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Running Head: ESTATE PLAN g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g g 1
Final Project
ESTATE PLAN 2
Table of Contents
Introduction to an estate planning strategy ................................................................................ 3
Introduction to the utilization of limited family partnerships ................................................ 4
Using Trusts in Estate Plan .................................................................................................... 5
Life Insurance, Annuity and Charitable Giving Strategies ........................................................ 7
Evaluation of life insurance products, annuities, and charitable giving................................. 7
Ethical compliance strategy ................................................................................................... 8
Additional ethical compliance strategy .................................................................................. 8
Personal income tax consequences and value ............................................................................ 8
Appendix ................................................................................................................................ 9
References ................................................................................................................................ 12
ESTATE PLAN 3
Introduction to an estate planning strategy
Estate planning is the most important part of the preparation tasks collection that helps
to manage an asset base of an individual in the event of their death or incapacitation,
including the settlement of estate taxes and the bequest of assets to heirs. It has been found
that the estate can be taxed at a 40% high rate for not having proper estate planning, which
can result in very high taxes for individuals with high wealth (CDFA, 2023). In the present
case, the client owns a company with $1 billion of fair market value. Here, if the client is not
planning their estate in a proper way, then it could result in paying nearly $400 million of
estate taxes by the estate upon death. It has been identified that many estate planning
strategies are there for high-wealth individuals to avoid gift taxes and paying estate, including
limited family partnerships, life insurance policies, establishing charitable trusts, gifting
assets during their lifetime, and a revocable living trust (CDFA, 2023). Thus, it becomes
important for the client to consult with a professional and experienced estate planning
attorney in the real estate industry to determine the right approach for the specific condition.
In general, the estate covers your house, life insurance, bank accounts, personal
property, and other investments. A client needs to consider all these items while looking for
the estate planning strategy so that it can be equally disbursed. The limited exemption
equivalent can make an individual leave another before incurring estate taxes (DuCharme et
al., 2019). For instance, if the client is married to someone, then they can get double the
amount as up to $11.4 million can be received by an individual tax-free, which can lead to a
total of $22.8 million. Similarly, in case you may leave your estate to your two children and
give your business 10% to a third party, then the exemption equivalent would reach $68.4
million, which is the lower estate amount. In such a scenario, it is always a better decision to
specify the client's wishes through a will that can administer the estate.
ESTATE PLAN 4
Another great estate strategy could be life insurance policies that will allow the client
to avoid estate taxes and provide you with several options to leave money for your children.
At the same time, the client needs to select a beneficiary while setting the life insurance so
that the beneficiary amount will be paid to the person upon the client's death. Another great
option could be transferring the life insurance policy to your children, but if the individual is
living for more than three years after the process of transfer, then the value will not be added
to the estate (Miller & Maine, 2020). Here, the person needs to ensure that the insurance
policy is purchased by one child who can insure them. For example, if the client is making
payments under $30,000 per year and paying the insurance premiums, then it will be
considered a non-taxable gift payment. In case the client cannot transfer the policy or does not
have the life insurance policy, then it will be considered tax-free and part of your estate
(DuCharme et al., 2019). It has been identified that the client can take advantage of tax
exclusions by transferring property or assets as gifts during their life to their friends, family,
or charities. In the case of a married client, it is possible to transfer estates without tax liability
to the spouse. Moreover, the client needs to ensure that the spouse is in a lower position
before doing this. Transferring the estate of the spouse to the heirs can help the client to pay
fewer taxes on the inheritances. If the client wants to give 10% of the business to a third party,
then the process should be conducted sooner as it can lower the fair market value of their
estate and business.
Introduction to the utilization of limited family partnerships
When focusing on long-term estate planning, it would be wise to create a family-
limited partnership. This FLP is a type of partnership that is specially designed to centralize
investment accounts or family businesses by pooling the family assets together into a single
partnership where all the family members have their shares (Vlahos, 2018). If a family limited
partnership is utilized, then it can offer a limited partnership interest in the company to
ESTATE PLAN 5
maintain its control. Here, the client's organization could invest in different commercial and
residential properties. The client's home will be covered by the company, so the company's
growth can be ensured with the mortgage payments. Likely, it will be possible to pay taxes on
the fair market value to the third party and the children. This way, the client can give $30,000
tax-free worth to their children as a family limited partnership interest.
