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Charitable Remainder Trusts (CRT) operate in reverse – the family retains the income stream for a chosen period with the charity receiving the assets in the future at the end of the term. The family enjoys a significant income tax deduction for the value of the future gift, which significantly reduces the income taxes due on the annual trust income. The younger generation does not receive any asset (it passes to the charity) and this can be adjusted using a portion of the charitable income to fund a well structured life insurance plan which transfers wealth in an easy to divide form (money is easier to share amongst children than a building) and can avoid all income and estate taxes.

Private Foundations are charities operated by the family for its favorite charitable purposes. It provides a large degree of control and is an opportunity to mold and encourage younger generations with values important to the family. They can be used in combination with CRTs and CLTs to achieve benefits of both.

Jurisdictions

Many of techniques to achieve protection and tax reduction goals use entities – limited liability companies, family limited partnerships, trusts, international business companies, etc. Many times a family forms these entities in their home state presuming it is required or preferable. State laws vary. A state is “good” when it limits rights of creditors, has consistent case law, offers flexible structures, and has reasonable fees. We may use whichever state we choose and can change the domicile as we wish. Many times the use of multiple jurisdictions in concert permits the most benefit and should be part of the planning equation at inception.

Control

Gifts, trusts, and other transfers often generate concerns that the family will lose control over their assets. This is not a requirement and well structured planning should maintain control with the family and preserve the right to be wrong. It is difficult to predict how assets will perform, when an emergency will arise, the actions of our children, or how relationships will change. A plan should have contingencies and an ability to modify. Many trusts that are irrevocable (typically insurance trusts and gifting trusts) lack any outs – what if the tax laws change? What if the parents need the assets returned? Any irrevocable technique should contain some safety valve, which can be achieved in most cases without jeopardizing tax benefits.

Life Insurance

Many families of significant net worth underutilize insurance believing they do not need it. Most do not need it - in the sense that the family has enough assets to pay death taxes and to benefit the younger generations. Insurance for planning rarely focuses on need but rather upon the cost efficiency and transfer of financial risk. The cost of paying death taxes with family assets is about $1.75 for each $1 of death tax. This is due to the fact that the funds to pay taxes are not deductible (i.e. an estate of $10 million would generate a $5 million tax and the family earns and sets aside an additional $5 million to fund the tax, however the tax fund is itself taxable and generates another $2.5 million in tax). Life insurance typically costs about ten to forty cents on the dollar and is used as a tool to discount taxes. As taxes are due in cash, and few families remain highly liquid, the liquidity of insurance can avoid the forced sale of assets to fund taxes.

Premiums for larger policies can be a significant financial burden and premium financing strategies have emerged which reduce cash flow impact. Essentially a loan is taken out against the policy with the policy as collateral thus the family is only paying interest on the premiums without using any gifting credit. It can serve as an additional tool to leverage true cost to pennies on the dollar.

Conclusion

There are dozens of strategies that can be used to preserve and protect family wealth from the perils of litigation, taxation, and family disputes. A combination of tools; LLCs, insurance, trusts, equity stripping, and a variety of others, are available to work collaboratively to provide substantial insulation while simultaneously reducing taxes, structuring transition to the next generation, while keeping control with the core family unit. As the central advisory source, the family office is in a unique position to guide and assist families towards sustainable legacy.

Adam Chodos, Esq., CPA, is an asset protection attorney based in Greenwich, Connecticut specializing in wealth preservation, business succession, and advanced estate planning. AChodos@WealthPreserve.com

Angelo J. Robles is founder and Chief Executive Officer of the Family Office Association. The Family Office Association is a global membership organization exclusive to single family offices and families of wealth. angelo@familyofficeassociation.org.

Please note that the information contained in this article is for informational purposes only and should not be construed as legal advice on any subject matter. No readers should act, or refrain from acting, on the basis of any content without seeking appropriate legal or other professional advice based on their particular circumstances.

As laws and rules change frequently, this article contains general information and may not reflect the most current legal developments. The authors expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this article.

FOA would like to thank contributing editor Adam Chodos, Esq. CPA. Co-written by Angelo J. Robles, Founder & CEO, Family Office Association