Paul O. Dillon, Attorney at Law

What Is Multigenerational Estate Planning?

Multigenerational planning is common today, where grandparents, parents, and children live in the same home. With more than two generations living in one residence, estate planning issues can arise, as explained in the recent article from Kiplinger, “How to Handle Estate Planning for Multigenerational Living Arrangements.”

For instance, if a grandparent pays for a separate apartment on their child’s property, who owns the apartment? What if an adult child living with elderly parents pays for updates on the property or provides caregiving services to the parents? Should these arrangements lead to unequal inheritances? All of these issues can be addressed through estate planning.

The first issue to address is home ownership. Should the title be taken jointly, as tenants in common, with a life estate, in trust, as a family partnership, or in some other manner? Which family members are allowed to live in the home? And again, how will this arrangement impact inheritances?

For many families, using a trust to detail all aspects of use and ownership is the best solution. The trust document can address everything, including the right of first refusal, language governing who has priority to buy the property upon the death of the parents, equalization language between beneficiaries to account for gifts to certain family members during life, and tax provisions to ensure beneficiaries pay applicable taxes, equally or proportionally.

The trust may also be used to address the incapacity or death of a family member and what will happen to the property for future generations. The level of detail can be extremely important when dealing with multigenerational shared real estate purchases and uses.

For some families, an LLC (Limited Liability Corporation) or LLP (Limited Liability Partnership) allows for easier fractional property ownership. LLCs and LLPs also help with asset protection and maintaining privacy.

An LLC operating agreement specifies which members will be in charge of the daily operation of the property, payment of expenses, and how ownership interests are divided. Intrafamily loans can be leveraged to pay for improvements on the property, and the agreement can be used to address many different scenarios for the family.

If one child provides care for an aging parent, or a grandparent provides regular daycare for working parents, should these arrangements be monetized and factored into the estate plan? What about a sibling who does not live in the home and does not provide any care for elderly parents or young children? There is no one answer for these or the many other situations arising from multigenerational living arrangements.

An experienced estate planning attorney can ensure your estate documents align with your wishes and address these issues. Often, having a professional in the room when mapping out a plan can alleviate some family dynamics, making these matters less emotional.

Reference: Kiplinger (June 29, 2023) “How to Handle Estate Planning for Multigenerational Living Arrangements”

When Is a Family Limited Partnership Needed?

Being able to transfer wealth from one generation to the next is a good thing, especially now, when a big change is coming to the federal estate tax exemption amount, says a recent article titled “The Pros and Cons of Family Limited Partnerships” from The Wall Street Journal.

In 2022, estates valued at up to $12.06 million are exempt from federal taxes. However, on January 1, 2026, the exemption sinks to around $6 million, with adjustments for inflation. As a result, wealthy Americans are now re-evaluating their estate plans and many are turning to the Family Limited Partnership, or FLP, as a tax saving strategy.

An FLP can be tailored to suit every family’s needs. You don’t have to be ultra-wealthy for an FLP to make sense. An upper-middle class family owning a small business or real estate properties they’re not ready to sell could make good use of an FLP, as well as a real estate mogul owning properties in multiple states.

There are some caveats. The cost of setting up an FLP ranges from $8,000 to $15,000. However, it can go higher depending on the state of residence and the complexity of the partnership. There are annual operating costs, tax filings and appraisal fees. The IRS isn’t always fond of FLPs, because there is an institutional belief that FLPs are subject to abuse.

The FLP needs to be drafted with an experienced estate planning attorney, working in consultation with a CPA and financial advisor. This is definitely not a Do-It-Yourself project.

What makes these partnerships different from traditional limited partnerships is that all partners are family members. There are two kinds of partners: general and limited. The parents or grandparents are usually the general partners. They contribute the bulk of the assets, typically a small business, stock portfolio or real estate. Children are limited partners, with interests in the partnership.

The general partners control all of the investment and management decisions and bear the partnership liability, even though their ownership of assets can be as little as 1% or 2%. They make the day-to-day business decisions, including funds allocation and income distribution. The ability of the general partner to maintain control of the transferred assets is one of the FLP’s biggest advantage. The FLP reduces the taxable estate, while maintaining control of the assets.

