1. ILITs, SLATs, GRATs, and Other Four-Letter Words
Presented by:
Julius H. Giarmarco, J.D., LL.M.
Giarmarco, Mullins & Horton, P.C.
101 W. Big Beaver Road, 10th Floor
Troy, Michigan 48084
(248)

2. Introduction
The federal estate tax is only vulnerable to lifetime gifting.
And there are generally three types of gifts you can make:
Gifts of life insurance.
Gifts that shift or reduce value.
Gifts to charity.

3. Estate, Gift and Generation-Skipping Tax Exemptions
Increased estate, gift and GST tax exemptions.
Lower estate, gift and GST tax rates.
Year
Estate Tax Exemption
Gift Tax Exemption
Estate/Gift Tax Rate
GST Exemption
Annual Gift Tax Exclusion
2012
$5.12 million
35%
$13,000
2013
$1 Million
$1 million
55%
Under current tax law, surviving spouses of decedents who die in 2011 or 2012 may use the unused federal estate and gift tax exemptions of their deceased spouse.

4. Four Basic Techniques to Minimize Your Estate Tax Liability
Pay for your grandchildren’s education. Tuition paid directly to an educational organization is exempt from gift tax.
Pay your grandchildren’s medical bills. Medical bills paid directly to the provider are exempt from gift tax.
Gift cash. Up to $13,000 ($26,000 for couples) per recipient can be gifted without gift tax each year.
For people with more than $5.12 million in assets, start gifting it before 12/31/2012.

5. Use of $5.12 Million Gift Tax Exemption
Can you afford to give it all away?
Is spousal access important?
Outright or in trust?
Dynasty trust and GST exemption.
Leveraging the gifts – FLLCs – discounts are still alive!
May not be here after 2012 – sunset.

6. Eight Advanced Techniques to Minimize Your Estate Tax Liability
Dynasty Trusts.
Irrevocable Life Insurance Trusts (ILITs).
Spousal Lifetime Access Trusts (SLATs).
Family Limited Liability Companies (FLLCs).

7. Eight Advanced Techniques to Minimize Your Estate Tax Liability
Grantor Retained Annuity Trusts (GRATs).
Intentionally Defective Grantor Trusts (IDGTs).
Qualified Personal Residence Trusts (QPRTs).
Zero Estate Tax Plans.

8. Dynasty Trust – Overview of Technique
Grantor
No transfer tax paid.
Discretionary Distributions
to Children for Life
Advantages
Creditor protection
Divorce protection
Estate tax protection
Dispositive plan protection
Spendthrift protection
Consolidation of capital
No transfer tax paid.
Discretionary Distributions
to Grandchildren for Life
No transfer tax paid.
Discretionary Distributions
to Great-Grandchildren
for Life
No transfer tax paid.
Future Generations

9. Dynasty Trust vs. 35% Estate Tax Every 30 Years
$1 Million After-Tax Growth
Value of Dynasty Trust After 120 Years
Value of Property if No Trust
3.00%
$34,710,987
$6,196,128
4.00%
$110,662,561
$19,753,959
5.00%
$348,911,561
$62,282,970
6.00%
$1,088,187,748
$194,248,314
7.00%
$3,357,788,383
$599,386,213
8.00%
$10,252,992,943
$1,830,223,321
9.00%
$30,987,015,749
$5,531,375,980
10.00%
$92,709,068,818
$16,549,148,216

10. Irrevocable Life Insurance Trusts (“ILITs”)

11. ILITs Life insurance trusts remain a key planning tool.
Increased exemptions provide additional opportunities.
An ILIT will typically be designed as both a grantor trust and a generation-skipping trust.

12. Life Insurance Company
ILITs
Structure of the ILIT
Grantor
1. Gift
Trust
2. Crummey Letter
Trust Beneficiaries
6. Distribute Assets
5. Loan Money to or Purchase Assets from Estate
3. Pay Premiums
4. Pay Death Proceeds
Life Insurance Company
Estate

13. Spousal Lifetime Access Trusts (“SLATs”)

14. Spousal Lifetime Access Trust $5.12M
SLATs
Grantor Gifts $5.12M
Spousal Lifetime Access Trust $5.12M
Grandchildren
Children
Spouse
Beneficiaries receive income and principal as needed for health, education, maintenance and support, with spouse being the primary beneficiary and initial trustee. Thus, grantor maintains “indirect” access to the trust assets. Trust property passes – estate tax free – as it passes from one generation to the next for the maximum period permitted under state law.

