Durable Power of Attorney

A durable power of attorney is a common type of power of attorney where the power to act on the signer’s behalf will still exist even if the signer becomes incompetent. Without a durable power of attorney, a friend or family member of someone who has become incompetent would have to petition an appropriate court for the authority to act on behalf of the incompetent person. This person would be subject to the oversight of the court until the recovery or death of the incompetent person.

Irrevocable Life Insurance Trust (ILIT)

An ILIT is a type of trust that is most often used to own life insurance policies, though it can hold many other types of assets. This type of trust is a common estate planning tool that is often recommended to those who wish to minimize the size of their estate by keeping any life insurance policy death benefits out of their taxable estate. To accomplish this, a life insurance policy is applied for by the trust, or an existing policy is transferred to or purchased by the trust, and the premiums are paid through gifts to the trust by the grantor(s). Since the policy is no longer owned by the grantor, the death benefit is no longer part of the grantor’s estate. This, in effect, lowers the size of the grantor’s estate, while providing the grantor’s heirs with access to a sum of money on their death that they can use to pay estate taxes.

It is important to know that an ILIT is irrevocable. That means once you’ve created it and funded it, you cannot change your mind and ask for the gift or the life insurance policy to be returned to you. However, the grantor will at least have indirect control over many other aspects of the ILIT. For example, you can specify who your initial beneficiaries are, and you can create the terms under which they will receive benefits. You also get to choose the trustee (or trustees) who will manage your ILIT.

Dynasty Trust

A dynasty trust is an estate planning tool that may help to provide money to your loved ones for generations to come. Instead of passing money directly to your children at your death, the assets are kept in a trust. The trust helps protect the assets transferred to it from estate taxes, divorce, creditors, and uncontrolled spending, while remaining available for the family for generations. A dynasty trust is a type of ILIT.

Unlimited Marital Deduction

The unlimited marital deduction allows for the transfer of an unlimited amount of property directly to or in a qualified trust for a U.S. citizen spouse without paying gift or estate tax on the transfer. This transfer can take place during life or at death.

A transfer at death for the benefit of a non-citizen spouse can still qualify for the unlimited marital deduction if the property is placed in a Qualified Domestic Trust (QDOT). The surviving spouse must be entitled to all of the income from the QDOT. Any distribution of trust corpus (the assets of the trust other than current income) to the surviving non-citizen spouse, other than for extreme hardship, triggers a deferred estate tax.

Estate Tax Exemption Amount

The estate tax exemption amount represents the amount of assets includable in your taxable estate that can be transferred at your death to anyone other than your spouse without having to pay federal estate taxes. This includes assets such as IRAs and other investments, real property, bank accounts, and life insurance that is personally owned. Any assets personally owned over the exemption amount are subject to federal and possibly state estate tax.

The Tax Cuts and Jobs Act of 2017 provides for a federal estate tax exemption amount of $10,000,000 per person ($20,000,000 per married couple), which is indexed annually for inflation. Unless changed by Congress, this is due to expire on December 31, 2025. The IRS revises the exemption amount each year based upon cost of living adjustment calculations. Please see IRS.gov for additional information. It is important to note that each state that imposes a tax has its own exemption amount, which may not be the same as the federal amount.

Annual Gift Exclusion Amount

The annual gift exclusion is the amount that you can gift to another person on a yearly basis without using any of your lifetime gift exemption (described next). Currently, the annual exclusion amount is $19,000 per year per person (2025). Therefore, if a person wishes to give to three different people, they can gift up to $57,000 per year.

Lifetime Gift Exemption Amount

The lifetime gift exemption amount is the amount of assets that you can gift to others during your lifetime without having to pay gift taxes on the gift. The lifetime gift exemption and estate tax exemption are unified. Gifts under the lifetime exemption do not actually reduce the taxable estate but are combined with assets held at death to determine the estate tax. It is the growth of the gift that is out of the estate. Please see IRS.gov for additional information.

