Estate planning with life insurance.

• Author: Pincus, Andrew S.

One of the biggest challenges facing advisers in estate planning today is giving clients effective advice and wealth transfer ideas under the current, uncertain transfer tax system. The estate and gift tax systems have been decoupled, creating a situation in which the lifetime gift tax exclusion is $1 million per person, while the estate tax equivalent exemption is $1.5 million per person. Further, the estate tax exemption will increase through 2009, disappear entirely in 2010 and, barring further legislation, reappear in 2011. The question for tax advisers is how best to proceed under the present tax structure to protect clients' wealth against an uncertain future.

Even though the future is somewhat vague, a "do nothing" approach is clearly not a solution. This column explores creative exclusion planning to generate additional wealth for clients.

One area not addressed in depth in this column is the annual gift tax exclusion. However, no discussion would be complete without mentioning this powerful wealth transfer tool. Even in today's tentative legislative environment, an actively managed gifting program, coupled with a trust for the benefit of children and/or grandchildren, allows an individual to make substantial gifts that could ultimately be exempt from estate and generation-skipping transfer taxes.

For example, a wealthy couple with six heirs could transfer $132,000 per year to a trust without affecting their lifetime credits or being concerned about the future of transfer tax legislation. The trust proceeds could be invested in marketable securities or leveraged to purchase life insurance. In any case, the annual gift tax exclusion is a great way to remove wealth and asset appreciation from an estate; it should not be forgotten amidst the more advanced planning techniques discussed below.

Leveraging the Gift Tax Exemption

The $1 million lifetime exemption available to individuals ($2 million for married couples) will remain even after the current law sunsets on Dec. 31,2010. Accordingly, tax advisers can reasonably rely on this exemption and focus on the best way to use it.

Several estate planning strategies can reduce a client's taxable estate. One of these combines three planning vehicles--a family limited partnership (FLP), a grantor retained annuity trust (GRAT) and an irrevocable life insurance trust (ILIT). This strategy is not overly complicated, and the results can be substantial.

FLPs: Recent litigation and case law on FLPs...