Deviating a bit from the world of estate planning, recently there have been a number of news stories regarding Gov. Paterson's proposed budget cuts to help close New York's huge budget deficit. Today I read an article discussing proposed cuts in early childhood intervention programs. The article of course quoted parents and service providers complaining about the proposal to reduce services and begin charging families (over a certain income level) user fees. Whenever there is a proposal to cut a program or require more user fees, people affected by the program cry foul, and the elected representatives are invariably quoted as saying "this is a program that should not be cut."
Few people want to see a reduction in services. However, we are always hearing complaints about New York's oppressive taxes that are driving families and businesses out of the state.
We can't have it both ways. New York provides more social services than any other state, but of course that costs money. When revenues were flush, the state could afford to be more generous. But unless New York's citizens are prepared to pay more taxes -- and after hearing repeated complaints from clients regarding the high costs of living in New York, I don't believe most New Yorkers would be willing to pay more in taxes -- it seems likely that we're just going to have to learn to live with fewer services. I just hope that the cuts are made equitably among the myriad of services and programs throughout the state.
Monday, February 22, 2010
Thursday, February 18, 2010
Asset Protection Trusts
Given the litigious nature of American society, a common concern voiced by business owners and professionals is how they might protect their hard-earned assets from the reach of creditors. While possessing adequate liability insurance is a must, successful individuals and business owners should not rely upon insurance protection alone.
As a fundamental principle of debtor-creditor law, you cannot shield your assets from existing creditors, whether or not a judgment has been entered or a lawsuit has been commenced. If, however, the “waters are calm” at the time you seek to engage in protective planning, there are a number of planning tools that can help keep your assets out of the reach of unanticipated future creditors.
One common planning tool that provides no asset protection is a standard revocable trust. Under this type of trust the “trustmaker” retains full access to the assets, so the trustmaker’s creditors retain the same right to access. An irrevocable income only trust, which is commonly used for Medicaid planning, does allow the trustmaker to shield the principal from any future creditors, since the trustmaker has made an irrevocable gift of the principal assets funded into the trust.
Many people, however, prefer to have greater access to all of their assets, including both income and principal. Under the laws of New York and most other states, it is not possible to create a creditor-protected irrevocable trust that would permit the trustmaker to be a beneficiary of both trust income and principal. But with Alaska leading the way in 1997, there are now eight states -- Alaska, Delaware, Nevada, South Dakota, New Hampshire, Wyoming, Colorado and Utah -- that have passed legislation authorizing the creation of what have become known as Domestic Asset Protection Trusts (“DAPT”). DAPT’s are irrevocable trusts in which the trustmaker can remain a beneficiary and yet be protected against prospective creditor claims. There is the additional potential benefit that the trust can be structured so that future appreciation of trust assets may be excluded from the trustmaker’s taxable estate.
To provide the requisite asset protection, DAPTs must satisfy, at minimum, the following criteria: (1) they must be irrevocable; (2) at least one Trustee (either an individual or corporate fiduciary) must be a resident of the jurisdiction in which the DAPT is being formed; (3) a minimum amount of trust assets (often as little as $10,000) must be located in the jurisdiction (usually held in a bank or investment account) where the trust is formed; and (4) the trust should provide the trustee with complete discretion for making distribution of income or principal to the trustmaker and other beneficiaries (often the trustmaker’s spouse, children or other family members). Note that you do not need to be a resident of the state where the DAPT is being formed to take advantage of these types of trusts; in fact, states that have established these types of trusts have done so with the express expectation that residents of other states will establish the DAPT in that particular jurisdiction, thereby bringing additional investments and business activity into that state.
DAPT’s can also be used in conjunction with, or as an alternative to, a prenuptial agreement. Not only may a prenuptial agreement be set-aside at the whim of a judge, but many people – even those with extreme wealth (see Paul McCartney) – are reluctant to broach the topic of a prenuptial agreement with a prospective spouse, and/or may be reluctant to comply with the asset disclosure requirements for prenuptial agreements. Placing assets in a DAPT in advance of a marriage should protect those assets from inclusion in determining the “equitable distribution” of the couple’s assets in the event of divorce.