Once the entity is created, assets can be transferred to the FLP immediately or over time, depending on the family’s plan. The overall goal is to get as much of the property out of the general partners’ taxable estate as possible. Assets in the FLP are divided and gifted to limited partners, although this is often a gift to a trust for the limited partners, who are the general partners’ descendants. Placing the assets in a trust adds another layer of protection, since the gift remains outside of the limited partner’s taxable estate as well.

To avoid a challenge by the IRS, the partnership must be conducted as a business entity. Meetings need to be scheduled regularly, with formal meeting minutes recorded properly. General partners are to be compensated for their services, and limited partners must pay taxes on their share of income from the partnership. The involvement of professionals in the FLP is needed to be sure the FLP remains compliant with IRS rules.

An alternative is to create a Family Limited Liability Company instead of a Family Limited Partnership. These can be created to operate much like an FLP, while also protecting partners from liability.

Partnerships are not for everyone. Your estate planning attorney will advise regarding whether an FLP or an FLLC makes more sense for your family.

Reference: The Wall Street Journal (Dec. 3, 2022) “The Pros and Cons of Family Limited Partnerships”

Should Spouses Use the Same Estate Planning Lawyer?

It’s a question that some couples should ask. For many, their estate is their estate together, right? Not always. There are benefits to using the same estate planning attorney. However, there may be reasons to use different attorneys, as discussed in the article “Should My Spouse and I Hire the Same Estate Lawyer?” from The Street.

If your estates are relatively simple and your interests are the same, it does make sense to use the same estate planning attorney. If there’s no need for sophisticated tax planning, yours is a first marriage with no children, or you own one piece of property, one attorney can represent both partners.

It’s important to understand joint representation. This means both partners and the attorney agree to share all information learned from one spouse with the other spouse. These terms are often outlined in the engagement letter signed when the attorney is retained.

However, life and marriages are not always so simple. Let’s say that one spouse owns property or a share of property in another state purchased before the marriage and not co-owned with the spouse. This often occurs when property is owned by members of the spouse’s immediate family, like a business property or a vacation home they own jointly with siblings or parents. It may also be property one spouse is likely to inherit with the expectation the property ownership remains solely with bloodline family members.

Note that owning property in another state will likely also require the services of another estate planning attorney who is familiar with the local laws. The out-of-state attorney can advise if there are any special planning considerations needed, such as placing property in a family-controlled entity, like a limited liability company or other family partnership.

Coordinating communication between the out-of-state attorney and the primary in-state attorney will be important, since there may be interrelated planning considerations to be addressed in wills or trusts.

What if you and your spouse have different communication styles? One wants a talkative attorney who wants to dive into long-term planning goals, engaging in discussions about building a legacy, while the other wants documents prepared, signed and executed, minus any big picture conversations.

A simple solution would be for each spouse to identify an attorney at the same firm who matches their personal style.

Another reason for using different estate planning attorneys is if one wants to use a “floating spouse” provision, which can cause some feelings to arise. This is a provision defining a “spouse” as the person you are married to at the time of death. If there’s a divorce and the prior spouse would have had a vested interest in property, the floating spouse provision affords another layer of protection to keep assets to the spouse at the time of death.

There are non-divorce related reasons for the floating spouse provision. If an irrevocable trust is created to benefit the spouse, the ability to make changes to the trust can be challenging, time consuming and costly. With a floating spouse provision, the prior spouse is removed as a beneficiary and the new spouse could be easily substituted. In this case, independent counsel is advised, as interests are considered legally adverse.

Estate planning is a personal process and there is no one-size-fits-all solution. If any part of the estate creates adverse interests, joint representation may not work. However, when the estate is relatively simple and the couple’s goals are the same, having a spouse by your side during the planning procress could give each of you the incentive to take care of this very important task.

Reference: The Street (Nov. 30, 2022) “Should My Spouse and I Hire the Same Estate Lawyer?”

How to Transfer Business to the Next Generation

The reality and finality of death is uncomfortable to think about. However, people need to plan for death, unless they want to leave their families a mess instead of a blessing. In a family-owned business, this is especially vital, according to a recent article, “All in the Family—Transition Strategies for Family Businesses” from Bloomberg Law.

