Advanced Planning Techniques: The Need to Go Beyond the Basics

Ben Franklin’s statement, “Nothing is certain but death and taxes,” has never been more true. Added to that list is the certainty of change and the need for vigilance regarding tax developments.

There are a variety of “advanced” or “sophisticated” estate planning tools that Davis Schilken, PC can employ for the purpose of reducing, or entirely eliminating in some cases, the federal estate tax which an individual’s estate must pay at his or her death. Some elements of these techniques are:

legitimately structuring one’s business and personal affairs to qualify for valuation discounts;
shifting growth, and sometimes, income from the wealthier family member’s estate;
leveraging the benefit of discounts and the lower gift tax rate on gifts made; and
exempting assets and growth on these assets forever from estate and generation-skipping transfer tax.
Many of these techniques offer advantages beyond transfer tax savings, e.g. satisfying an individual’s wishes to benefit charities, fostering the orderly transfer of the family business or ranch to family members, protecting beneficiaries from creditors and divorcing spouses, and more.

Under current federal law, there are three taxes that are imposed on the transfer of assets: the gift tax, the estate tax, and the generation-skipping transfer tax (GSTT). In addition to the transfer taxes that may apply, income tax can also reduce transfers. The gift tax applies to transfers made during life, the estate tax applies to transfers at death, and the generation-skipping transfer tax applies to transfers during life or at death that skip the children’s generation and pass to future generations, who are generally grandchildren and those in lower generations.

  • Gift Tax: A donor can give assets with unlimited values to spouses who are U.S. citizens and to qualified charities. In 2011, gifts totaling up to $13,000 can be made to any number of individuals in each calendar year. “Taxable gifts” are all gifts other than those that qualify for the (a) marital deduction, (b) charitable deduction, or (c) $13,000 annual exclusion; however, no out-of-pocket gift tax has to be paid until a donor’s cumulative lifetime gifts exceed the “applicable exclusion” (explained below) that is available for gift and estate tax purposes.  After the applicable exclusion amount has been exceeded, the federal gift tax rate is 35% (during 2011 and 2012). The gift tax is paid by the donor out of assets remaining after the gift, so the tax itself is not included in the computation of the tax.
  • Estate Tax: Upon death, the decedent’s gross estate includes the then current fair market value of all property interests held by the decedent at the time of his or her death, whether passing by will, trust, contract, operation of law (such as by beneficiary designation) or by the law of intestacy. There are deductions for debts, administrative expenses, qualified transfers to spouses, and transfers to qualified charities. The net amount is the taxable estate. To the extent the applicable exclusion amount (“unified credit”) has not been utilized for lifetime gifts, it will be applied against the taxable estate.
    Applicable Exclusion: The past, present, and future values for the “applicable exclusion amount” for the federal gift and estate taxes are shown in this table:

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  • Generation-Skipping Transfer Tax: Congress enacted the generation-skipping Multi-Generational Plans transfer tax (GSTT) which applies to transfers to “skip persons”, whether made during life or at death. “Skip persons” are typically grandchildren and lower generation descendants. The GSTT is a one-rate tax equal to the highest applicable estate tax rate (shown in the table above this paragraph), and it applies in addition to any applicable gift or estate tax. Estate taxes paid are deducted before computing the GSTT, but the combination of the estate tax and the GSTT can result in a combined rate of over 70%. Each donor or decedent has a $5,340,000 million GSTT exemption (for 2014), which can be used for transfers either during life or at death. The GSTT exemption applies to the transferor (donor or decedent) regardless of the number of skip persons to whom the transfers are made. Since 2004, the GSTT exemption has been the same as the “applicable exclusion amount” for estate tax purposes.
  • Income Taxes: Income taxes may further deplete transfers, especially with respect to assets that are considered “income with respect to the decedent” (“IRD”).  IRD items contain income upon which the decedent has not paid income taxes.  Examples would include individual retirement accounts (IRAs) and installment contracts. The combination of transfer taxes and income taxes can deplete some transfers by more than 85%.

Personal Considerations
Some estate-tax savings techniques require giving up at least some control over assets and to limit or eliminate the benefits from them. Only you can decide how much benefit and control you are willing to give up in order to save someone else (your children or other beneficiaries) taxes and other expenses at a future date. Davis Schilken, PC is qualified to discuss what your desires and goals are for your estate plan and what tools and techniques may be most beneficial for your individual circumstances. Below are just a few advanced planning techniques that may be applicable to your family’s needs.


We were very pleased with the level of expertise available at Davis Schilken. It enabled us to feel confident that we were presented all options. The process was efficient and allowed us to complete our estate planning effectively and efficiently. - W&L R.
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