In planning for the financial welfare of loved ones and charitable interests the following should be considered:
1) Annual Gifts
If a person has both the desire and financial means to consistently make gifts over a period of years, he/she can transfer a substantial amount of assets, free of both estate and gift tax. A person is allowed to make annual gifts not exceeding $13,000 in value to as many different recipients as he/she chooses on an annual basis. For example, a parent can give $13,000 per year to each of his/her children, grandchildren, other relatives, or even friends without being subject to gift tax or reducing the lifetime exemption.
Techniques that can be used to take advantage of these provisions include irrevocable trusts, outright gifts, education savings plans, etc.
2) Freezing Gifts
If a person has assets that are likely to appreciate in value, he/she can transfer those assets out of his/her estate allowing any future increase in asset values not to be included in his/her estate. For example, if a person, called a trustor, transfers interests in a trust but also retains sufficient benefit for a fixed number of years, future appreciation of the trust assets will not be included in the trustor's estate. When the trustor transfers those interests, the value of the transferred interests is only a fraction of the their actual value, thus reducing the settlor's gift tax liability.
Techniques to "freeze" the value of assets to include grantor retained annuity trusts (the example above), installment sales, etc.
3) Discounted Gifts
If a person owns a majority interest in a high-value asset, he/she can divide that interest into multiple interests and substantially discount the value of such interests, thereby reducing his/her gift tax liability. For example, a parent owns 100% of business and he/she divides and transfers that interest equally to his/her three children. Each of the children will own 33% of the business and the parent will be able to substantially discount that value of the gifts because the child owns a minority, non-controlling interest.
Discounting can be achieved through various estate planning techniques such as outright gifts of partial interests (the example above), family limited partnerships, etc.
4) Charitable Gifts
If a person would like to provide for both charity and his/her loved ones, he/she can make a temporary gift of an asset to charity that will allow the asset to appreciate in value without such appreciation being subject to gift or estate tax. For example, a person places $500,000 in trust. The trust will pay $35,000 annually to a charitable organization for 20 years. The present value of the remainder, which will be taxed as a gift, is $111,250. The value of the trust principal after 20 years will be $1,298,500, assuming a 3% net return, which the beneficiaries of the trust will receive tax free.
There are several types of charitable gifts that allow donors not to include the value of assets in their estates, including charitable lead trusts (the aforementioned example), charitable remainder trusts, private charitable foundations, etc.
5) Life Insurance
If a person does not possess the resources to fulfill all of his/her obligations upon death, life insurance can be used to do so. However, if the insured is the owner or holds certain powers over a policy, such as the power to change the beneficiary, the value of the policy will be included in his/her estate for tax purposes.
Two techniques that can be useful to keep the value of life insurance proceeds from inclusion in a person's estate upon his/her death: irrevocable insurance trusts and split dollar insurance plans.
This brief overview of some important considerations associated with estate planning strategies is by no means comprehensive. Always seek the advice of a competent professional when making important estate planning decisions.