Credit Shelter Trust

A credit shelter trust is a type of trust that is often used by married couples to pass assets for the surviving spouse and heirs that will not be includable in the surviving spouse’s taxable estate. Each spouse can transfer up to the estate tax exemption amount into their credit shelter trust, which is reduced by any prior taxable gifts in excess of the annual exclusion amount. The trust or trusts are drafted while both spouses are alive but are generally funded at the death of the first spouse with an amount equal to their estate tax exemption amount.

The surviving spouse will generally be an eligible beneficiary of the trust income and trust principal if necessary for the surviving spouse’s health, education, maintenance, and support.

The eventual beneficiaries of this type of trust are usually the children of the grantor. Another term for this type of trust is a “bypass trust,” as it bypasses estate taxes at the death of the surviving spouse and is passed to the beneficiaries free of estate tax. This type of trust is most commonly used when marital assets of the couple are near or over the estate tax exemption amount.

A common use for credit shelter trusts is a type of estate planning known as a “Marital A/B Trust” arrangement. Under this arrangement, the credit shelter trust (trust B) will hold the amount of assets up to the estate tax exemption amount, and the marital trust (trust A) will hold the rest of the assets. Many times, both spouses will set up this type of arrangement.

Portability of Estate Tax Exemption Amount

Upon the death of the first spouse, the surviving spouse is able to add what is left of the estate tax exemption amount unused by their spouse to their own gift and estate tax exemption amount by making a timely election on the decedent’s estate tax return. This is referred to as portability of a deceased spouse’s unused estate exemption amount (DSUEA). The availability of portability has reduced or eliminated, in some instances, the need to create a credit shelter trust at the death of the first spouse.

Private Split Dollar Planning

Private or family split dollar planning can be an effective way to provide life insurance protection to take care of your family’s estate planning needs without requiring you to make large taxable gifts to pay the annual life insurance premium. There is a lot of flexibility in how these arrangements can be set up. A common arrangement has the insured or the insured’s spouse as the premium payor, with the insured’s ILIT (or sometimes the insured’s children) as the owner of the life insurance policy.

This type of planning is used with permanent life insurance. Under a split dollar arrangement, the premium payor owns all of the life insurance policy cash value, both during life and at the death of the insured. The remainder of the policy death benefit is paid to the trust or other beneficiary. When the insured is the premium payor, there is a “deemed” gift each year of the term insurance value of the death benefit that would be paid to the beneficiary if the insured died during that calendar year. If someone else is the premium payor, the arrangement may require that the trust or other beneficiary contribute to the annual premium an amount equal to the term insurance value.

Private Premium Financing

Life insurance policy premiums can be paid partially or fully with loans from the insured to the insured’s ILIT. In some instances, it may be beneficial to pay the premiums partially with annual exclusion gifts and partially with loans. The loan must bear interest at least equal to the applicable federal rate (AFR), or an imputed amount of interest will be treated as a gift from the insured to the ILIT under the below market rate loan rules of IRC Section 7872.

The ILIT trustee may use future policy cash values¹ to make payments on the loan to the insured. Regular payments on the loan may be used by the insured to supplement their retirement income.

Qualified Personal Residence Trust (QPRT)

In a QPRT, the grantor transfers (gifts) their residence to a trust but keeps the beneficial right to use it for a specific period of time that the grantor chooses in the trust agreement. At the end of the term, the residence is given to the beneficiaries of the trust. The goal is to transfer the home to the beneficiaries at a discount from the home’s actual value. This is possible because the gift of the residence is reduced by the value of the grantor’s right to continue to live in the residence during the term of the trust.

It is important to pick a length of time that the grantor believes that they will outlive. If the grantor dies before the term is up, the residence will still be in their estate. If the grantor outlives the term, it will transfer to the beneficiaries free of further estate or gift tax. The grantor can continue to live in the residence but must begin to pay fair market value rent to the beneficiary, who now owns the property.

