Table of Contents

Strategies for Asset Protection and Tax Avoidance for Persons with High Net Worth

Rental Property Protection: LLCs and Asset Protection Trusts

Spousal Lifetime Access Trust (SLAT)

A Spousal Lifetime Access Trust (SLAT) is a powerful estate planning tool that allows high-net-worth individuals to transfer assets to an irrevocable trust for the benefit of their spouse. By utilizing a SLAT, you can remove assets from your taxable estate, potentially reducing estate taxes. The spouse can access the trust’s income or principal during their lifetime, providing financial security, while also preserving wealth for future generations. Because the SLAT is a Grantor Trust for income tax purposes, you (the creator of the SLAT) must personally pay the income taxes from interest and dividends accruing inside the trust (even though you don’t receive the income), thus preventing the income from being taxes at the compressed tax rates of an irrevocable trust, while also allowing you to get additional assets out of your name on a tax-free basis.

Spousal Lifetime Access Non-Grantor Trust (SLANT)

A Spousal Lifetime Access Non-Grantor Trust (SLANT) is an advanced estate planning strategy that combines the benefits of a SLAT with potential additional tax advantages. Unlike a SLAT, a SLANT is structured as a non-grantor trust, meaning the trust itself is responsible for paying taxes, or the beneficiaries, typically your adult children, will have to pay taxes on income earned by the trust that is distributed to them. This feature prevents you from having to pay income taxes on phantom income, but does require your children or other beneficiaries to pay the income tax (but they will also receive the trust income distributions.

Qualified Personal Residence Trust (QPRT)

A Qualified Personal Residence Trust (QPRT) is a specialized estate planning tool designed to transfer a primary residence or vacation home to a trust while allowing you to continue to use the property for a predetermined period. By transferring the property to a QPRT, you can potentially reduce estate taxes and remove the property’s value from your taxable estate. At the end of the trust term (so long as your survive the trust term), the property passes to your designated beneficiaries, providing them with a valuable asset while minimizing estate tax implications.

Family LLC (FLLC)

A Family Limited Liability Company (LLC) is a versatile estate planning tool that allows high-net-worth families to consolidate and manage their assets while providing a range of benefits. By forming a Family LLC, you can centralize the control and management of various family assets, such as real estate, investments, and business interests, under one entity. This structure can provide asset protection, facilitate efficient wealth transfer, minimize estate taxes by allowing partial ownership annual gifts, and can enable seamless succession planning for future generations.

Family Limited Partnership (FLP)

A Family Limited Partnership (FLP) is very similar to a Family LLC. It’s a strategic estate planning tool that allows high-net-worth families to protect and manage their assets while providing various asset protection and tax benefits. By establishing an FLP, family members can contribute their assets, such as real estate, investments, and business interests, to a partnership structure. The FLP provides limited liability protection to the family members and allows for centralized management and control of the assets. It also offers potential tax advantages, including gift and estate tax reduction, as well as flexibility and potential gifting discounts in transferring wealth via minority interests to future generations. However, FLPs (and especially using discounting gifts by giving away minority interests) have come under very strict scrutiny by the IRS and are therefore becoming highly disfavored entities.

Grantor Retained Annuity Trust (GRAT)

A Grantor Retained Annuity Trust (GRAT) is a sophisticated estate planning tool designed to transfer assets to beneficiaries with potential estate and gift tax benefits. With a GRAT, you, as the grantor, transfer assets into an irrevocable trust while retaining the right to receive fixed annuity payments for a fixed period. At the end of the trust term, any remaining assets pass to the beneficiaries you have designated. A properly structured GRAT allows you to minimize the taxable value of the gift to your beneficiaries and potentially transfer wealth to future generations with reduced estate tax consequences.

Grantor Retained Uni-Trust (GRUT)

Similar to a GRAT, a Grantor Retained Unitrust (GRUT) is an advanced estate planning tool that allows you to transfer assets to a trust while retaining the right to receive annual payments based on a fixed percentage of the trust’s value. The unique feature of a GRUT is that the annuity payments fluctuate based on the trust’s value, recalculated annually. By establishing a GRUT, you can potentially minimize estate and gift taxes while providing for your financial needs during the trust term. This strategy allows for the transfer of wealth to beneficiaries while taking advantage of potential tax savings.

Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust (ILIT) is a powerful estate planning tool designed to hold life insurance policies outside of your taxable estate. By establishing an ILIT, you transfer ownership of one or more life insurance policies to the trust, removing them from your taxable estate and potentially reducing estate taxes. The ILIT ensures that the policy proceeds are distributed according to your wishes, providing financial security to your beneficiaries. Additionally, the ILIT offers creditor protection and potential income tax advantages when structured properly. It is an effective way to preserve and transfer wealth to future generations.

Series LLCs, either in Virginia, Wyoming, Arizona, or Delaware

A Series LLC is a relatively new form of limited liability company that can provide significant flexibility and asset protection for high-net-worth individuals and businesses, especially real estate investors. With a Series LLC, you can establish multiple individual “series” within a single LLC, each with its own separate assets, liabilities, and operations. This structure allows for distinct segregation of assets and liabilities, minimizing risk exposure across different series. Additionally, each series can have its own members, managers, and business purposes. A Series LLC offers streamlined administration, cost savings, and enhanced asset protection, making it an attractive option for individuals and businesses with diverse investments or ventures. Although a Series LLC offers several benefits, it is important to consider its downsides before deciding to establish one. Here are a few potential downsides of a Series LLC:

Legal Uncertainty: The concept of a Series LLC is relatively new, and the legal framework surrounding it can vary across jurisdictions. Not all states have enacted legislation to recognize Series LLCs, which may limit their effectiveness or raise legal uncertainties if you operate in multiple states or wish to expand your business in the future.
Limited Precedent: Due to the novelty of Series LLCs, there is a limited body of case law and legal precedent to rely upon. This lack of established legal guidance may lead to greater uncertainty and potential disputes in certain situations.
Administrative Complexity: While the Series LLC structure allows for the segregation of assets and liabilities among individual series, it also requires very careful record-keeping and accounting practices to maintain the separation properly. Each series must be operated and managed as a distinct entity, with separate financial statements and tax filings, which can increase administrative complexity and costs. Because of its novelty, many CPAs and tax attorneys are not yet familiar with these entities and may not be able to navigate the complicated tax filings that are required.
Potential Liability Risks: While the liability protection within each series of a Series LLC is generally recognized in states that have a Series LLC statute, it is not guaranteed that courts in all jurisdictions will uphold the separation of liabilities between each series. If a court were to disregard the separation and treat the Series LLC as a single entity, the liability protection could be compromised, exposing assets in one series to claims against another series.
Limited Availability of Services: Due to the complexity and potential risks associated with Series LLCs, not all service providers, such as banks, lenders, and insurance companies, are willing to work with or offer services to Series LLCs. This limited availability may pose challenges in accessing financial services or obtaining favorable terms for your business operations.

Outright Gifts to Trust with Retained Interests such as Life Estates

Outright gifts to a trust with retained interests, such as life estates, are a strategic estate planning tool that allows you to transfer assets to a trust while retaining certain rights or benefits during your lifetime. With this approach, you can gift assets, such as a primary residence or other property, to a trust while retaining the right to use or live in the property for the rest of your life (life estate). After your passing, the property passes to the designated beneficiaries or continues to be managed by the trust according to your wishes. This strategy enables you to achieve both asset transfer and potential estate tax benefits while maintaining some control and enjoyment of the gifted assets during your lifetime.

Charitable Trusts: High-Net-Worth Planning for People with Charitable Intent who also Wish to Reduce Gift and Estate Taxes

Lifetime Charitable Remainder Trust (CRT, CRAT, and CRUT)

A Lifetime Charitable Remainder Trust (CRT) is a powerful estate planning tool that allows you to support charitable causes while also benefiting from potential tax advantages. With a CRT, you transfer assets, such as cash, securities, or real estate, to an irrevocable trust. During your lifetime, you or your designated beneficiaries receive regular income payments from the trust. After your death, or after a term of years that you choose, the remaining assets in the trust are distributed to the charitable organizations of your choice. A CRT can provide a stream of income, reduce estate taxes, and leave a lasting philanthropic legacy. A lifetime CRT combined with an ILIT can be an especially valuable tool.

