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Practice Areas
Estate Taxes
In General
Congress has provided so many ways to reduce estate taxes that it has been written – in a 1979 Brookings Institution Study – that the estate tax is a voluntary tax. No matter how large your estate is, it need not be reduced by estate taxes if you engage in thoughtful planning while you are young and healthy.
Timing
The farther in advance the planning begins, the easier and less expensive it is, and the more tools there are available, to help you reach a zero or near-zero taxable estate. When planning has been delayed too long, there are fewer structures that are available and appropriate.
Techniques
Face Of The Code
Some of the techniques used to reach a near-zero taxable estate are on the face of the Internal Revenue Code. In other words, they are not aggressive. However, since so few practitioners employ them for their clients, these techniques are properly viewed as sophisticated. Examples of these types of techniques (and their statutory underpinnings) are as follows:
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(i)
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CLATs (charitable lead annuity trusts) and CLUTs (charitable lead unitrusts) - IRC 170(f)(2)(B), 2055(e)(2)(B) and 2522(c)(2)(B);
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(ii)
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CRATs (charitable remainder annuity trusts) and CRUTs (charitable remainder unitrusts) - IRC 664;
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(iii)
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FLPs (family limited partnerships) - IRC 704(e);[1]
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(iv)
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GRATs (grantor retained annuity trusts) and GRUTs (grantor retained unitrusts) - IRC 2702(a)(2)(B);
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(v)
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House GRITs (grantor retained income trusts), also known as QPRTs (qualified Personal Residence Trusts) - IRC 2702(a)(3)(A)(ii);"
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(vi)
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Irrevocable Life Insurance Trusts - IRC 2042;
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(vii)
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Lead trust pouring over to a private foundation. A combination of two statutory techniques - IRC 664 and 509;
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(viii)
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Private annuities - IRC 2039. See also IRS' General Counsel Memorandum 39503 (6/28/85); and
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Significant Authority
Some of the techniques used to reach a near-zero taxable estate are not on the face of the Internal Revenue Code, but have significant other types of authority, e.g., case law. These techniques are aggressive only compared to those described above which appear on the face of the law. Otherwise, these techniques have significant academic, professional and legal underpinnings. Examples of these types of techniques, and references to the authority in favor of them, are as follows:
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(i)
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Buy-sell agreements. IRC 2703.
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(ii)
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Consecutive private annuities - an extension of the normal, statutorily based private annuity cited above.
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(iii)
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Corporate recapitalizations - pass bulk of the value in a closely held business to the heirs while retaining dictatorial control. Estate Of Simplot, 112 TC 130 (1999).
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(iv)
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Funding the bypass trust[2] with assets most likely to appreciate. IRC 2010.
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(v)
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IDITs[3] (sale to an intentionally defective[4] inter-vivos[5] trust) - IRC 671-679.
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(vi)
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Sale to the bypass trust - IRC 2010.
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(vii)
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Sale to an inter vivos QTIP trust. See 2056.
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(viii)
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SCINs (self-canceling installment notes) - the Austin,[6] Moss,[7] Wilson,[8]; Estate of Frane[9] and Estate of Constanza [10] cases.
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[1]
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The IRS is openly hostile to FLPs. Therefore, it is important to remember that the technique appears on the face of the Internal Revenue Code, putting a distinct limit on the IRS' ability to attack them.
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[2]
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Another name is the decedent's trust. This is designed to hold the portion of the deceased spouse's assets which can be transferred free of estate tax using the unified credit (i.e., $1,000,000 per person in 2003, increasing to $1,500,000 per person on 1/1/04, $2,000,000 on 1/1/06 and $3,500,000 on 1/1/09).
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[3]
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Sometimes referred to as IDGTs - intentionally defective grantor trusts.
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[4]
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Defective is a misnomer. It refers to the fact that most people expect a trust to pay its own tax. However, the tax law allows us to establish a trust which does not pay its own tax. Instead, the grantor pays the trust's income tax liability. Though this sounds convoluted, the result - having the grantor pay the trust's income tax - results in what might be viewed as a hidden gift, one that is not subject to gift tax. Example: the trust's income tax is $100; the grantor pays the tax; the trust still has all of its assets; therefore, the grantor's heirs receive the entire trust corpus, without reduction for income tax. The grantor's payment of the income tax, though clearly a gift in the broadest sense of the term, is not recognized as a gift for purposes of the Internal Revenue Code. See. Rev. Rul. 85-13
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[5]
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Translated from the Latin: among the living. A conventional living trust, designed to avoid probate, is one example of this type. The opposite of a living trust is a testamentary trust, i.e., one that comes into existence after your death. The provisions that govern a testamentary trust are prescribed by your Will or living trust.
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[6]
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26 BTA 1216.
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[7]
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74 TC 1239 (1980), acq. in result in part 1981-1 CB.
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[8]
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TCM 1992-489 (1992).
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[9]
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98 TC 341 (1992), aff'd in part, rev'd in part, 93-2 USTC 50,386 (8th Cir. 7/6/93).
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[10]
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6th Circuit, (2/21/03), reversing and remanding the Tax Court (Judge Laro) decision in favor of the IRS.
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Capital Gains Taxes | Creditor Planning | Entity Formation | Estate Planning | Estate Taxes | Income Taxes | Insurance(life) | Post-mortem Administration | Probate Litigation | Probate | Retirement Planning | Transactions | Trusts
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