Third-Party Premium Financing

Third-party premium financing involves obtaining the funding to purchase a life insurance policy from a third party or financing company. The borrower must sign a formal agreement and is frequently required to provide collateral in addition to the life insurance policy that was purchased. The loan may last from one year to the life of the policy. The financing company pays the premium, then bills the borrower on a monthly, quarterly, or annual basis for the cost of the loan. Traditionally, premium financing is for those who intend to keep the policy to maturity. This is done usually for estate liquidity needs, when a person has a large, mostly illiquid estate (i.e., real estate, partnership share).

Life Insurance for the Blended Family

"The majority of families have shifted from the original, biologically bonded mother, father, and child," according to The Stepfamily Foundation.² This requires a precise type of planning on behalf of the parents to make sure that their assets will be divided as they wish at their deaths. First, it is important to have a will drafted and kept up to date. That will help to ensure that the parents’ assets are passed according to their current wishes and they do not leave anyone out due to having an outdated document. With a blended family, one possible strategy is to use life insurance. This can help equalize the amounts being left to each beneficiary and help minimize or possibly prevent family conflict. The purchase of life insurance to balance what is given to each beneficiary is also known as estate equalization.

Family Limited Partnership (FLP)

An FLP is often used to help facilitate the transfer of assets from one generation to another. The transaction usually begins with the older generation transferring assets to a newly formed limited partnership. When the transfer is made, the older generation will own all of the partnership interests (general and limited partnership interests). At this point, no gifts have yet been made. The older generation then gifts limited partnership interests to the children and/or grandchildren directly or to a trust set up for their benefit. With a limited partnership interest, the children will not have much if any say in the running of the business. They just receive the economic benefit of their share or shares. The older generation with the general partnership interest still has authority over the running of the business.

Because the limited partnership interests are not easily marketable as described in the discounting paragraph, the value for gifting purposes may be less than the same percentage of value of the assets of the partnership for estate tax planning purposes. Often, interests in an FLP may not be transferrable outside the family, hence the term family partnership. Increasingly, LLCs are used in a similar way.

Self-Canceling Installment Note (SCIN)

A SCIN involves the sale of a business interest, stock, or an interest in real estate or other asset, typically to one or more family members of the seller or to a trust for their benefit, in exchange for an installment note with a term shorter than the seller’s life expectancy. One notable feature is that the note in a SCIN includes provisions for automatic cancellation of the unpaid balance at the death of the seller. The SCIN is a promise, given by a buyer to a seller, to buy an interest with a feature that the obligation to make payments ends at the seller’s death. If the seller lives longer than the period over which payments are made, the “cancel at death” feature of the agreement is ignored. If the seller dies during the term, the buyer’s obligation to make payments ends on the date of death. The goal of this strategy is twofold: first, the exclusion of the unpaid balance of the note from the seller’s estate and second, the avoidance of any gift tax on the transfer. So a SCIN helps enable an asset to be kept in the family while its value is frozen for estate tax purposes. This can be particularly useful during economic conditions in which asset values are low at the same time interest rates are relatively low.

Estate Equalization

Estate equalization is used in business and personal planning, which sometimes overlap. In a business planning context, it is used for people whose primary asset is the family business. They often want all of their children to inherit “equal” shares of their estates. That becomes difficult when some of the children are working in the business and others are not. Business owners often feel that their children working in the business should be rewarded for their efforts, yet they do not want the others to be left out. One answer is for the children working in the business to own life insurance on the life of their parent or parents. Upon the death of the parent(s), the children working in the business will use the death benefit amount to buy the business the parent's estate. With the death benefit amount, the estate of the parent should have enough liquidity to pay expenses and give an equal inheritance to all the children.

This strategy also provides funds to support a surviving spouse who is not actively involved in the business. Another idea is for the actively involved children to own enough life insurance to buy out the interest of their siblings that are not involved. Alternatively, the parent can purchase life insurance to enhance the value of their estate enough to provide about the same inheritance for the children that are and are not involved in the business. Depending on the value of the business interest, the parent may not want the death benefit of the life insurance policy to be in their taxable estate. In that case, the parent could utilize an ILIT or have the child who is the beneficiary of the policy own it. It is important to look at annual gift exclusion amounts and lifetime gift exemption amounts when using this strategy, to help ensure that the funding for the policy is done in a tax-efficient manner.