One potential disadvantage of DAPT’s is that, even more than a decade after the Alaska and Delaware statutes were adopted, there have been no cases testing whether a judgment obtained in one state (e.g., New York) can be enforced against a DAPT created in another state (e.g., Alaska or Delaware) under the “Full Faith and Credit” clause of the U.S. Constitution. Perhaps the absence of reported cases supports the effectiveness of the DAPT statutes. It is likely that there have been cases where a creditor, faced with challenging a DAPT, may have instead settled on terms favorable to the trustmaker. Inevitably, however, we can expect to see reported court cases determining the scope of creditor protection to be afforded a trustmaker residing in a state that has not enacted DAPT legislation (i.e., New York) who has established a DAPT in one of the eight DAPT jurisdictions.
While no asset protection strategy can be deemed “bulletproof,” the foreign asset protection trust (“FAPT”) provides the greatest barrier to the claims of future creditors. FAPT’s are similar in structure to DAPT’s, but because they are created in foreign jurisdictions such as Nevis, the Cook Islands, the Bahamas, and other similar jurisdictions that are not subject to the Full Faith and Credit clause of the U.S. Constitution, they are widely considered to provide a higher level of asset protection than a DAPT. In addition, foreign nations typically impose more stringent burdens of proof, shorter statutes of limitation and other legal hurdles that tend to discourage a judgment creditor from pursuing their claim (and will often lead to a settlement more favorable to the judgment debtor). A disadvantage of FAPT’s is their higher cost to create and maintain, as well as the discomfort some people have of dealing with a foreign jurisdiction.
Asset protection is a legitimate and valuable part of the planning process. Keep in mind, however, that the time to protect your assets is before an actual or likely creditor claim has arisen. At that point, engaging in any of the above-described asset protection strategies might be deemed invalid under the doctrine of “fraudulent conveyance,” and might expose you and your professional advisor to civil, and possibly even criminal, sanctions.
As a fundamental principle of debtor-creditor law, you cannot shield your assets from existing creditors, whether or not a judgment has been entered or a lawsuit has been commenced. If, however, the “waters are calm” at the time you seek to engage in protective planning, there are a number of planning tools that can help keep your assets out of the reach of unanticipated future creditors.
One common planning tool that provides no asset protection is a standard revocable trust. Under this type of trust the “trustmaker” retains full access to the assets, so the trustmaker’s creditors retain the same right to access. An irrevocable income only trust, which is commonly used for Medicaid planning, does allow the trustmaker to shield the principal from any future creditors, since the trustmaker has made an irrevocable gift of the principal assets funded into the trust.
Many people, however, prefer to have greater access to all of their assets, including both income and principal. Under the laws of New York and most other states, it is not possible to create a creditor-protected irrevocable trust that would permit the trustmaker to be a beneficiary of both trust income and principal. But with Alaska leading the way in 1997, there are now eight states -- Alaska, Delaware, Nevada, South Dakota, New Hampshire, Wyoming, Colorado and Utah -- that have passed legislation authorizing the creation of what have become known as Domestic Asset Protection Trusts (“DAPT”). DAPT’s are irrevocable trusts in which the trustmaker can remain a beneficiary and yet be protected against prospective creditor claims. There is the additional potential benefit that the trust can be structured so that future appreciation of trust assets may be excluded from the trustmaker’s taxable estate.
To provide the requisite asset protection, DAPTs must satisfy, at minimum, the following criteria: (1) they must be irrevocable; (2) at least one Trustee (either an individual or corporate fiduciary) must be a resident of the jurisdiction in which the DAPT is being formed; (3) a minimum amount of trust assets (often as little as $10,000) must be located in the jurisdiction (usually held in a bank or investment account) where the trust is formed; and (4) the trust should provide the trustee with complete discretion for making distribution of income or principal to the trustmaker and other beneficiaries (often the trustmaker’s spouse, children or other family members). Note that you do not need to be a resident of the state where the DAPT is being formed to take advantage of these types of trusts; in fact, states that have established these types of trusts have done so with the express expectation that residents of other states will establish the DAPT in that particular jurisdiction, thereby bringing additional investments and business activity into that state.
DAPT’s can also be used in conjunction with, or as an alternative to, a prenuptial agreement. Not only may a prenuptial agreement be set-aside at the whim of a judge, but many people – even those with extreme wealth (see Paul McCartney) – are reluctant to broach the topic of a prenuptial agreement with a prospective spouse, and/or may be reluctant to comply with the asset disclosure requirements for prenuptial agreements. Placing assets in a DAPT in advance of a marriage should protect those assets from inclusion in determining the “equitable distribution” of the couple’s assets in the event of divorce.
