Integrated Estate Planning in California
Family Limited Liability Company (FLLC)
Integrated Estate Planning will generally involve the use of a Family Limited Liability Company (FLLC) in conjunction with one or more types of irrevocable trusts. For example, an Intentionally Defective Grantor Trust (IDGT) is an irrevocable trust that leverages the accumulation of trust assets in several ways. First, discounted membership units from an FLLC are gifted to the IDGT using your gift tax exemption (up to $5,490,000 in 2017). Also, an equal amount of your Generation Skipping Transfer Tax (GSTT) exemption is allocated to the IDGT at the time the gift is made. The allocation of your GSTT exemption makes the entire Trust and Exempt Trust. Second, certain powers which are retained by you cause you to become the owner of the Trust for income tax purposes, but not for gift or death tax purposes. Consequently, you are taxed on the Trust income which amounts to a gift tax free addition to the Trust. Third, additional membership units are sold to the Trust in exchange for an interest only promissory note with a balloon payment. The sale will produce additional tax savings if the income earned on the membership units exceeds the amount of interest paid on the note. There is no gain recognized on the sale of appreciated assets to the IDGT, because you are treated as the owner of the Trust for income tax purposes. Likewise, the repayment of the promissory note has no income tax consequences to you or to the Trust. In summary an IDGT allows tax-free sale transactions of appreciated property between you and the Trust; gift tax free additions to the Trust when you pay the income taxes; and removal from your estate of any gifted or sold assets, including any appreciation on those assets.
Integrated Estate Planning & Asset Protection
Integrated Estate Planning also involves incorporating an asset protection component into the overall estate plan. The use of an FLLC or Family Limited Partnership (FLP) together with a Domestic or Offshore Asset Protection Trust (APT) lies at the heart of Integrated Estate Planning. The APT and the FLP are usually created at the same time. Once the FLP is formed, a gift of almost all the limited partner interest is made to the APT with a small general partner interest being retained by you and your spouse.
An FLP will typically hold assets that require active management such as securities and cash accounts. Whereas the personal residence, Subchapter S stock and tax-deferred annuities are contributed directly to the APT to avoid adverse tax consequences. An APT can be structured to provide varying degrees of asset protection. Generally, there is a trade off between control and benefit - the less control, the greater the asset protection and vice versa. One exception to this rule may be a Domestic Asset Protection Trust that can be converted into an Offshore Asset Protection Trust if the need arises. Such an APT will provide a very high degree of asset protection because the creditor would have to prevail domestically and then fight anew offshore with both the domestic and offshore jurisdictions being disadvantageous to the creditor.
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