15. Family Limited Liability Companies (“FLLCs”)

16. FLLCs
Design:
Donor transfers assets to LLC in exchange for voting and non-voting membership interests.
Donor retains control of the LLC as manager.
Donor transfers non-voting membership interests to younger generation (either outright or in trust).

17. FLLCs
Benefits:
Transfers ownership while allowing donor to retain control.
Leverages gift and estate tax exemption due to valuation discounts applied to non-voting membership interests for lack of control and lack of marketability.
Provides centralized management of family assets.

18. FLLCs
Benefits:
Provides protection from creditors and protection from spouses in divorce.
Permits easy division of assets (such as real estate) to facilitate annual gifting.
Flexible – operating agreement can be modified.
Donor can retain income stream via management fees paid to manager.

19. FLLC Flowchart Family Limited Liability Company Donor Donor Donor
Step 1
Donor
Assets
Step 2
Step 2
1% Voting Membership Interest (Control Interest)
99% Non-Voting Membership Interest
Donor
Donor
Gifts of Membership Interests to Heirs or Trusts for Heirs
Step 3

20. Grantor Retained Annuity Trusts (“GRATs”)

21. GRATs
A GRAT is an irrevocable trust in which a grantor transfers property for the benefit of one or more beneficiaries and retains an annuity interest for a term of years.
Each year the GRAT will pay the grantor a fixed annual annuity, as defined by the terms of the Trust.

22. GRATs
The amount of the taxable gift for transfer tax purposes is the Fair Market Value of the property transferred minus the value of the grantor’s retained annuity interest.
The GRAT may be structured so that the grantor’s retained annuity’s actuarial value is almost equal to the value of the property transferred, therefore resulting in little gift tax consequences.
At the end of the GRAT term, any remaining property in the GRAT passes to the remainder beneficiaries with no further gift tax consequences.

23. GRATs GRAT Grantor (Age 70) Beneficiaries $1 million of Securities
______________________
End of Year 1
End of Year 2
GRAT Remainder
$137,915
$1 million of Securities
$510,517 of Securities
$510,517 of Securities
Taxable Gift $0.08
Assumed growth rate 10%
§7520 Rate (February ’12) 1.4%
$137,915 of Securities
Beneficiaries

24. Intentionally-Defective Grantor Trusts (“IDGTs”)

25. IDGTs
An IDGT is an irrevocable trust that is not included in the grantor’s gross estate.
However, the trust income is taxable to the grantor.
IDGTs are a powerful estate planning technique that reduces a grantor’s taxable estate through asset transfers and the payment of trust tax liability by the grantor.

26. IDGTs
The grantor establishes an IDGT and then loans assets to the trust for an installment note.
The installment note pays the lowest amount of interest based on the Applicable Federal Rate (AFR).
Any appreciation of the trust assets above the AFR is transferred to the trust beneficiaries without any additional transfer taxes.

27. Low Interest Rate Loan to IDGT
1. Gifts $1M
5. Excess Cash Flow/Premiums
Grantor/ Insured
IDGT
Life Insurance Company
2. Loans $9M
6. Death Proceeds (Income and Estate Tax Free/Leverages GST Exemption)
3. $9M Note to Grantor Balloon Payment in 9 Years
4. $100,800 annual interest (Interest Rate 1.12%)
Advantages:
Value of loan proceeds frozen at 1.12% for nine years (February ’12 Mid-Term AFR).
Grantor’s estate further reduced by the income taxes paid on behalf of the trust.
The trust property escapes estate taxation for as long as permitted under state law.
Possible valuation discounts for promissory note in Grantor’s estate.

