My wife and I are planning on setting up a family limited partnership ("FLP") which will be split into safe and not-so-safe assets. We are also having a revocable living trust set up which will own the limited partnership. An irrevocable life insurance trust is being established and a charitable remainder trust. Can you provide any advice and help in understanding the efficiency of our plan and in filing the required forms?
How you formulate an overall estate plan with partnerships, insurance, and charitable trusts is a complex question and you really need to get professional guidance (attorney, CPA, and perhaps others). Here is some food for thougth to get you going. Lots of complex stuff. The bottom life is if your estate is large enough to warrant this type of planning, you should be sitting down with a top notch estate planning expert, preferably one who is well-known within your state and at the cutting edge of the profession. Expect to pay serious money to get the work done right. If none of this applies to you, then perhaps your plan is a bit too sophisticated or complex for what your needs are. Let's first make a few general points, and then we will explain briefly each of the techniques that you are using (at least those you are using) and identify some of the issues for you to consider. Again, however, each of the many techniques you are suggesting are quite sophisticated and could be more harmful than beneficial if not handled properly. First and foremost, you have to establish your goals. If your estate is worth $10,000,000 and you don't really care about estate tax, then you certainly need not go through all the complexities you are addressing. If your estate is not substantial, you might be able to use fewer or less sophisticated techniques to achieve your same goal. For example, if your children are of a reasonable age, and you don't want to incur the cost or complexity perhaps, you simply have them own some of the life insurance involved rather than setting up another insurance trust. You might be able to use gifts of interest and assets direct to the children or other heirs in lieu of setting up a more complex family limited partnership structure. The bottom line is once you have your asset and family data in front of you and your advisers, a plan must be developed that meets your goals based on the facts and circumstances which you uniquely face. Finally, it is generally recommended that when you proceed with a plan as complex as the one you outlined, assuming you have determined after some analysis with pros that it is the right thing for you, that you address the plan in phases. For example, for Phase I of your plan, tackle the core documents of durable powers of attorney, living wills, health care proxies, and wills. You might wish to add an insurance trust or revocable living trust at Phase I. Once that is in place, then tackle the next phase which might consist of your insurance trust and revocable living trust. You might then wish to save the more complex techniques for the charitable remainder trust and family limited partnership for Phase III. Breaking the work down into phases enables you to prioritize and get the most important work done first. The most important work in every instance is not the taxes to save money, but rather the basic core documents to protect the human beings involved. If you have young children this is especially critical. Now, let us address each of the techniques that you mentioned. First, you talk about a family limited partnership ("FLP"). Without more information, it is hard to tell if a FLP is appropriate. Many people have been oversold on the concept of simply putting assets into an FLP and obtaining substantial discounts for estate tax purposes. If this is your objective, it just "ain't so simple". If you are transferring securities to the FLP, Congress is aware of the substantial discounts which people have been taking on FLPs owning securities and has proposals to clamp down. This doesn't mean don't do the planning. This just means be aware that time is limited and expect an audit. It also means that if you don't dot your T's and cross your I's (just seeing if you are paying attention), an audit may not be so successful. The FLP has to be handled with proper legal formalities and treated as an distinct legal entity. Many people fail to observe these safeguards and lose when the IRS calls their bluff. Be very cautious when you transfer securities to an FLP not to trigger all the unrealized capitals gains under the investment company rules of Code Âº721. Your accountant can help you review that. You mentioned something about safe and not so-safe assets. If by not so-safe assets, you were referring to rental properties or business activities which could have a significant liability risk associated with them, a preferable structure is that each of these risk activities be structured in a separate independent legal entity. For example, you could have a limited liability company ("LLC") depending on your state law which in turn owns one member LLCs, each of which owns a risk property or business. Thus the structure would appear as a master family LLC owning the various subsidiaries or second tier LLCs with the risk assets in order to safeguard the primary entity and securities from the risk assets. As to the choice as to whether or not an FLP or LLC is preferable, it depends on state law, your objectives, and other facts. You have to see an estate planning tax expert for that one. You indicated that you were going to have a revocable living trust. Revocable living trusts are great planning tools when properly used. However, in many cases they are oversold and improperly applied. Make sure you understand why you are doing it and that the benefits you hope to achieve will be obtained. In most cases, the purported fears of probate are not all that significant in reality. Living trusts are useful for avoiding probate if done properly and if that is a legitimate goal of yours. Finally, living trusts are a great tool for managing assets in the event of illness or disability. Be certain that your trust is properly drafted to address this. You might wish to take a look at the illustrative document on this website for additional ideas. You indicated that you are going to have an irrevocable life insurance trust. The term irrevocable, for those visitors wanting English, simply means that you can't change it once it is set up. In estate planning, the irrevocability is often critical to assure that an asset is being removed from your estate. One of the primary uses of insurance trusts is to remove at a nominal cost (i.e. the cost of annual premiums), the ultimately large insurance proceeds from your estate. You might wish to discuss with your advisers whether or not you need a separate trust for your wife's insurance, a separate trust for your insurance, and perhaps a third trust for second-to-die insurance or survivorship policies as it is often called. If you set up insurance trusts, be sure to address with your estate planner whether or not you should engage in generation skipping transfer tax planning. If your estate is as large as your plan indicates, it would be appropriate to either use your insurance trust for GST planning or perhaps even to set up what is called a dynasty trust (a perpetual trust to maximize intergenerational tax planning benefits). Finally, you mentioned a charitable remainder trust. This is a trust formed to ultimately benefit charity, and you must have some charitable intent under the present rules. To start a charitable remainder trust ("CRT") is for you to transfer highly appreciated assets to the trust. The trustee would then sell the assets and invest in a diversified portfolio and pay you and your wife an annuity payment for life. At the end of your lives, the money would go to charity. Often this is combined with an insurance trust to replace the assets which are going to charity at your death so that your heirs will receive an inheritance. Although this can be a great planning technique, it is not essential that you combine the insurance trust with the CRT. Whether or not it is appropriate to do so depends on the facts and circumstances, health considerations, personal objectives, and so on. Your key question seems to regard your plan's formation. Without lots more information as to who comprises your family, the nature of your assets, the liability risk of the assets, the size of your estate, how your estate is expected to grow and, most importantly, your personal goals, objectives, and preferences, it is impossible to comment. Suffice it to say to do the documentation that you are contemplating is a major undertaking. It certainly pays to think it through first to make sure it is right for you. Caution: You have begun to touch upon some of the most aggressive and sophisticated of estate planning techniques. Be certain to consult with not only an expert estate planner, but a tax accountant with substantial estate experience, an insurance consultant, who can properly help you structure and plan your insurance coverage, a planned-giving professional from the charity you hope to ultimately benefit, and perhaps even a real estate attorney if real estate is involved as one of your "not so-safe" assets. While your planning is complex, the tax laws change rapidly and the rules differ from state to state. Be very careful applying any planning techniques from the above discussion or from any general planning book or material to your circumstances.
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