The family business is often the family’s largest financial asset. The business owner typically doesn’t have much liquidity outside of the business itself. Federal estate taxes upon death need special consideration. Every person has an estate, gift, and generation-skipping transfer tax exemption of $12.06 million, although these historically high levels may revert to prior levels in 2026. The amount exceeding the exemption may be taxed at 40%, making planning critical.

Assuming an estate tax liability is created upon the death of the business owner, how will the family pay the tax? If the spouse survives the business owner, they can use the unlimited marital deduction to defer federal estate tax liabilities, until the survivor dies. If no advance planning has been done prior to the death of the first spouse to die, it would be wise to address it while the surviving spouse is still living.

Certain provisions in the tax code may mitigate or prevent the need to sell the business to raise funds to pay the estate tax. One law allows the executor to pay part or all of the estate tax due over 15 years (Section 6166), provided certain conditions are met. This may be appropriate. However, it is a weighty burden for an extended period of time. Planning in advance would be better.

Business owners with a charitable inclination could use charitable trusts or entities as part of a tax-efficient business transition plan. This includes the Charitable Remainder Trust, or CRT. If the business owner transfers equity interest in the business to a CRT before a liquidity event, no capital gains would be generated on the sale of the business, since the CRT is generally exempt from federal income tax. Income from the sale would be deferred and recognized, since the CRT made distributions to the business owner according to the terms of the trust.

At the end of the term, the CRT’s remaining assets would pass to the selected charitable remainderman, which might be a family-established and managed private foundation.

Family businesses usually appreciate over time, so owners need to plan to shift equity out of the taxable estate. One option is to use a combination of gifting and selling business interests to an intentionally defective grantor trust. Any appreciation after the date of transfer may be excluded from the taxable estate upon death for purposes of determining federal estate tax liabilities.

For some business owners, establishing their business as a family limited partnership or limited liability company makes the most sense. Over time, they may sell or gift part of the interest to the next generation, subject to the discounts available for a transfer. An appraiser will need to be hired to issue a valuation report on the transferred interests in order to claim any possible discounts after recapitalizing the ownership interest.

The ultimate disposition of the family business is one of the biggest decisions a business owner must make, and there’s only one chance to get it right. Consult with an experienced estate planning attorney and don’t procrastinate. Succession planning takes time, so the sooner the process begins, the better.

Reference: Bloomberg Law (Nov. 9, 2022) “All in the Family—Transition Strategies for Family Businesses”

What Is a Holistic Estate Plan?

Estate planning is more than a tax strategy. It’s about creating a legacy and protecting your family for the short and long term, explains the article “Create A Holistic Estate Plan Now For Bigger Payoffs In The Future” from Forbes. The process begins with as much disclosure as possible. That means talking with your estate planning attorney about the challenges your family faces, as well as the assets to be left for loved ones.

One change to the tax code can disrupt decades of careful planning and leave people scrambling to protect loved ones. Market tumult can require assets to be sold to meet cash flow needs. Charitable contributions may also need to be reviewed and possibly changed, if the family’s asset level changes.

There are three aspects to consider when creating an estate plan: a lifetime spending strategy, a charitable legacy and bequests. All of these are impacted by taxes and need to be reviewed as a whole.

Lifetime spending strategy. These questions are centered on your goals and plans. Where do you want to live during retirement and how do you wish to live, travel and entertain? Will you stay in place and focus on charitable organizations, or travel throughout the year? It’s good to set a budget and stress-test it to see what different outcomes may arise.

A family that owns businesses or large real estate holdings may benefit from strategies, like family limited partnerships. A sale of the business to an outsider or a family member could create many different options, and all should be considered.

Charitable gift planning. Estate planning offers a way to clarify charitable giving goals and create a road map for how gifting can be transformed into a legacy. A well-planned charitable gift strategy can also minimize estate taxes and maximize the future of the gift, for both the family and the charities you favor.

A Charitable Remainder Trust is used to provide an income stream during your lifetime and reach gifting goals at the same time. One way to accomplish this is to transfer an asset, like highly appreciated stocks or bonds, into an irrevocable trust, thereby removing the asset from your taxable estate. The trustee may then sell the asset at market value and reinvest, creating a lifelong income stream for you or a beneficiary.