Grantor Retained Annuity Trust (GRAT)

A GRAT is a type of trust that is generally used to help facilitate a transfer of assets to the next generation with lower gift taxes. The trust is established by the grantor to last for a specific number of years (term of trust). During that time, the trustee of the trust will distribute a set amount to the grantor either on a yearly basis or more often, as is written in the trust. At the end of the term of the trust, the trustee distributes all remaining assets to the trust’s remainder beneficiary or beneficiaries, generally the grantor’s children or a trust for the grantor’s children. When the grantor puts assets in the trust, the grantor is making a taxable gift to the trust. The value of that gift, however, is reduced by the value of the grantor’s retained interest (the present value of the distributions to be made to the grantor prior to the termination of the trust).

The larger the retained annuity interest, the more the value of the taxable gift is reduced at the funding of the GRAT. This strategy is more effective in a lower interest rate environment, as the lower the interest rate, the higher the value of the grantor’s retained annuity interest, thereby reducing the value of the gift. The GRAT strategy works more effectively when the assets used to fund the trust have good cash flow, since the trustee must distribute the specified annuity amount whether out of income or other trust assets. This strategy can be leveraged even further by gifting assets that can be discounted, such as family limited partnership interests or closely held business interests.

Buy-Sell Agreement

A buy-sell agreement is a contract that is entered into between the owners of a business that governs what is to happen to the business interests in the event one of the owners/shareholders dies, becomes disabled, or leaves the business. These agreements are generally funded with disability insurance and life insurance. A buy-sell agreement should state who can buy the exiting owner/shareholder’s shares. It should also identify the specific event that would trigger the sale, whether it is death, disability, termination, retirement, or an event such as divorce or the bankruptcy of an owner. Lastly, this agreement will state what price is to be paid per share or how the price will be determined at the time of sale.

There are essentially two different types of buy-sell agreements, a cross-purchase buy-sell agreement and an entity purchase buy-sell agreement. There are numerous factors involved in the determination of which type of arrangement to use. Therefore, it is important to discuss the alternatives with the attorney drafting the agreement to help ensure the correct decision is made for the specific business involved.

Cross-Purchase Buy-Sell Agreement

A cross-purchase buy-sell agreement is structured so that each owner/shareholder has the primary obligation to purchase the shares of the other. Typically, each owner/shareholder purchases an insurance policy on all of the other owners/shareholders to fund this obligation at death. This is most commonly used when there are only a few people involved in the agreement. For example, if John and Jane were co-owners of a company, John would have an obligation to purchase Jane’s shares at her death and own a policy on Jane and vice versa. If George were an owner as well, George would need to buy a policy on both Jane and John, and Jane and John would need to buy on both of the other owners. This would lead to six policies being purchased for this agreement. It depends on the individual situation of the company as to whether this is the most effective strategy. The other option is an entity purchase buy-sell agreement, which tends to be used when more than a few owners are involved.

Entity Purchase Buy-Sell Agreement

An entity purchase buy-sell agreement is structured so that the business entity itself has the obligation to purchase the business interests of an owner at death. The business entity typically purchases and is the owner of the life insurance policies³ on all of the shareholders/owners that are involved in the agreement. If Betty, Jane, and Sara own a company, the company would purchase three policies, one on each of them, instead of the six that would be necessary to fund a cross-purchase buy-sell agreement. This strategy is used more often when there are larger groups of owners/shareholders involved or where the people involved don’t wish to individually own the policies on each other. This strategy may also be used when there is a large difference in what the premiums would cost each owner based on age or health differences. A benefit of this method is that the company pays the premiums on the policies and owns them. Having the company own the policies may add assets to the company’s balance sheet, which may be advantageous in obtaining financing, meeting loan obligations, or having a ready source of cash to take advantage of a business opportunity or meet an emergency need.

