The following list of planning techniques is by no means exhaustive. It is offered only to provide you with a sense of the breadth of options that exist in this area. Schumacher Law, LLC has the expertise to assist you with even the most advanced planning strategies.

Revocable Trusts (also called “Living Trusts”):  A revocable trust can be used to dispose of property that you transfer to it during your lifetime or which is added to it at your death by the terms of your will or beneficiary designations. In almost every case, there will be no tax implications associated with creating the trust, and you will maintain complete control over the property in the trust for as long as you are alive and competent. Depending upon the terms of the trust, a revocable trust may also be able to help you achieve significant estate tax savings upon your death.

There are at least three advantages to using a revocable trust to dispose of your assets instead of simply using a will:

Avoid probate:  Assets that you transfer into your revocable trust during lifetime will not be subject to the court-managed probate process at your death. Because your trustee will not need to wait for any appointment or grant of authority from the Probate Court, upon your death the trustee can immediately begin managing your trust assets and, when appropriate, can distribute them in accordance with the terms of your trust. Transferring assets into your trust during your lifetime can help reduce the legal fees that are generally associated with probate and estate administration while also lowering the probate fee charged by the Court. (That fee is generally calculated as a percentage of your probate assets.) Even if you do not place all of your assets in trust during lifetime, you will avoid probate with respect to the assets that are held by the trust at your death.

Maintain privacy:  Probate records are open to public review, and it is expected that South Carolina probate records (including wills) will be available online within the next few years. If you do not wish for the general public to know who is receiving your property and upon what terms, a revocable trust can keep your estate plan private. Moreover, the value of assets that you placed into your trust during lifetime need not be disclosed on the Probate Inventory, which is a public document. There are many reasons why you may wish not to disclose the value of particular assets owned by you or your family, particularly if you own a business interest.

Management during your incapacity:  If you ever become unable to manage your own finances, it is important that someone you trust be able to manage them for you. While a durable power of attorney is useful in this regard, it is even easier for trustee to manage your affairs with respect to assets held in trust, since the trustee actually holds title to the assets. An attorney-in-fact under a durable power of attorney is acting as your agent with respect to your assets, and thus often receives greater scrutiny (and administrative hassles) from financial institutions than would a trustee.

Qualified Personal Residence Trust (“QPRT”):  A donor may use a QPRT to give a primary residence or vacation home to children at a tax discount. Because use of a QPRT is specifically authorized by the Internal Revenue Code, it provides an opportunity for tax-favored gifting with far lower audit risk than certain other complex planning devices.

The donor places a residence into an irrevocable trust for a specified term of years (“QPRT Term”). If the donor dies before the end of the QPRT Term, the value of the trust property will be entirely includable in his or her estate. The donor’s retained right to use the residence causes the value of the remainder interest in the trust (i.e., the property that will pass to the children) to be discounted for gift tax purposes. If the donor survives the QPRT Term and the trust was properly drafted, the residence will be outside of his estate for estate tax purposes. QPRTs become more attractive – in other words, the value of the donor’s retained interest increases and the value of the taxable gift decreases – as (1) interest rates increase, (2) the donor’s age increases, and/or (3) the length of the QPRT Term increases.

Grantor Retained Annuity & Trust (“GRAT”):  A GRAT can be an ideal gifting method for an asset of low value that is expected to appreciate rapidly within a short period of time. This irrevocable trust must provide that each year during the term of the GRAT the person who creates the trust (the “donor”) will receive an annuity payment that is determined by reference to a particular rate set by the IRS. To the extent that the trust asset grows faster than the IRS-mandated interest rate, the appreciation will pass to the donor’s children tax-free at the end of the trust term, so long as the donor survives the term. If the donor does not survive the term, some or all of the trust property will be included in the donor's estate for estate tax purposes.

The GRAT can be drafted so that none of the donor’s gift tax exemption or annual exclusions need be used to cover the transfer into the trust. As such, even if the asset fails to appreciate significantly, there may be no gift tax cost or loss of exemption associated with the downturn in value of the gifted asset as there would be in the case of a direct gift of the same asset. The “failed” GRAT thus costs nothing more than the legal and administrative fees incurred in establishing it. GRATs are particularly attractive when interest rates are low.