28. Grantor Trust vs. Non-Grantor Trust
Year
Beginning Balance
Taxable Income 7%
Less: Taxes at 40%
Ending Balance 1
$10,000,000
$700,000
$(280,000)
$10,420,000 $
$10,700,000 2
10,420,000
729,400
(291,760)
10,857,640
10,700,000
749,000 -
11,449,000 3
760,035
(304,014)
11,313,661
801,430
12,250,430 4
791,956
(316,783)
11,788,835
857,530
13,107,960 5
825,218
(330,087)
12,283,966
917,557
14,025,517 6
859,878
(343,951)
12,799,892
981,786
15,007,304 7
895,992
(358,397)
13,337,488
1,050,511
16,057,815 8
933,624
(373,450)
13,897,662
1,124,047
17,181,862 9
972,836
(389,135)
14,481,364
1,202,730
18,384,592 10
1,013,695
(405,478)
15,089,581
1,286,921
19,671,514

29. Qualified Personal Residence Trusts (“QPRTs”)

30. QPRTs
A QPRT is an irrevocable trust to which the grantor transfers his or her personal residence or vacation home.
The grantor retains the exclusive use of the residence for a term of years specified in the trust instrument.
If the grantor survives the term of the trust, the residence is either retained in further trust for or distributed outright to the grantor’s children.

31. QPRTs
The transfer of the residence to the QPRT is a taxable gift by the grantor to the remainder beneficiaries, determined by reference to the IRS actuarial tables.
The actual amount of the gift is a function of the grantor’s age, the value of the residence, and the term of the trust.

32. QPRTs
If the grantor survives the term of the QPRT, no further gift or estate tax will be imposed.
At the end of the term, the grantor will have the option of paying fair rent for his continued use of the residence.
If the grantor dies prior to the expiration of the term, the residence will be included in the grantor’s estate, but any gift tax exemption used will be restored.

33. QPRTs Grantor QPRT Grantor Children or ILIT Residence
Rent-Free Right of Use of Residence for 15 Years
After Expiration of Selected Term of Years
ASSUMPTIONS:
Grantor’s Age 70
FMV of Residence $1,000,000
Term of QPRT 15 Years
FMV in 15 years
(at 5% growth) $2,079,000
Initial Gift $374,130
FET Savings (35%) $569,679
§7520 Rate (February ‘12) 1.4%
Grantor
Children or ILIT
Pays
RESULTS:
Rent

34. Zero Estate Tax Plan

35. Conventional Estate Planning
Projected Gross Estate $10,000,000
Credit Shelter Trust
$3,500,000
Estate of Surviving Spouse or Marital Trust
$6,500,000
Federal
Estate
Tax $0
After Tax Estate
$5,150,000
Federal Estate Tax $1,350,000
(13.5%)
Distribution to Heirs
After Tax Estate $5,150,000
Credit Shelter Trust 3,500,000
Total $8,650,000
Assumes estate tax exemption is $3.5 million and top tax rate is 45%.

36. Zero Estate Tax Planning
Current Net Estate $10,000,000
- Less premiums gifted (600,000)*
Total $9,400,000
* Using annual exclusion gifts
Credit Shelter Trust
$3,500,000
Estate of Surviving Spouse or Marital Trust
$5,900,000
Irrevocable Life Insurance Trust
$3,000,000
Federal
Estate
Tax $0
Federal
Estate
Tax $0
Children
$3,500,000
Private Foundation or Charity
$2,400,000
Distribution to Heirs and Charity
Private Foundation / Charity $2,400,000
Estate Tax Exemptions 7,000,000
Life Insurance Trust 3,000,000
Total $12,400,000
Assumes estate tax exemption is $3.5 million and top tax rate is 45%.

37. Reviewing Your Estate Plan is One Resolution You’ll Want to Keep in 2012
The increased exemption in 2012 gives you an unprecedented opportunity to make large gifts to save on estate taxes.
The death of a named beneficiary may be reason to review your plan to ensure that his or her share passes to the proper beneficiaries in accordance with your wishes.

38. Reviewing Your Estate Plan is One Resolution You’ll Want to Keep in 2012
If your family has grown with the addition of grandchildren, you may wish to make special provisions for them, such as ensuring that assets left to minors are done so in trust.
You may wish to review those individuals whom you have named as trustees, executors and agents in financial and health care powers of attorney.

39. Reviewing Your Estate Plan is One Resolution You’ll Want to Keep in 2012
If any of your beneficiaries has been diagnosed with a disability, you may wish to review the manner of disposition to that person. Would disposition in a special needs trust be appropriate?
If there has been a marriage or divorce, either by you or by one of your beneficiaries, you may wish to revisit the choices you have made in your estate plan.

40. Reviewing Your Estate Plan is One Resolution You’ll Want to Keep in 2012
Have your assets experienced significant changes, such as conversion of real estate or a business interest, or through inheritance of additional assets? If so, you may wish to review your plan to make sure these changes have been taken into consideration.

42. THE END
THANK YOU