Charitable Remainder Trust (CRT)

A CRT is a vehicle that is used for people wishing to make a charitable donation but still retain an income interest for themselves or their non-charitable beneficiary before the gift is made to the charity. There are two types of charitable remainder trusts that we will discuss here, the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). A significant difference between these two types of trusts is how the amount of the income interest that is paid to the donor or the donor’s beneficiary on an annual basis is calculated. With charitable remainder trusts, it is important to work with an experienced trustee (or tax advisor) who understands how to do the valuations as well as the rest of the recordkeeping requirements involved.

• A CRAT is a trust that pays the donor or the donor’s beneficiary a fixed amount of income from the trust on a yearly or more frequent basis. There are two choices for when the charity gets the money from the trust, either after a specific period of time or upon the death of the donor and/or the donor’s successor beneficiary. This flexibility allows the donor to choose whether to receive income for the rest of their life or whether the donor would like to see the charity get the money during their lifetime.
• A CRUT works in a similar manner to the CRAT. The difference is that instead of the donor or other non-charitable beneficiary being paid a fixed amount annually, they are paid a fixed percentage (at least five percent) of the value of the trust annually. The value must be calculated once per year on December 31st, for distributions to be made during the following calendar year.
• With either a CRAT or CRUT, at the time the trust is funded the present value of the charitable interest (after subtracting the value of the donor’s retained interest) must equal at least 10 percent.

Donation of Property

A donor can make a gift of real or personal property to a charity during life. The property is transferred by title, deed, or other method of ownership change to become officially owned by the charity. The donor may be able to get a deduction for the gift of the fair market value of the property that was given, subject to the charitable deduction percentage limits. The donation of property is not always just a simple transfer of ownership. One example is using appreciated non-income-producing property such as real estate to fund a charitable remainder trust. Assets gifted into the trust can then be sold by the trustee and reinvested into income-producing assets without triggering a current tax on the gain, although the payments from the CRT will be taxable to the extent that the trust has taxable income or gain. The donor receives an income tax deduction equal to the fair market value of the gifted assets minus the value of the income interest kept by the donor and other secondary beneficiaries.

Charitable Giving With Life Insurance

Naming a Charity as Beneficiary

This is a simple way to utilize life insurance to help make charitable donations. The donor purchases a policy or uses an existing policy and names the charity of their choice as beneficiary. At the donor’s death, the charity receives the life insurance death benefit as a donation. The donor continues to pay the premiums on the policy for life. The donor cannot take an income tax deduction for premium payments because they retain an ownership interest in the policy. The donor has the ability to change the beneficiary of the policy at any time during their life.

Gifting an Existing Policy

A donor can take an existing life insurance policy and change the ownership and beneficiary to a charitable organization. The donor would usually continue to pay the premiums for that policy, and when the donor dies, the life insurance death benefit is paid to the charity. By using life insurance, the insured can leverage their dollars to leave a larger gift to the charity of their choice than they may otherwise be able to do if just donating money. Also, the donor may be able to get a deduction for the lower of the value of the policy or the cost basis, subject to the charitable deduction percentage limits. However, if the value of the policy is over $5,000, the donor has to get a qualified appraisal of the policy in order to claim a tax deduction.

Gifting a New Policy

In this case, the donor would apply for a life insurance policy as the insured person. The charity would be the owner and beneficiary of the policy from the beginning. Each year, the donor would gift the equivalent dollar amount of the policy premium to the charity. The charity would then use that money to pay the life insurance premium.

The donor may be able to deduct the amount of the premium on their taxes as a charitable contribution, subject to the charitable deduction percentage limits. However, the donor has no ability to change the beneficiary should he or she become disenchanted with the charity that was chosen, nor is the charity obligated to continue paying the premium on the policy. This is important for the donor to remember as the donor is making the choice of charity.

Wealth Replacement Trust (WRT)

In some cases, a charitable donor would like to benefit their favorite charity but does not want to disinherit their family by the amount of the donated gift. Creating and funding a WRT is a strategy by which a donor replaces the property that was gifted to the charity. The way this strategy works is that the donor applies for a life insurance policy equal to the value of the property gifted to the charity. The donor, working with an attorney, establishes an ILIT that will own the life insurance from the time it is issued. If properly designed and implemented, the life insurance will be out of the donor’s taxable estate.