Estate Tax Planning Strategies


Copyright ©1995 WMA Reporter

 Estate Planning Strategies

by Barry Boscoe, CFP

Estate taxes are more burdensome and confiscatory than any other tax, with exorbitant tax brackets ranging from 37% to 60%.  For example, an estate with assets worth $5 million will give Uncle Sam almost $2 million in taxes, due nine months after the date of death.  Those who have not planned ahead will be forced to liquidate or sell their assets in order to pay the inheritance tax.

However, despite the preceding dismal figures, several options are available to reduce the estate taxes:

  • Exemption trust.
  • Family limited liability company.
  • Third-party ownership of insurance.
  • Gifting.
  • Personal residence GRIT.
  • 664 tax-exempt trust.

An explanation of each follows:

Exemption trust

Everyone is entitled to pass along to heirs $600,000 tax-free, an amount that Congress may raise to  $750,000.  To take full advantage of this exemption, you must do some trust planning.

Without an exemption trust, you will lose the $600,000 exemption to your spouse.  Upon your surviving spouse’s death, your total estate will only be entitled to one exemption of $600,000.  Your estate thus loses the benefit of the additional $600,000 exemption.

However, an exemption trust, which is funded after the first death, guarantees that all future appreciation of assets in the trust will escape estate taxes.  The original $600,000 can grow to $3 million by the time of the second death, and the entire $3 million will pass estate tax-free to your heirs.  The assets in the trust will also be available during your surviving spouse’s lifetime.  Your spouse benefits from using the exemption trust while Uncle Sam loses at least $192,000.

The family limited liability corporation

The family limited liability corporation (FLLC) provides deep discounting of assets within the corporation, due to lack of liquidity, lack of marketability and minority interest discounts.  In addition to establishing these discounts for both gifting and estate tax planning, the FLLC can provide asset protection from judgment of creditors.

The FLLC is one of the most powerful tools today for estate and asset protection planning.  Although this vehicle is a complex one, it should be reviewed as a strategy in reducing estate and gift taxes and protecting one’s assets.

Third-party ownership of insurance

Anyone who owns life insurance will want to pass down the death benefit free of estate taxes.  To escape taxes, someone other than the insured must own the policy.  One common method of removing ownership is to use an irrevocable life insurance trust, which guarantees that the entire face amount of the insurance will pass to your heirs estate tax-free.

Another type of third-party ownership is the limited partnership.  The owner’s estate will be taxed according to the percentage owned in the partnership, usually 1 or 2%.   A partnership is more flexible than an irrevocable trust.  Also, you can simply give outright ownership to your heirs.

Using any of these methods will remove the death benefit from the estate, thereby avoiding any estate tax inclusion.


Two types of gifting are available:  the outright gift and the retained control gift.  The annual dollar amount you are allowed to gift without incurring a gift tax is $10,000 per year.  In addition, you have a $600,000 lifetime gift exemption.

If you are concerned about the gift becoming an asset of your son-in-law or daughter-in-law after a divorce, consider making the gift to a trust or a partnership, which allows you to retain some control of the gift even though it is not a part of your estate.  If you gift the asset outright, you have lost all control over it.

Which assets are best to give?  Appreciating assets are the best choice because all future appreciation will escape estate taxation.  If you give cash, you are gifting a depreciating asset.  One dollar gifted today will only be worth 68 cents 10 years from now, assuming 4% inflation.  However, an asset worth $1 today that will appreciate over the next 10 years at the same 4% will grow to $1.48.

The grantor-retained income trust (GRIT)

The grantor-retained income trust (GRIT) allows you to gift your personal residence to a trust and retain control of it for a specific period of time, such as 15 years.  At the end of that time period, you pass the house down to your children, free of taxes, because you retain a right to use the home for a period of time.  The children receive it after the term, thus creating a discount on the value of the house for gifting purposes.

For example, assume your house is worth $1 million today and you are planning on using it for 15 years, when it will become your children’s.  The $1 million fair market value may be gifted to the children for a value of only $300,000.  This method of deep discounting provides tremendous leverage and estate tax savings.

664 exempt trust

The 664 exempt trust allows you to sell appreciated assets, retain control and avoid paying any capital gains tax.  The 664 trust is most beneficial when you want to sell appreciated assets, but are concerned about having to pay capital gains tax.

The 664 exempt trust allows you to make a gift to a trust, sell the asset within the trust and invest 100% of the sales proceeds, since you avoid capital gains taxes.  You can also receive a lifetime income based on the entire sales proceeds.

After you have considered the various methods of reducing estate taxes, you must decide how you will plan on paying the remaining estate tax.  The estate taxes must be paid within nine months of the date of death.  The options for paying the taxes are cash, refinancing (which requires re-paying the principal, plus interest) or selling existing assets (which results in a loss of any cash flow the sold assets produce).

An alternative to the above three methods is to use discounted money, or life insurance.  Because of the low cost of buying insurance compared to using existing assets, it is the most cost-efficient method to provide for the payment of estate taxes.

Establishing a cost-effective method for paying estate taxes requires advanced planning and careful consideration of the options available for reducing taxes.  Your heirs, not the government, deserve your assets.

Barry Boscoe, CFP, is affiliated with Brighton Advisory Group in Encino.