Using Complex Strategies to Reduce, Avoid Estate Taxes
The concepts behind modern estate planning have been referred to as Freeze, Squeeze, Stretch and Burn.
A Freeze describes the result of transferring assets, such as interests in a business or real property, out of an estate in such a way that future appreciation is not included at date of death – it has effectively been passed on to future generations. A Freeze is often coupled with a Squeeze. For example, see this link: Gifting Discounted Interests.
A Squeeze is the use of various planning techniques that have the affect of discounting the value of an interest prior to its transfer, so that its value, for transfer tax (gift tax) purposes is reduced. The is a technique developed to keep control and the benefits, but keep future appreciation out of your estate. A Squeeze is often coupled with a Freeze. For example, see this link: Gifting Discounted Interests.
A Stretch is the use of various planning techniques that have the affect of permitting assets to grow tax-free undiminished by either income or estate taxes. One example is naming a trust as the beneficiary of either a regular retirement account or ROTH retirement account. When disbursements from these accounts are controlled through a trust, not only are the assets protected from the beneficiary’s spouses and creditors, but they will continue to grow, diminished only by Required Minimum Distributions based upon the ages of the beneficiaries. In the case of a ROTH, there will be no income tax on these distributions – either in the trust or at the time of distribution to the beneficiary. For example, see this link: Protecting Your Retirement Account. Another strategy used to achieve a stretch is creation of a Dynasty Trust.
A Burn is the use of various planning techniques that have the affect of reducing the assets in your estate, meanwhile creating value outside of your estate. An example of this would be a gifting program to an Irrevocable Life Insurance Trust. Another example is a Grantor Trust. With a Grantor Trust, the income and other gains from an asset remain outside of your estate, but you, the Grantor, are obligated to pay taxes. At first blush, this may seem the worst of all worlds, but on second look, the payment of taxes reduces your estate, but the gains are outside in your estate, in the Grantor Trust, the provisions of which benefit your children and grandchildren.
We can answer your questions about these strategies and discuss other techniques. Call us today.