Leaving assets, not estate tax bills, for heirs. Families who own multiple properties in their own names or in a single LLC can lead to a lot of administrative headaches when the owners die. One simple fix is to place each property into a separate LLC, which increases the availability of strategic tax savings.

Another way to minimize estate taxes is through the use of life insurance. This is a strategy to do while you are still relatively healthy, as it becomes increasing difficult to obtain once you turn 60 or 70.

All of these strategies take knowledge and time to set up, so creating an estate plan and working through the many different strategies is best done with an experienced estate planning attorney and before any trigger events occur.

Reference: Forbes (April 6, 2021) “Create A Holistic Estate Plan Now For Bigger Payoffs In The Future”

Pre-Election Estate Planning Includes a Vast Variety of Trusts

You might remember a flurry of activity in advance of the 2016 presidential election, when concerns about changes to the estate tax propelled many people to review their estate plans. In 2020, COVID-19 concerns have added to pre-presidential election worries. A recent article from Kiplinger, “Pre-Election Estate Planning Moves for High Net-Worth Families,” describes an extensive selection of trusts that can are used to protect wealth, and despite the title, not all of these trusts are just for the wealthy.

The time to make these changes is now, since there have been many instances where tax changes are made retroactively—something to keep in mind. The biggest opportunity is the ability to gift up to $11.58 million to another person free of transfer tax. However, there are many more.

Spousal Lifetime Access Trust (SLAT) The SLAT is an irrevocable trust created to benefit a spouse funded by a gift of assets, while the grantor-spouse is still living. The goal is to move assets out of the grantor spouse’s name into a trust to provide financial assistance to the spouse, while sheltering property from the spouse’s future creditors and taxable estate.

Beneficiary Defective Inheritor’s Trust (BDIT) The BDIT is an irrevocable trust structured so the beneficiary can manage and use assets but the assets are not included in their taxable estate.

Grantor Retained Annuity Trust (GRAT) The GRAT is also an irrevocable trust. The GRAT lets the grantor freeze the value of appreciating assets and transfer the growth at a discount for federal gift tax purposes. The grantor contributes assets in the trust and retains the right to receive an annuity from the trust, while earning a rate of return as specified by the IRS. GRATs are best in a low interest-rate environment because the appreciation of assets over the rate goes to the beneficiaries and at the end of the term of the trust, any leftover assets pass to the designated beneficiaries with little or no tax impact.

Gift or Sale of Interest in Family Partnerships. Family Limited Partnerships are used to transfer assets through partnership interests from one generation to the next. Retaining control of the property is part of the appeal. The partnerships may also be transferred at a discount to net asset value, which can reduce gift and estate tax liability.

Charitable Lead Trust (CLT). The CLT lets a grantor make a gift to a charitable organization while they are alive, while creating tax benefits for the grantor or their heirs. An annuity is paid to a charity for a set term, and when the term expires, the balance of the trust is available for the trust beneficiary.

Charitable Remainder Trust (CRT) The CRT is kind of like a reverse CLT. In a CRT, the grantor receives an income stream from the trust for a certain number of years. At the end of the trust term, the charitable organization receives the remaining assets. The grantor gets an immediate income tax charitable deduction when the CRT is funded, based on the present value of the estimated assets remaining after the end of the term.

These are a sampling of the types of trusts used to protect family’s assets. Your estate planning attorney will be able to determine if a trust is right for you and your family, and which one will be most advantageous for your situation.

Reference: Kiplinger (Aug. 16, 2020) “Pre-Election Estate Planning Moves for High Net-Worth Families”

Don’t Shrink Your Estate with Last Minute Tax Planning

In the best-case scenario, you’d start talking with your estate planning attorney early on about your overall goals and the various tools available to minimize tax liability and transfer wealth to the next generation. Whether your estate is modest or significant, the article “A Recipe for Risk—Last-Minute Tax Planning for Estates” from The Legal Intelligencer explains how a last-minute plan failed on a grand scale. A recent memorandum opinion from the U.S. Tax Court provides a cautionary tale.

