In addition to REITs and irrevocable trusts, there are other ways to legally protect your assets while getting great tax benefits. These are some of the more sophisticated asset allocation vehicles, that if set up properly by a qualified professional can provide great benefits.
Family Limited Partnership
An FLP, also known as a Family Limited Liability Company (FLLC), is designed to put a family business or investment accounts all in one pool of assets. Just like a regular LLC, you can disseminate shares of the pooled assets. It’s a useful way to minimize estate taxes, and shares can be transferred between generations or gifted. The more complex the asset mix, the more difficult to evaluate and the more likely you’ll see larger tax savings.
Qualified Personal Residence Trust
With a QPRT you can transfer your primary or vacation property into a trust and still reserve the right to live for a certain period of time. How this works is you write an irrevocable trust agreement that will indicate the trustees and beneficiaries as well as how long you have the right to live in the residence. Then transfer the ownership of your property to your QPRT.
Next, get an appraisal of the property as of the transfer date for gift tax purposes and file the gift with the IRS. While you’re living there, you can take advantage of all the income tax deductions available, maintain the property for your beneficiaries, and eventually transfer the property to your ultimate beneficiary. If the retained income period ends and you still want to live in the residence, you’ll have to pay rent, which can further help reduce the value of your taxable estate because rent is not considered a gift.
Inter Vivos Qualified Terminable Interest Property
Known as QTIP, this trust provides unlimited marital deduction but it has to be set up properly. How this works is assets equal to the estate tax exemption go into the QTIP family trust and then the remaining assets are allocated to the marital trust. That marital trust is subject to marital deduction and no federal estate taxes upon the death of your spouse. For example, if your spouse dies, the family trust assets escape estate taxes because they considered unqualified assets. If you die, they won’t be subject to federal estate taxes either. This type of asset protection is a great way to protect your assets from creditors because those assets are insulated from claims during the life of your spouse.
Grantor Retained Annuity Trusts
GRAT is another intergenerational asset transfer vehicle that helps minimize tax liability. A term-limited irrevocable trust is created and an individual pays tax on the trust when it’s established. A yearly annuity is paid from the assets under the trust and when it expires, the assets are allocated to the beneficiary tax free. The annuity comes from two sources, interest earned on the assets or a percentage of the value of the assets. There is a catch, though. If the person who created the trust dies before the trust expires, it’s become a part of the taxable estate and the beneficiaries receive nothing.
If you want to pass on as much as you can to your heirs, one or a combination of these vehicles can provide the means to alleviate the tax burdens they could face.