Father, a widower age 60, wants to transfer $18,000,000 of non-taxable assets to his children and grandchildren (which total 12 in number) using $5,000,000 of existing investment assets without immediate out-of-pocket tax consequences.
Father creates a family limited partnership (AFLP@) into which he transfers $5,000,000 of real estate and investment assets. Father becomes the 1% General Partner (with a capital account value of $50,000) and the 99% Limited Partner (with a capital account value of $4,950,000).
Father creates a Grantor Retained Annuity Trust (AGRAT@). Father becomes the trustee of the GRAT. Father also creates an Irrevocable Life Insurance Trust (AILIT@) which is the beneficiary of the GRAT, and names one of his children as trustee. The ILIT provides that upon Father=s death the ILIT assets are distributed to the children and grandchildren.
Father sells his 99% interest in FLP to the GRAT for its fair market value of $3,200,000, which is, pursuant to an appraisal, a 35% discount from original value of $4,950,000. He agrees to accept annuity payments of $300,000 for 9 years, which is the term of the GRAT. The present value of the annuity payments is $2,200,000. Father has thus made a gift of $1,000,000 to the GRAT, which (gift) is sheltered from gift taxation because Father uses his lifetime gift tax exemption.
The ILIT purchases a $18,000,000 term life insurance policy on Father's life, convertible to permanent life insurance after 9 years. The premiums for the first 9 years are less than $144,000 annually. Father annually gifts $12,000 per beneficiary, or an aggregate of $144,000, to the ILIT so it can pay the premium on the policy. Father incurs no gift taxes because of the annual gift tax exemption.
The GRAT terminates after 9 years. The assets in the GRAT, which were originally $4,950,000, have appreciated to $7,000,000, even after the annual deduction of the annuity payments to Father. This amount is then distributed to the ILIT, the beneficiary of the GRAT.
The ILIT converts the term life insurance coverage to permanent insurance, with an increased annual premium. The ILIT, now with $7,000,000 in investable assets, is financially capable of paying the increased annual premiums on the $18,000,000 permanent life insurance policy.
Upon Father's death the ILIT collects $18,000,000 in insurance proceeds that are then distributed tax-free to Father's children and grandchildren pursuant to the provisions of the ILIT, just as Father planned.
There are multiple variations of this strategy, but the bottom line is that the results are achievable. Please do not hesitate to call us if you would like to discuss this or any other sophisticated estate planning strategy.