Prenuptial Agreement

Prenuptial agreements have seen a surge in popularity over the last several years.  Prenuptial agreements are particularly advisable for those who have sizeable wealth, own a business, have an expectation of assets from inheritance or a trust, or are entering into a second marriage with significant personal assets. 


Prenuptial agreements allow prospective spouses to determine the property rights and financial responsibilities of each party during the marriage, and establish how the property will be distributed and support obligations upon divorce or death.  They provide certainty for both parties and protections that go beyond the laws governing the division of assets, including provisions with respect to spousal support, property division, inheritance and other rights and obligations.  However, like any contract, prenuptial agreements are subject to challenge in a court of law. Accordingly, it is critical that prenuptial agreements be executed voluntarily and with comprehensive financial disclosure (or an appropriate waiver of such disclosure); that each party engage separate and independent counsel in connection with the negotiation of the prenuptial agreement; that negotiation of the prenuptial agreement begin as far in advance of the wedding date as possible; and that the agreement is fair and reasonable.


When carefully planned and used correctly, a prenuptial agreement can be an equitable way of disbursing assets and responsibilities between prospective spouses.  

 
 
 
 
 
 
 
 
 
 
 
 
 

The information contained on this website is provided for informational purposes only and should not be construed as legal advice on any subject matter.  If you wish to discuss the topics addressed on this website, or other estate planning issues, please contact Lara Sass & Associates, PLLC.
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