Using Trusts in Estate Plan
Trusts can be incorporated into real estate planning since they can serve as vital tools
that can help in the reduction of the estate tax with the passage of time. It has been argued that
two vital mechanisms that can be integrated into real estate planning for the purpose of
reducing the tax base are intentionally defective grantor trusts (IDGTs) and family-controlled
entities (Hemel & Lord, 2021).
In case the client intends to use a family-limited partnership for his real estate, using a
trust, especially the utilization of an intentionally defective grantor trust, is an appropriate
choice. An intentionally defective grantor trust is a trust that is specifically tailored to meet
the exact needs of the grantor relating to their transfer requirements (Perez, 2023). By
strategically using the IDGT, it is possible for the client to get tax benefits since the value of
the assets can be frozen, which will help to reduce the tax burden. One of the distinguishing
features of intentionally defective grantor trusts is that while the income is normally taxed to
the grantor, the contributed assets are not included in the estate of the grantor for taxation
purposes. As a result of the exclusion, the grantor can ensure that he pays tax on the income
but does not have to pay tax on assets in the estate. Thus, by using the IDGT trust in real
estate planning, it is possible to make sure that an ethical and accountable approach is adopted
to handle the taxation obligations and that there is no breach of law in any manner. g g
If the client makes the decision to transfer the family limited partnership assets, it will
be considered to be a comprehensive transfer for the estate as well as gift tax purposes. On the
ESTATE PLAN 6
other hand, such a transfer will be considered to be partial or incomplete from the perspective
of income tax. As a result of this, the inclusion of the intentionally defective grantor trust will
help to reduce the total amount of tax that has to be paid by the client. According to the
AICPA Code of professional conduct, it is essential to demonstrate responsible behavior
while carrying out one’s duties by exercising moral and professional judgements (Aicpa Code
of Professional Conduct). In the specific context involving the client, the integration of IDGT
is a moral behavior that will enable to reduce the tax base by not considering the asset value.
It has been argued that estate planning involves the confrontation of one’s morality (Rojeck,
2019). In client must carefully make decisions on how to use IDGT so that he can derive
taxation benefits in a moral and ethical way.
By incorporating a trust (IDGT) into the estate plan, the client will be responsible to
pay the taxable income on the income generated from the trust. When the client will pay the
income tax on the outstanding income that is generated from the trust, he will be able to
capable of making extra transfers to his children on which tax will not be applicable. In this
case, the tax will not be applicable on the transfers that are made to the children since the
grantor has already been paying tax on the income from the trust. The income that will be
generated from the family limited partnership will be considered as that of the trust since the
FLP is a segment of the trust.
The value of the real estate firm of the client is USD 1 billion. Due to the high value,
he will have to establish one or more trusts for the estate. A viable recommendation for the
client is to initially establish a single trust and then selling the family limited partnership to
the intentionally defective grantor trust. Based on the transaction, the client is entitled to
receive an interest-bearing promissory note (Perez, 2023). Such an exchange will ensure that
no tax will be applicable. The sale price of the FLP will be based on lower value due to the
absence of marketability and not based on its assets (Feinleib, 2022). After the acquisition,
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the trust will have complete control over the interest of the partnership. In case the client
makes the decision to gift the assets to the intentionally defective grantor trust, no gift tax will
be applicable in this case. The income that is generated as a result can be withheld by the trust
which can later be passed on to the children of the client.
If the client decides to gift the family limited partnership, it is instrumental in having
an insight into the concept of Crummey power. It is a technique that allows an individual to
receive a gift that does not have eligibility for gift-tax exclusion. It is a vital tool used as an
effective estate planning tool to withdraw gifts (Adler, 2020). g
Life Insurance, Annuity and Charitable Giving Strategies
Charitable giving by the client will have a direct implication on his income gift as well
as estate tax outcome. A charity donation can help him to reduce his tax obligation. The IRS
allows the deduction of charitable contributions from tax computation (Internal Revenue
Service). Before making the decision, he must consider options relating to charitable
remainder trusts. The IRS has defined charitable remainder trusts as trusts that allow
individuals to donate assets and draw annual income for a specified time period or for life
(Internal Revenue Service).
