The purpose of proper estate planning is to (1) insure the clients’ long term security; (2) share with family members their years of efforts in developing wealth; (3) maintain control; and (4) reduce estate tax which would otherwise total upwards of fifty percent (50%) of the net value at the surviving spouse’s death.

The cornerstone of a successful estate plan is through the use of a revocable living trust, pour-over wills, advance healthcare directives, and durable powers of attorney for management to avoid probate and conservatorship proceedings.

Revocable Living Trust
A revocable living trust is used to avoid probate and to insure an orderly administration of the assets. All income is payable to the settlers of the trust during their lifetime, and thereafter to the surviving spouse for his or her lifetime. Upon the death of the surviving spouse the trust assets are distributed to the designated beneficiaries. The trust utilizes to the maximum extent possible the clients’ federal estate tax exemptions (presently $1,000,000.00 per individual).

Pour-Over Will
A pour-over will transfers all probate assets to the revocable trust to be administered as part of the trust estate. The will names executors and guardians for minor children.

Durable Power Of Attorney For Asset Management
A durable power of attorney for asset management avoids the need for a conservatorship and allows a person to name another person to act on their behalf should they be become incapacitated or disabled. The power operates as to assets held outside the revocable trust.

Advance Healthcare Directive
An advance healthcare directive enables the person to appoint another person to make healthcare decisions if they are unable to do so on their own.

WEALTH PRESERVATION

Although the above estate planning techniques are extremely important to properly utilize each spouse’s federal estate tax exemptions and to insure continuity of management without probate, the greatest estate tax savings can be accomplished through lifetime asset transfers intended to “fractionalize” the taxable estate. Through valuation discounts for lack of marketability and control, a “family limited partnership” can substantially reduce estate and gift tax. Rather than owning an asset, such as an apartment building, outright at death, the decedent owns a partnership interest, which has certain restrictions which reduce its value for federal estate tax purposes. The rationale behind the discounts is that the fair market value of a gift, or of an asset owned by a person at his death, is determined by what a “willing buyer” would pay for that particular asset. A willing buyer would pay less for an interest in a partnership that owns the investment than he would for 100% of the assets.

The following is an illustration showing the tax savings that can be achieved through the use of a family limited partner-ship. The facts for the illustration is a married couple with three children and five grandchildren with a total estate of $5,000,000.00, $4,000,000.00 of which is commercial real estate.

SUMMARY

Under this illustration, estate tax savings in the amount of $722,704.00 can be achieved in addition to the estate tax savings obtained by using a revocable trust utilizing both spouses’ federal estate tax exemptions. There are issues that need to be addressed in connection with the use of a family limited partnership, such as local property tax issues, capital gain tax considerations and partnership income tax reporting requirements.

If you would like further information with respect to estate planning and wealth preservation, please call either Donald J. Hromadka or Paul T. Gaulke at:

Hromadka & Gaulke
11661 San Vicente Boulevard, Suite 410
Los Angeles, CA 90049-5112
Phone: (310) 820-4100
Fax: (310) 820-8565