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How to avoid estate taxes in Nevada
A primary concern for our high night worth clients is avoiding or minimizing estate taxes. Although the current estate tax exemption is $11,180,000 ($22.36 million for married couples), those individuals and families who have accumulated significant assets may face a 40 percent estate tax. Our Reno estate planning attorney has experience and an advanced education in estate tax planning. We regularly assist wealthy clients with estate planning designed to maximized wealth preservation reduce estate taxes.
Some of the strategies we regularly use include:
Family Limited Partnerships
A Family Limited Partnership (FLP) is a special legal vehicle created to hold valuable assets such as real estate or stock in a closely held company. The main advantages of an FLP are estate and gift tax savings and asset protection. An FLP provides these benefits while still allowing you to retain control over the transferred assets.
In most cases, you (and your spouse) will establish the FLP and then serve as the FLP’s general partner. Once the FLP is established and funded with valuable assets, you can begin transferring limited partnership interests to your children or other beneficiaries as a gift.
This accomplishes several different estate planning objectives simultaneously. First, each partnership interest you give away further reduces the value of your estate, thereby avoiding future estate taxes.
Second, these FLP interests are worth substantially less than the corresponding value of the assets you transferred into it due to special estate tax discounts given for minority ownership and lack of marketability. This provides a powerful opportunity to leverage the lifetime estate tax exemption and transfer more wealth to your family free of any gift or estate tax.
Finally, FLPs benefit from strong asset protection laws in Nevada, thereby helping to ensure that your wealth does not end up in the hand of litigious plaintiffs or other creditors.
Irrevocable Life Insurance Trusts
Life insurance trusts are one of the more common ways of creating readily available cash for estate taxes and other expenses after death. Life insurance proceeds are typically free from income taxes, but depending on ownership of the policy, the proceeds can be included in your estate for estate tax purposes. Because life insurance can be one of the more affordable ways of passing wealth, it becomes very important to know whether the insurance proceeds might trigger an estate tax.
When structured properly with an irrevocable life insurance trusts (commonly known as ILITs), life insurance proceeds can remain outside of your estate and therefore escape estate taxes. This allows you to provide an almost immediate liquid asset that your family can either enjoy tax free or use to pay any estate taxes owed on the rest of your estate without the need to sell off, possibly at a significant discount, other assets to raise funds.
Qualified Personal Residence Trusts
A Qualified Personal Residence Trust or QPRT is a special type of trust that allows you to give your home to your children or other beneficiaries while allowing you to retain the right to continue living in it. Since your home is likely one of your most valuable assets, this is an easy way to reduce your estate’s value for tax purposes.
With a QPRT, title to the house is transferred into the trust for the eventual benefit of your children or other family members. You retain the right to live there for a specified period, after which time the house (and any appreciation in its value since the transfer) passes to the beneficiaries free of additional estate or gift taxes. If you want to continue living in the home after the designated period, you will need to rent to the beneficiaries. In so doing, you can further deplete your taxable estate. Additionally, a QPRT can provide asset and creditor protection since you technically no longer own the home once it’s transferred to the trust.
Grantor Retained Annuity Trusts
The Grantor Retained Annuity Trust (also known as a GRAT) is an advanced estate planning technique whereby an individual (the “Grantor”), transfers a high-yield asset to an irrevocable trust while retaining the right to receive an annuity from the trust for a period of year (usually set as a percentage of the trust assets). Each year, the GRAT will pay the established annuity payment to the Grantor. When the annuity period ends, the remaining assets in the trust (including any appreciation) go to the remainder beneficiaries, who are are usually children or close family members.
The “magic” of the GRAT is that the IRS assumes that assets will only grow at the IRC 7520 rate. This rate is generally between 2-4%. Therefore, any appreciation of the assets in excess of this rate will pass to the beneficiaries free of estate and gift tax. The GRAT offers tremendous leverage for transferring high yield assets, such as founder stock or speculative real estate.
Charitable Remainder Trusts
Charitable remainder trusts (CRTs) are powerful tax planning vehicles and are especially effective for investors holding highly appreciated assets, such as real estate or stock in closely held businesses. These appreciated assets are transferred into an special kind of irrevocable trust. The trustee then sells the asset at full market value and re-invests the proceeds into other income-producing assets. You pay no capital gains tax when the asset is sold, and you also receive an charitable deduction for the property transferred to the trust. The trust then pays you an annuity for the rest of your life, and when you die, the remaining trust assets go to charity. As a result, CRTs make it possible to reduce current year taxes while allowing you to convert highly appreciated assets into a lifetime income stream.
If you are a high net worth individual and want to start planning ahead to reduce the amount of taxes your family might have to pay at your death, use the form below to schedule a free consultation with our Reno estate planning attorney.
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