Lifetime Charitable Lead Trust (CLT, CLAT, and CLUT)

A Lifetime Charitable Lead Trust (CLT) is a powerful estate planning tool that allows you to support charitable causes while potentially minimizing estate and gift taxes. With a CLT, you transfer assets, such as cash, securities, or real estate, to an irrevocable trust. During your lifetime or a predetermined period of years, the trust makes regular payments to one or more charitable organizations of your choice, which might include your own Family Foundation. After a specified period of years or upon your death, the remaining assets in the trust are transferred to your designated beneficiaries, typically children, grandchildren, and great-grandchildren. A CLT can provide ongoing support to charities, reduce estate taxes, and facilitate the transfer of wealth to your loved ones. A CLT can be structured as either a CLUT (Charitable Lead Unitrust) or a CLAT (Charitable Lead Annuity Trust).

Charitable Lead Unitrust

A CLUT is much more common than a CLAT, as it has the better potential to benefit your family members, as it pays a fixed percentage (typically set between 5% and 8%) of the trust’s value, reevaluated annually, to the charity or charities chosen as the “lead” beneficiary(ies). As the trust’s value fluctuates, the income paid to the charitable beneficiaries adjusts accordingly. A Unitrust offers the potential for greater growth inside the trust if the trust assets appreciate over time. It is commonly used to provide income to beneficiaries while supporting charitable causes.

Charitable Lead Annuity Trust

Unlike a Unitrust, the income paid from an Annuity Trust does not fluctuate based on the trust’s value, but remains fixed from day one. An Annuity Trust is useful if you prefer a predictable income stream to go the charity and do not want it to vary based on changes in the trust’s investments or market conditions.

Key Differences:

Income Structure: Unitrusts provide a variable income based on a percentage of the trust’s value, while Annuity Trusts provide a fixed income amount.
Income Fluctuation: Unitrust income to the charity fluctuates annually based on changes in the trust’s value, whereas Annuity Trust income remains constant throughout the trust’s term.
Investment Impact: Unitrust income is influenced by the performance of the trust’s investments, while Annuity Trust income is unaffected by investment returns.
Flexibility: Unitrusts offer potential growth if the trust assets appreciate, while Annuity Trusts provide a stable, predetermined income stream to the charity, but at the risk of providing less money ultimately to your remainder beneficiaries, depending on market performance inside the trust; if the investments inside the trust perform poorly during the term of the trust, the trust assets will be more depleted to pay the annuity amount to charity; if the investments inside the trust perform well during the term of the trust, then the trust may have more many to pay to ultimately pay to your remainder beneficiaries.

Choosing between a Unitrust and an Annuity Trust depends on your specific goals, risk tolerance, and income preferences. Consulting with an estate planning professional can help determine which type of trust aligns best with your needs and objectives.

Strategies Primarily for Estate Tax Avoidance:

Testamentary Charitable Remainder Trust (CRT)

A Testamentary Charitable Remainder Trust (CRT) is a powerful estate planning tool that allows you to support charitable causes while potentially minimizing estate taxes. Unlike a Lifetime CRT, a Testamentary CRT is established upon your death and comes into effect after your passing, so requires no complexity or management during your lifetime. With a Testamentary CRT, you can designate a portion of your estate to be transferred to the trust, which then provides income to your designated beneficiaries for a specified period or their lifetime. Afterward, the remaining assets in the trust are distributed to the charitable organizations of your choice. A Testamentary CRT allows you to leave a lasting charitable legacy while potentially reducing estate taxes and providing for your loved ones.

Testamentary Charitable Lead Trust (CLT)

A Testamentary Charitable Lead Trust (CLT) is a valuable estate planning tool that allows you to support charitable causes while potentially minimizing estate taxes. Unlike a Lifetime CLT, a Testamentary CLT is established upon your death. With a Testamentary CLT, you designate a portion of your estate to fund the trust, which then makes regular payments to charitable organizations for a specified period. Afterward, the remaining assets in the trust are transferred to your designated beneficiaries, such as family members or other individuals. A Testamentary CLT allows you to leave a charitable legacy, support causes dear to your heart, and potentially reduce estate taxes while providing for your loved ones.

Strategies Primarily for Asset Protection:

The Quantum Living Trust

A unique onshore and possibly offshore asset protection trust for people with estates under $1 or $2 million who are not concerned about the expenses of long-term care.