Charitable Remainder Trust (“CRT”):  With this irrevocable trust, the donor transfers assets to the CRT while retaining the right to periodic distributions from the trust property for life (and possibly the life of a spouse), or for a term than cannot exceed 20 years. Upon the death of the income beneficiary(ies), the remaining trust property will pass to one or more charities selected by the donor or, if preferred, by the trustee. There are different types of CRTs, so care must taken to ensure that the appropriate trust is selected after reviewing the needs of the donor, the income beneficiaries (if other than the donor), and the assets to be contributed.

Because the remaining trust property will pass to charity, upon funding the trust the donor should receive a significant income tax and gift tax deduction for the value of the charity’s interest. CRTs can thus be particularly attractive if a donor has a high-income year or comes into an unexpected windfall. To the extent that the donor is concerned that his or her children will not receive the property that must pass to charity, it may be possible to use some of the income payments that the donor receives to pay premiums on a life insurance policy for the benefit of the donor’s children. If the life insurance policy is owned by a special type of trust, the insurance proceeds can pass to the children free of income and estate taxation.

Charitable Lead Trust (“CLT”):  A CLT is the inverse of a CRT; the charity receives trust distributions for a term of years or for the donor’s life (or the life of another), and upon expiration of the “lead” term the remaining trust property passes to children or other non-charitable beneficiaries. CLTs provide an opportunity to remove property (and appreciation) from the donor’s estate while also benefiting favorite charities. A CLT may also provide the donor with a way to make charitable gifts without being subject to the percentage limitations on deductibility.

Family Limited Partnership (“FLP”):  This is a type of partnership designed to centralize family business or investment accounts. FLPs pool together assets into a single family-owned business partnership in which family members own interests. In addition to the business advantages related to pooled management and certain asset protections benefits, FLPs can also reduce estate and gift taxes related to transfers to children or other family members. Interests can be gifted to over time, and at an owner’s death the value of his or her FLP interest may be discounted because of the numerous restrictions on the used disposition of assets set forth in the partnership agreement.

FLPs (and also family limited liability companies – “FLLCs”) are power planning tools for wealthy clients who expect to have an estate tax liability. For years, however, the Internal Revenue Service has been attacking the significant discounts claimed for FLP interests. Excellent legal counsel and coordination between your attorney and your other advisors is critical to minimizing the risk that your FLP and associated discounts will not be respected for tax purposes.

Premarital/Prenuptial Agreements:  A premarital agreement allows prospective spouses to agree how their assets will be divided if they are ever divorced, and what rights they will each have with respect to the other’s estate upon death. As the average age at which individuals marry increases, and as the number of second (and third) marriages grows, premarital agreements begin to make sense for more and more people. While people often think that these agreements conflict with their romantic notions of marriage, the awkwardness of raising the issue with a soon-to-be spouse is generally far less than the pain caused by a contentious, litigated divorce.

It has been said that divorce is the great destroyer of wealth. The required equitable division of assets, the possibility of having to pay alimony or other spousal support, and the high legal fees incident to the break-up can cause significant wealth to be transferred or lost. Instead of looking to the Family Court to dictate the terms of a break-up, it is often advisable to take matters into one’s own hands by deciding these issues prior to marriage.

In South Carolina, a surviving spouse has a right to receive one-third of a deceased spouse’s estate if that much is not left to him or her under the deceased spouse’s estate plan. If one of the spouses has been married previously, the other may want to ensure that a significant portion of his or her estate does not pass to the spouse’s children by a prior marriage. A premarital agreement with a waiver of the “elective share” can be useful in avoiding this result.

Other Options: There are numerous other planning vehicles – private foundations, spousal annual exclusion gift trusts, dynasty trusts, irrevocable insurance trusts, self-settled asset protection trusts, and many others – that may be useful to you. To contact us to learn more, click here.