Howard Moore owned a large amount of property and ran a successful farm. He was admitted to the hospital late in 2004, was discharged to hospice and told he only had six months to live. He created an estate plan that included a family limited partnership (FLP), a living trust, a charitable lead annuity trust, a trust for the adult children, a management trust that acted as the general partner of the family limited partnership and an “Irrevocable Trust No. 1” that was created to act as a conduit for the transfer of funds from the FLP to a charitable foundation.

The primary focus of the plan was to transfer the farm to a living trust and then to transfer 80% of the farm property to the FLP. The management trust was to serve as a partner to the FLP, with the living trust owning almost all the limited partnership interests and with each of the decedent’s children owning a 1% partnership interest. The FLP was to offer protection against liabilities from the use of pesticides, potential bad marriages, creditors and the fact that the family was a bit dysfunctional and would need to work together to manage the FLP. The FLP had many transfer restrictions and the limited partners were not given any rights to participate in business management or operational decisions regarding the FLP.

The trust known as “Irrevocable Trust No. 1” was nominally funded at the time of the decedent’s death and received funding from the FLP. Those funds, in turn, were transferred to the charitable trust to gain a charitable deduction by the estate. Just before he died, Moore used FLP funds to make large transfers to his children that were designated as loans. He also made outright gifts to the children and to one grandchild.

The estate filed an estate tax return and a gift tax return after Moore’s death. The IRS issued a notice of deficiency for nearly $6.4 million and the case went to tax court. The U. S. Tax Court agreed with the IRS’ findings. The defense of the estate plan, the tax court maintained, was form over substance and the only reason for the estate plan and the numerous transactions was to save estate taxes.

There were a lot of hurdles in this case, in addition to the short time period for the estate plan to have been created. At the time of the decedent’s hospitalization, the sale of the farm to a neighbor was being negotiated. A contract to sell the farm was executed with days of transferring it to the living trust. There were numerous transfers and distributions made between trusts and the FLP, and the court concluded that all decisions about the FLP after its formation were made unilaterally by the decedent. An FLP is supposed to function as a true partnership. Many other issues and errors occurred in the rush to have this estate structured in such a short period of time.

Had Moore engaged in planning five or ten years earlier, there would have been time to create a plan in which both the substance and execution of the plan were sound and the family would have been able to save millions of dollars in taxes. By waiting until his death was imminent, the plan attempted to establish transfer requirements without the opportunity to execute them properly.

Reference: The Legal Intelligencer (May 18, 2020) “A Recipe for Risk—Last-Minute Tax Planning for Estates”

Did Rapper Nipsey Hussle Have an Estate Plan?

This raises significant issues, because minors can’t own more than a certain amount of assets, explains Rolling Out in the recent article, “RIP Nipsey Hussle: 5 reasons you need an estate plan.”

This means that a guardian or trustee must be appointed to manage the funds for them, until they reach the age of majority. If the deceased doesn’t have a will that instructs who that guardian shall be, they will be chosen by the court. In this case, Nipsey’s longtime girlfriend Lauren London would get nothing from Hussle’s estate (even though that may not have been his intention), because it looks like she wasn’t his spouse or an heir. Consider these important reasons for an estate plan:

Property transfer wishes. This is the primary objective of estate planning. Your estate consists of all your property (real, personal, and intellectual) minus your debts. Your estate plan will determine who gets what and when. Create clear goals, as to who should inherit your property and alternative beneficiaries, in case someone predeceases you.

Transfer costs and taxes. Another goal of estate planning is maximizing any available tax benefits. You can limit estate taxes by creating trusts, making charitable donations and by establishing a family limited partnership for a business.

More net assets to heirs. An estate plan will help avoid the expense and delays of probate.

Liquidity at death. Funds need to be available to satisfy the immediate needs of the family. This can be accomplished with life insurance policies, IRAs, stocks and bonds. If all of your property is being transferred by will or intestate succession, no one gets anything, until the estate is probated.

Personal wishes surrounding death. Write down all of your preferences concerning burial, cremation, and organ donation to help your family.

Hopefully Hussle created an estate plan, so his family doesn’t have to grieve his death, while figuring out his personal, business and family matters.

Reference: Rolling Out (April 1, 2019) “RIP Nipsey Hussle: 5 reasons you need an estate plan”