One potential disadvantage of DAPT’s is that, even more than a decade after the Alaska and Delaware statutes were adopted, there have been no cases testing whether a judgment obtained in one state (e.g., New York) can be enforced against a DAPT created in another state (e.g., Alaska or Delaware) under the “Full Faith and Credit” clause of the U.S. Constitution. Perhaps the absence of reported cases supports the effectiveness of the DAPT statutes. It is likely that there have been cases where a creditor, faced with challenging a DAPT, may have instead settled on terms favorable to the trustmaker. Inevitably, however, we can expect to see reported court cases determining the scope of creditor protection to be afforded a trustmaker residing in a state that has not enacted DAPT legislation (i.e., New York) who has established a DAPT in one of the eight DAPT jurisdictions.
While no asset protection strategy can be deemed “bulletproof,” the foreign asset protection trust (“FAPT”) provides the greatest barrier to the claims of future creditors. FAPT’s are similar in structure to DAPT’s, but because they are created in foreign jurisdictions such as Nevis, the Cook Islands, the Bahamas, and other similar jurisdictions that are not subject to the Full Faith and Credit clause of the U.S. Constitution, they are widely considered to provide a higher level of asset protection than a DAPT. In addition, foreign nations typically impose more stringent burdens of proof, shorter statutes of limitation and other legal hurdles that tend to discourage a judgment creditor from pursuing their claim (and will often lead to a settlement more favorable to the judgment debtor). A disadvantage of FAPT’s is their higher cost to create and maintain, as well as the discomfort some people have of dealing with a foreign jurisdiction.
Asset protection is a legitimate and valuable part of the planning process. Keep in mind, however, that the time to protect your assets is before an actual or likely creditor claim has arisen. At that point, engaging in any of the above-described asset protection strategies might be deemed invalid under the doctrine of “fraudulent conveyance,” and might expose you and your professional advisor to civil, and possibly even criminal, sanctions.
Sunday, February 7, 2010
Estate Planning for People with Diminished Capacity
Although people are living longer lives, we know that a significant percentage of seniors will be afflicted with Alzheimer’s, Parkinson’s or some other condition that limits their cognitive abilities. While it is always a good idea for people to engage in estate planning when they are mentally sound, in reality many people do not get around to doing any estate planning until later in life – often during a period of mental decline.
When a senior first meets with an attorney to create an estate plan, as a threshold matter the attorney will need to determine whether the Senior has the mental capacity necessary to reasonably articulate their desires concerning their legal affairs. Simply because a person has some form of mental impairment – even Alzheimer’s or other form of dementia – the existence of such a condition will not automatically preclude that person from executing a will or completing other forms of estate planning, especially when such condition is in the earlier stages.
In working with a person exhibiting diminished capacity, the attorney will need to consider a number of factors before commencing with the representation of that client. Such factors include: (1) the client’s ability to articulate the reasoning behind his or her planning decisions; (2) the variability of the client’s state of mind; (3) the client’s appreciation of the consequences of their planning decisions; (4) the irreversibility of the client’s decisions (such as transferring title to real property to another person); (5) the substantive fairness of the transaction; and (6) the consistency of the proposed action with the client’s prior lifetime activities and decisions.
There are actually different standards of capacity required for the execution of various types of estate planning documents. To execute a will, a person must be of “sound mind” – that is, they must be cognizant of the persons who are the natural “objects of their bounty;” they must exhibit a reasonable understanding of the nature and extent of their property; and they must be able to interrelate those elements sufficiently to be able to dispose of their property pursuant to a rational plan. Execution of a revocable trust will largely follow the same criteria, since a revocable trust is seen as a “will substitute” and the trustmaker will retain full control of the trust property during his or her lifetime.
Irrevocable trusts – which are often used for Medicaid planning purposes – will require a heightened standard of mental capacity. Unlike the execution of wills or revocable trusts that can be modified at any time, the creation and funding of an irrevocable trust results in the trustmaker making a completed gift of the trust assets to one or more beneficiaries. Engaging in such an irrevocable act logically requires that the client exhibit a heightened level of awareness as to the nature and consequences of his or her actions.
A particularly challenging issue faced by elder law attorneys in dealing with cognitively impaired clients is that many such clients exhibit varying degrees of lucidity depending upon factors such as the time of day, the location of the meeting, and the presence (or absence) of family members. In scheduling an appointment with such an individual, the attorney should strive to hold a meeting at a time and in a place in which the client is likely to be functioning at their highest level.
