SAVING ESTATE TAXES

Estate taxes can be reduced by techniques including Lifetime Gifts, Fractional Interest Discounts, Family Limited Partnerships, and Charitable Gifts.
 
LIFETIME GIFTS:  Lifetime gifts generally remove assets from the donor's taxable estate, provided that the gifts don't remain subject to the donor's control.  The amount of the gift tax paid can also be removed from the donor's estate if death occurs at least three years after the gift.  Lifetime gifts are often made to irrevocable trusts, the trustees of which then apply for and purchase life insurance on the donor's life.  Each year, the donor makes gifts to the trustee of the irrevocable trust, who pays the premiums.  When the donor dies, the life insurance proceeds can pass to the beneficiaries free of estate tax and income taxes.
 
FRACTIONAL INTEREST DISCOUNTS: Fractional interest discounts can also save estate taxes, because of the fact that the value of a whole is more than the value of the sum of its parts.
 
For example, if two sisters each own 50% of a house, and they offer to sell their combined 100% interest in the property to a third party, the price will be 100% of the market value.
 
If, however, just one of the owners wants to sell her share, no stranger will pay 50% of the value of the whole property for her half; the price will have to reflect the cost of suing to divide the property and the uncertainty and inconvenience of having to deal with another owner.  The IRS has allowed discounts in excess of 60% when a  fractional interest is transferred.
 
FAMILY LIMITED PARTNERSHIPS:  Fractional Interest Discounts and Lifetime Gifts can be combined in Family Limited Partnerships and split-interest gifts to charities.  Mom and Dad can form a limited partnership, transfer their assets into it, and make lifetime gifts of fractional interests to their children.  The value of the gift of a fractional interest is less than the value of the whole property.  If an appropriate Gift Tax return is filed, the IRS has only three years in which to challenge the valuations.  Future appreciation of the assets in the Family Limited Partnership (called a "FLP"), will accrue to the children instead of swelling Mom and Dad's estates.  If, however, Mom and Dad retain excessive control over the FLP's assets, the IRS can disregard the entire FLP.
 
SPLIT INTEREST GIFTS TO CHARITIES:  Giving highly appreciated assets to charity, retaining only a lifetime stream of income, can benefit both the donor and the charity.  For example, the donors might own low-basis stock.  If they were to sell it, Federal capital gain taxes and California income taxes could eat up 24.3% of the proceeds. If they were to give the same stock to charity and retain a stream of income for their lives, they could get an  income tax deduction for most of the fair market value of the stock and pay no capital gain or income taxes on the transfer. The charity or the trustee typically sells the stock and reinvests the proceeds in a diversified portfolio, paying the donors quarterly income until both donors die.

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