Lifetime Family Trusts
You can create one or more separate lifetime family trusts for the benefit of each of you and your family members. You could use part or all of the $11.7 million you each can give without owing gift tax to establish the lifetime family trusts. If you create the FLP described in item #1 above, you can give your limited partnership interests having a value of up to $11.7 million to a lifetime family trust for one or both of you and your family members. Following such a gift, the lifetime family trusts would be limited partners in the FLP.
Under this scenario, (client) could create a lifetime family trust for the benefit of some combination of (spouse), your descendants, and possibly other family members. (spouse) can be Trustee or Co-Trustee of this trust. (client) could gift up to $11.7 million in assets to the trust. The trust can be structured as a grantor trust for income tax purposes so that all income of the trust assets is reported on your individual return as it is now.
Subsequently, (spouse) could create a lifetime family trust for the benefit of some combination of (client), your descendants, and possibly other family members. (client) can be Trustee or Co-Trustee of this trust. (spouse) could gift up to $11.7 million in assets to the trust. The trust can be structured as a grantor trust for income tax purposes. In order for the IRS to respect both trusts and not “uncross” them under the reciprocal trust doctrine, we would want to be sure that the two trusts have different beneficiaries (such as adding siblings, or nieces and nephews as beneficiaries). We also will want to implement other differences, such as different Trustees, signing the trusts at different times, funding the trusts with different kinds and amounts of assets, and using different powers of appointment.
Gift tax returns would be filed reporting these gifts and allocating part or all of your gift tax free amount such that no gift tax is expected to be owed. We would need an appraisal to support the value of the gift if the trusts are funded with an interest in a limited partnership, real estate, or other non-publicly traded assets.
During your respective lifetimes, if the funds in the trusts are needed, the Trustee could distribute the assets to one or more of the beneficiaries. The assets in the trusts could increase in value without causing any additional gift tax during your life or estate tax upon the death of either of you. Thus, the Trustee likely would distribute the assets of the trusts only if other assets (outside of the trusts) have been depleted. Also, by doing this you attain a measure of creditor protection since assets in this type of trust generally cannot be reached by creditors of a beneficiary.
In considering this technique, please consider that such a division of assets and placement into trusts determines the ownership of assets in the event you one day get divorced. For this reason, you may want to fund each trust over time with approximately the same value in assets.
Also, note that when one of you dies, the trust assets of which the first-to-die was a beneficiary generally are no longer available to the survivor of you since the survivor is not a beneficiary of that trust. The trust assets would continue to be available to benefit your descendants and the other beneficiaries. The survivor would continue to be a beneficiary of the other trust. If the other trust owned a life insurance policy on the life of the deceased spouse, then the assets of the other trust would increase upon the death of the deceased spouse to replace in whole or in part the assets that are no longer available to the survivor. Also, the trust of which the first-to-die was a beneficiary can loan assets to the survivor if needed.