Evaluation of life insurance products, annuities, and charitable giving g
Establishing a Charitable Remainder Annuity Trust is an ideal option for the client
and his beneficiary. It can give rise to several advantages, such as the client can transfer his
assets and real estate to the trust, and the trustee can sell the same at market value (Rojeck,
2019). So, no implications relating to capital gain taxes will arise. Furthermore, it can also be
reinvested in other places that will help in generating income. He can purchase a life
insurance policy for replacing the assets that have been contributed to the trust. The client has
to create an irrevocable insurance trust so that the policy can be transferred to it, and it will
not be considered as a part of the gross estate (Parrish, 2019). The client can make a donation
ESTATE PLAN 8
below $ 14,000 and name his children as beneficiaries so that they will be able to get the tax-
free insurance proceeds. g
Ethical compliance strategy
Based on the client’s comments relating to the valuation discount on the family
limited partnership, an ethical compliance strategy has been developed. As he showed interest
in the valuation discount approach, it is advisable for him to get in touch with an estate
lawyer. The professional will play a cardinal role to prepare an appraisal report relating to the
family partnership assets. He will follow authoritative guidance and appropriate standards
while providing personal financial planning services to the client (AICPA). In addition to this,
the client must also expand his knowledge of valuation discounts by familiarizing himself
with the regulations that have been introduced by the IRS. By having a thorough
understanding of the regulatory requirements, he can ensure the tax value is ethically
managed.
Additional ethical compliance strategy
An additional ethical compliance strategy has been devised to address issues relating
to the client’s failure to make the timely payment of estate tax and the interest and penalty
aspects. According to Section 6901 of the IRS, personal liability for the payment relating to
real estate income or trust may arise as a result of failure to pay tax (Internal Revenue
Service). If the client fails to pay tax and necessary penalties relating to it, interest will be
calculated on the aggregate amount. In order to avoid the payment of penalties and extra
interest, it is advisable for him to pay tax on his estate in a timely manner. Such an ethical and
responsible approach can ensure all the tax-related obligations are met by the client.
Personal income tax consequences and value
In the case of the client, it has been suggested that he must set up a Charitable
Remainder Annuity Trust for a decade. According to IRS, in the majority of cases, charitable
ESTATE PLAN 9
cash contribution taxpayers are eligible to deduct, usually 60 % on Schedule A, of their
adjusted gross income (Internal Revenue Service). The proposed strategy could have a direct
impact on the tax-related aspects, and the same is computed and presented in the appendix.
On the basis of the client’s annual payout from the Charitable Remainder Annuity Trust
(CRAT), which is $ 66000 and the tax-free portion of $ 47538.75, it is viable for him to make
a charitable contribution. He will have to pay a minimal tax amount on his ordinary income.
In the next 24 months, he will only have to pay the tax amount of $ 5222.7 (at 12 %). As a
considerable portion of the money is tax-free, the client will be able to purchase the life
insurance relating to the wealth replacement trust.
Appendix
Age of the client
65
FMV of real estate (charitable
contribution)
$ 1200000
Cost Basis
$ 1200000
Date of gift
02-06-2023
Received payment
per annum
basis
IRS Rate of Discount
1.80 %
Annual payout
$ 66000
Ordinary Income
$ 21761.25
Income free of tax
$ 47538.75
Charitable deduction
$ 365546.12
30.46 %
Rate of payment
5.50 %
ESTATE PLAN 10
Value available with the client after the
creation of the IDGT, in life term estate
and gift exclusion
$
2200000
$
1500000
$ 700000
The personal income tax consequences
and value over the next 24 months based
on the overall proposed tax strategy
Tax rate = 12 % for ordinary income of
individual ranging between $ 11001 to $
44725
Year
Ordinary
income
Rate 12
%
2023
$ 21761.25
$ 2611.35
2024
$ 21761.25
$ 2611.35
The tax consequences that will arise for the client in the estate planning context will
vary depending on how the ownership will be transferred to his children. He can make a
charitable contribution as it can reduce the tax amount that he will have to pay. The
Charitable Remainder Annuity Trust will act as a chief tool that will make $ 47538.75 tax-
free and hence the client has to pay tax of $ 5222.7 in 24 months.
