Estate Planning

How a Living Trust Works with Your Estate Planning  

When you set up a living trust, you transfer assets from your name to the name of your trust, which you control yourself — such as from “John and Jane Smith, husband and wife” to “John and Jane Smith, trustees under trust dated (date of trust).” 
Legally you no longer own anything (don’t worry: everything now belongs to your trust – which you control).  The reason your living trust owns all your assets and not you is so there is nothing for the courts to control when you die or become incapacitated.
The living trust is what keeps you and your family out of the impacted state court system (probate court). Unlike a will, a trust doesn’t have to die with you. Assets can stay in your trust, managed by any person or private fiduciary of your choice, until your beneficiaries reach the age(s) you desire for them to inherit.  However, at Chhokar Law Group, P.C. we recommend your assets remain in trust for asset protection purposes so potential creditors of your beneficiaries cannot take the trust assets.  

Special Needs Trust Planning 

A special needs trust- sometimes called a “supplemental needs trust” – makes it possible to appoint a trustee (who can be anyone you trust or a private fiduciary) to hold property for the benefit of your special needs child after you’re gone.  A special needs trust provides for the needs of a disabled person without disqualifying him or her from benefits received from government programs such as Social Security and Medicaid.

Advanced Estate Tax Planning

Our law firm discovers opportunities for clients to take advantage of the unique income tax or asset protection benefits associated with a variety of domestic and offshore planning structures, including asset protection trusts, limited liability entities, captive insurance companies, offshore private placement life insurance, annuities and premarital trusts, just to name a few. Using these structures and others, clients are able to build sophisticated asset protection and tax planning strategies to meet their specific goals.  

A great way to reduce estate taxes is to reduce the size of your estate before you die. Thus, it is perfectly fine to spend some of your hard earned money, take a vacation or two, or make a gift following certain guidelines. Appreciating assets are usually best to give, because the asset and future appreciation will be out of your estate.  

Assets you give away keep your cost basis (what you paid), so the recipients may have to pay capital gains tax when they sell. But the top capital gains rate is only 20% (on assets held at least 12 months). That is far less than estate taxes (40%) would cost you if you keep the assets until you die, above the Life-Time Exemption of $11.4 Million. Some of the most commonly used strategies to remove assets from estates are explained below. Note that these are all irrevocable, so you cannot change your mind later.  

Tax Free Gifts  

This is simple method of distribution that does not incur any tax. Each year, you can give up to $15,000 ($30,000 if married) to as many people as you wish. So if you give $15,000 to each of your two children and five grandchildren, you will reduce your estate by $105,000 (7 x $15,000) a year, or $210,000 if your spouse joins you. (This amount is tied to inflation and may increase every few years.) If you give more than this, the excess will be considered a taxable gift and will be applied to your $11.4 million gift tax exemption. Charitable gifts, medical expenses, and tuition (if you give directly to the institution) are unlimited.  

Irrevocable Life Insurance Trusts (ILIT)  An easy way to remove life insurance from your estate is to make an ILIT the owner of the policies. As long as you live three years after the transfer of an existing policy, the death benefits will not be included in your estate. Usually the ILIT is also the beneficiary of the policy, giving you the option of keeping the proceeds in the trust for years, with periodic distributions to your spouse, children and grandchildren. Proceeds kept in the trust are protected from irresponsible spending and creditors, even ex-spouses.  

Qualified Personal Residence Trusts (QPRT) 

A QPRT lets you save estate taxes by removing your home (a substantial asset) from your estate now; yet you can continue to live there. Here’s how it works.
You transfer your home to a trust for a period of time, depending on the particular circumstances. During this time, you continue to live in your home. When the time is up, it transfers to the trust beneficiaries, usually your children. If you wish to stay there longer, you may make arrangements to pay rent. If you die before the trust ends, your home will be included in your estate, just as it would without a QPRT. 
There’s more.

A QPRT “leverages” your estate tax exemption. Since your children will not receive the house until the trust ends, its value as a gift is reduced. For example, if the current value of your home is $250,000 and you put it in a QPRT for 15 years, its value for tax purposes could be as little as $75,000. That leaves much more of your exemption for other assets.  

Grantor Retained Annuity Trusts (GRAT) & Grantor Retained Unitrusts (GRUT)  These are much like a QPRT. The main difference is that a GRAT or GRUT lets you transfer an income-producing asset (e.g., stock, real estate, business) to a trust for a set number of years, removing it from your estate, and still receive the income. (If the income is a set amount, the trust is called a GRAT. If the income fluctuates, it’s called a GRUT.) When the trust ends, the asset will go to the beneficiaries of the trust. Since they will not receive it until then, the value of the gift is reduced. If you die before the trust ends, some or all of the assets may be in your estate.  

Family Limited Partnerships (FLP) & Limited Liability Companies (LLC)  

FLPs and LLCs let you reduce estate taxes by transferring assets like a family business, farm, real estate or stocks to your children now and still keep some control. They can also protect the assets from future lawsuits and creditors.
Here’s how it works. You and your spouse can set up an FLP or LLC and transfer assets to it. In exchange, you receive ownership interests. Though you have a fiduciary obligation to other owners, you control the FLP (as the general partner) or LLC (as manager). You can give ownership interests to your children, which removes value from your taxable estate. These interests cannot be sold or transferred without your approval, and because there is no market for these interests, their value is often discounted. This lets you transfer the underlying assets to your children at a reduced value, without losing control.  

Charitable Remainder Trusts (CRT)  

A CRT lets you convert a highly appreciated asset (like stocks or investment real estate) into a lifetime income without paying capital gains tax when the asset is sold. It also reduces your income and estate taxes, and lets you benefit a charity that has special meaning to you. With a CRT, you transfer the asset to an irrevocable trust. This removes it from your estate. You also get an immediate charitable income tax deduction. The trust then sells the asset at market value, paying no capital gains tax, and reinvests in income-producing assets. For the rest of your life, the trust pays you an income. Since the principal has not been reduced by capital gains tax, you can receive more income over your lifetime than if you had sold the asset yourself. After you die, the trust assets go to the charity you have chosen.  

Charitable Lead Trusts (CLT)  

A CLT is just about the opposite of a CRT. You transfer an asset to the trust, which reduces the size of your estate and saves estate taxes. But instead of paying the income to you, the trust pays it to a charity for a set number of years or until you die. After the trust ends, the trust assets will go to your spouse, children or other beneficiaries.