When a senior first meets with an attorney to create an estate plan, as a threshold matter the attorney will need to determine whether the Senior has the mental capacity necessary to reasonably articulate their desires concerning their legal affairs. Simply because a person has some form of mental impairment – even Alzheimer’s or other form of dementia – the existence of such a condition will not automatically preclude that person from executing a will or completing other forms of estate planning, especially when such condition is in the earlier stages.
In working with a person exhibiting diminished capacity, the attorney will need to consider a number of factors before commencing with the representation of that client. Such factors include: (1) the client’s ability to articulate the reasoning behind his or her planning decisions; (2) the variability of the client’s state of mind; (3) the client’s appreciation of the consequences of their planning decisions; (4) the irreversibility of the client’s decisions (such as transferring title to real property to another person); (5) the substantive fairness of the transaction; and (6) the consistency of the proposed action with the client’s prior lifetime activities and decisions.
There are actually different standards of capacity required for the execution of various types of estate planning documents. To execute a will, a person must be of “sound mind” – that is, they must be cognizant of the persons who are the natural “objects of their bounty;” they must exhibit a reasonable understanding of the nature and extent of their property; and they must be able to interrelate those elements sufficiently to be able to dispose of their property pursuant to a rational plan. Execution of a revocable trust will largely follow the same criteria, since a revocable trust is seen as a “will substitute” and the trustmaker will retain full control of the trust property during his or her lifetime.
Irrevocable trusts – which are often used for Medicaid planning purposes – will require a heightened standard of mental capacity. Unlike the execution of wills or revocable trusts that can be modified at any time, the creation and funding of an irrevocable trust results in the trustmaker making a completed gift of the trust assets to one or more beneficiaries. Engaging in such an irrevocable act logically requires that the client exhibit a heightened level of awareness as to the nature and consequences of his or her actions.
A particularly challenging issue faced by elder law attorneys in dealing with cognitively impaired clients is that many such clients exhibit varying degrees of lucidity depending upon factors such as the time of day, the location of the meeting, and the presence (or absence) of family members. In scheduling an appointment with such an individual, the attorney should strive to hold a meeting at a time and in a place in which the client is likely to be functioning at their highest level.
A Smart Way to Transfer Your Business to Your Children
In a prior blog post I described the unfortunate saga of a hypothetical business owner, “Louie Lucky”. A widower, Louie had built a successful medical supply company that, at the time of his death in 2009, was worth $8 million. Combined with his other assets, Louie had a gross estate of $9.3 million. Based on the $3.5 million estate tax exemption in effect in 2009, Louie’s three children were faced with a federal and New York State estate tax bill of over $3.6 million. Even worse, the kids had only $800,000 of liquid assets available to cover the tax, which is due nine months from the decedent’s date of death.
What could Louie have done during his lifetime to avoid this unfortunate result? One possible solution would have been for Louie to purchase a life insurance policy – typically owned in an irrevocable life insurance trust (commonly referred to as an “ILIT”) -- to help cover the estate tax obligation. Had Louie established an ILIT that owned, for example, $3 million worth of life insurance, the policy proceeds could have been available to cover most of the estate tax liability; a portion of his liquid assets could have been used to cover the balance of the taxes. This strategy would have spared Louie’s kids the hardship of trying to liquidate Louie’s business assets to cover the tax.
While life insurance can be a great estate planning tool, there are some limitations. Sometimes the business owner has health conditions that render him uninsurable. Also, if the value of the business grows rapidly, that increase in estate value may soon outstrip the amount of life insurance purchased to cover the projected estate taxes.
Another common estate tax planning strategy is for the business owner to gift shares in a company to his children. Given that the annual gift exemption is only $13,000 per donee, however, it would have been impractical for Louie to transfer his $8 million company to his children through the use of the annual gift exclusions. Even if he were to fully utilize his $1 million total lifetime gift exemption by making a lump-sum gift, Louie would still be left with $7 million worth of stock after such a transfer.
To address the limitations inherent with lifetime gifts of business assets, we have to consider alternative strategies. One advanced estate planning option that has gained traction over the past few years is the sale of assets to a Grantor Deemed Owner Trust, or “GDOT”. The GDOT strategy is based upon two key concepts. First, it is a fundamental business valuation principle that non-controlling interests in a closely held business are entitled to a valuation “discount” based upon both the lack of control of such minority interests, and a discount for their inherent lack of marketability. Second, an arms-length sale of the non-controlling business interests to a GDOT established by the business owner is not deemed a taxable transaction, and hence will not result in the imposition of a capital gains tax. Once the non-controlling minority interests have been sold to the GDOT, the value of such minority interests – as well as all future appreciation in the value of those interests – grows within the trust and outside of the controlling business owner’s estate.