Forms required for Sole proprietorship business
Schedule C
Schedule SE
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Form 1040 (Client)
Form 1040 (Children)
Forms required for S Corporation business
Form 1040 (Client)
Form 1040 (Children)
Schedule E (Client)
Schedule E (Children)
Form 1120S
Schedule K-1
ESTATE PLAN 12
References
Adler, R. J. (2020). Crummey Powers: Still a Powerful Estate Planning Tool. Prob. & Prop.,
34, 24.
Aicpa Code of Professional conduct. Available at:
https://us.aicpa.org/content/dam/aicpa/research/standards/codeofconduct/downloadabl
edocuments/2014december15contentasof2016august31codeofconduct.pdf (Accessed:
18 May 2023).
CDFA, C. (2023). How Portability Can Be an Impactful Estate Planning Strategy. Journal of
Financial Planning, 36(2), 64-67.
CDFA, C. (2023). Prenuptial Agreements and How They Affect Estate Planning. Journal of
Financial Planning, 36(4), 48-51.
Charitable contribution deductions (no date) Internal Revenue Service. Available at:
https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-
contribution-deductions (Accessed: 02 June 2023).
Charitable remainder trusts (no date) Internal Revenue Service. Available at:
https://www.irs.gov/charities-non-profits/charitable-remainder-
trusts#:~:text=Charitable%20remainder%20trusts%20are%20irrevocable,income%20
and%20distributions%20to%20beneficiaries (Accessed: 02 June 2023).
DuCharme, J., Rodgers, J., Teague, L. J., Weiant, L., Wigley, M., & Zhang, Y. (2019). Tax
Violations. Am. Crim. L. Rev., 56, 1477.
Feinleib, T. E. (2022). Estate Planning for Ranch Owners. Est. Plan. & Cmty. Prop. LJ, 15, 1.
Hemel, D. J., & Lord, R. (2021). Closing Gaps in the Estate and Gift Tax Base. University of
Chicago Coase-Sandor Institute for Law & Economics Research Paper, (937).
Parrish, S. (2019). Removing the Irrevocable Life Insurance Trust as the Default in Estate
Planning. Journal of Financial Service Professionals, 73(2).
ESTATE PLAN 13
Perez, K. (2023). Grantor Trusts: The MVP of the IRC. Estate Planning & Community
Property Law Journal, 15(1), 92-136.
Professional responsibilities (no date) AICPA. Available at:
https://us.aicpa.org/interestareas/personalfinancialplanning/resources/practicecenter/pr
ofessionalresponsibilities#:~:text=Additionally%2C%20all%20AICPA%20members
%20are,client%20confidentiality%2C%20disclose%20to%20the (Accessed: 02 June
2023).
Rojeck, R. P. (2019). Charitable Planning. Wealth: The Ultra-High Net Worth Guide to
Growing and Protecting Assets, 25-36.
Rojeck, R. P. (2019). Estate Planning. Wealth: The Ultra-High Net Worth Guide to Growing
and Protecting Assets, 7-24.
Transferee liability cases: Internal Revenue Service (no date) 4.11.52 Transferee Liability
Cases | Internal Revenue Service. Available at: https://www.irs.gov/irm/part4/irm_04-
011-052 (Accessed: 02 June 2023).
Wealth Transfer Tax Planning After the Tax Cuts and Jobs Act. BYU L. Rev., 46, 1411.
Vlahos, Lou. "Family Limited Partnerships They're Still Out There (?)." Tax Law for the
Closely Held Business, 30 Oct. 2018, https://www.taxlawforchb.com/2018/10/family-
limitedpartnerships-theyre-still-out-there/.
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