Here’s how such a strategy might be used in Louie’s situation: Louie’s attorney would recapitalize Louie’s 100% voting stock into 1% voting shares and 99% non-voting shares. A qualified business valuation professional would be retained to determine the fair market value of the non-voting shares. Assume the valuation specialist determines that the non-voting interests are entitled to a “discount” of 34.5% for lack of marketability and lack of control. If Louie’s medical supply business is worth $8 million as a going concern, then applying the 34.5% discount to the 99% non-voting interests would give us a valuation for those non-controlling shares of $5,000,000.
Louie would then establish a GDOT. He could name one or more of his children, or a trusted advisor or corporate fiduciary, as Trustee. The children, or trusts for their benefit, would be the beneficiaries of the GDOT. Louie would make a “seed” gift to the GDOT, which is typically 10% of the value of the assets to be sold to the GDOT; in this case we would presume a seed gift of $500,000. Louie and the GDOT Trustee would enter into a contract of sale whereby he agrees to sell the 99% non-voting interests to the GDOT in exchange for a promissory note. Assume the note is structured as an interest only note payable in 25 years, using an applicable federal rate (“AFR”) of 4%. After the sale is completed, the GDOT Trustee would make monthly interest only payments of $16,666, or about $200,000 per year.
So, where is the money to come from to pay the note? Since the GDOT is now the owner of 99% of the company’s stock, a significant portion of the cash flow from the business can go to the GDOT. Louie’s regular salary of $300,000 can be reduced, if necessary to accommodate the shift in cash flow. The note payments to Louie will still be taxed as ordinary income, so this structure is income-tax neutral to Louie. At the end of 25-year term, the note can be extended or otherwise renegotiated; if the business has been sold in the interim, the note can be paid-off at its “frozen” value of $5 million. If the business has increased in value – say in ten years it is worth $12 million – all that appreciation grows within the GDOT, and outside of Louie’s estate. Only the $5 million note would be includable in Louie’s estate were he to die before the note is paid-off; the result is a reduction in the value of Louie’s estate by a cool $7 million.
What if the business continues to be a cash cow and produces cash flow in excess of the amount needed to pay back the note? Perhaps the GDOT Trustee can use some of this excess cash flow to purchase life insurance on Louie’s life. Since no gifts from Louie are required to fund the life insurance premiums, we reduce the administrative complexity inherent with ILITs that requires the sending of periodic “Crummey” notices to the beneficiaries. And, we are not then subject to the $13,000 annual gifting limitation that often makes the purchase of a large life insurance policy within an ILIT unfeasible.
These estate tax issues, of course, might be moot if the federal estate tax repeal that exists for 2010 were to be made “permanent.” As things presently stand, however, the federal estate tax will be reinstated in 2011 with a $1 million per person exemption, increasing the likelihood that larger estates will face significant estate tax liabilities in the years ahead. And, for New York residents, we still have in effect the limited $1 million per person estate tax exemption that is unaffected by the federal estate tax repeal.
The GDOT sale strategy requires the right facts to work successfully. It is particularly important that the assets sold to the GDOT produce adequate cash flow to fund the promissory note payments. But for many successful business owners – including real estate investors -- the GDOT sale strategy might be the “centerpiece” estate planning strategy to effectively transfer family business assets to subsequent generations in the most controlled and tax-efficient manner.
What could Louie have done during his lifetime to avoid this unfortunate result? One possible solution would have been for Louie to purchase a life insurance policy – typically owned in an irrevocable life insurance trust (commonly referred to as an “ILIT”) -- to help cover the estate tax obligation. Had Louie established an ILIT that owned, for example, $3 million worth of life insurance, the policy proceeds could have been available to cover most of the estate tax liability; a portion of his liquid assets could have been used to cover the balance of the taxes. This strategy would have spared Louie’s kids the hardship of trying to liquidate Louie’s business assets to cover the tax.
While life insurance can be a great estate planning tool, there are some limitations. Sometimes the business owner has health conditions that render him uninsurable. Also, if the value of the business grows rapidly, that increase in estate value may soon outstrip the amount of life insurance purchased to cover the projected estate taxes.
Another common estate tax planning strategy is for the business owner to gift shares in a company to his children. Given that the annual gift exemption is only $13,000 per donee, however, it would have been impractical for Louie to transfer his $8 million company to his children through the use of the annual gift exclusions. Even if he were to fully utilize his $1 million total lifetime gift exemption by making a lump-sum gift, Louie would still be left with $7 million worth of stock after such a transfer.
To address the limitations inherent with lifetime gifts of business assets, we have to consider alternative strategies. One advanced estate planning option that has gained traction over the past few years is the sale of assets to a Grantor Deemed Owner Trust, or “GDOT”. The GDOT strategy is based upon two key concepts. First, it is a fundamental business valuation principle that non-controlling interests in a closely held business are entitled to a valuation “discount” based upon both the lack of control of such minority interests, and a discount for their inherent lack of marketability. Second, an arms-length sale of the non-controlling business interests to a GDOT established by the business owner is not deemed a taxable transaction, and hence will not result in the imposition of a capital gains tax. Once the non-controlling minority interests have been sold to the GDOT, the value of such minority interests – as well as all future appreciation in the value of those interests – grows within the trust and outside of the controlling business owner’s estate.
Here’s how such a strategy might be used in Louie’s situation: Louie’s attorney would recapitalize Louie’s 100% voting stock into 1% voting shares and 99% non-voting shares. A qualified business valuation professional would be retained to determine the fair market value of the non-voting shares. Assume the valuation specialist determines that the non-voting interests are entitled to a “discount” of 34.5% for lack of marketability and lack of control. If Louie’s medical supply business is worth $8 million as a going concern, then applying the 34.5% discount to the 99% non-voting interests would give us a valuation for those non-controlling shares of $5,000,000.
Louie would then establish a GDOT. He could name one or more of his children, or a trusted advisor or corporate fiduciary, as Trustee. The children, or trusts for their benefit, would be the beneficiaries of the GDOT. Louie would make a “seed” gift to the GDOT, which is typically 10% of the value of the assets to be sold to the GDOT; in this case we would presume a seed gift of $500,000. Louie and the GDOT Trustee would enter into a contract of sale whereby he agrees to sell the 99% non-voting interests to the GDOT in exchange for a promissory note. Assume the note is structured as an interest only note payable in 25 years, using an applicable federal rate (“AFR”) of 4%. After the sale is completed, the GDOT Trustee would make monthly interest only payments of $16,666, or about $200,000 per year.
So, where is the money to come from to pay the note? Since the GDOT is now the owner of 99% of the company’s stock, a significant portion of the cash flow from the business can go to the GDOT. Louie’s regular salary of $300,000 can be reduced, if necessary to accommodate the shift in cash flow. The note payments to Louie will still be taxed as ordinary income, so this structure is income-tax neutral to Louie. At the end of 25-year term, the note can be extended or otherwise renegotiated; if the business has been sold in the interim, the note can be paid-off at its “frozen” value of $5 million. If the business has increased in value – say in ten years it is worth $12 million – all that appreciation grows within the GDOT, and outside of Louie’s estate. Only the $5 million note would be includable in Louie’s estate were he to die before the note is paid-off; the result is a reduction in the value of Louie’s estate by a cool $7 million.
What if the business continues to be a cash cow and produces cash flow in excess of the amount needed to pay back the note? Perhaps the GDOT Trustee can use some of this excess cash flow to purchase life insurance on Louie’s life. Since no gifts from Louie are required to fund the life insurance premiums, we reduce the administrative complexity inherent with ILITs that requires the sending of periodic “Crummey” notices to the beneficiaries. And, we are not then subject to the $13,000 annual gifting limitation that often makes the purchase of a large life insurance policy within an ILIT unfeasible.
These estate tax issues, of course, might be moot if the federal estate tax repeal that exists for 2010 were to be made “permanent.” As things presently stand, however, the federal estate tax will be reinstated in 2011 with a $1 million per person exemption, increasing the likelihood that larger estates will face significant estate tax liabilities in the years ahead. And, for New York residents, we still have in effect the limited $1 million per person estate tax exemption that is unaffected by the federal estate tax repeal.
The GDOT sale strategy requires the right facts to work successfully. It is particularly important that the assets sold to the GDOT produce adequate cash flow to fund the promissory note payments. But for many successful business owners – including real estate investors -- the GDOT sale strategy might be the “centerpiece” estate planning strategy to effectively transfer family business assets to subsequent generations in the most controlled and tax-efficient manner.
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