"Navigating the Continuing Cascade Of Tax Law Complexity"

Moving wealth down to younger family members without punitive taxes is the soul of estate planning.

The stakes are high. Tax brackets for taxable estates during 2004 run up quickly to 48%; for 2005, 47%. Income taxes on trusts escalate to 35% on a scant $9,550 of taxable trust income. The Generation-Skipping Tax bites at the maximum federal estate tax rate. Qualified retirement plans and IRAs are subject to combined estate, income, and excise taxes which can exceed 70%.

Under present law, increasingly larger amounts are scheduled to be exempt from federal estate tax:

Year	Sheltered Amount
2004-2005	$1,500,000
2006-2008	$2,000,000
2009	$3,500,000
2010	no federal estate tax
2011	$1,000,000

Persons whose estates exceed the Sheltered Amount (including life insurance) unwittingly generate avoidable federal estate taxes unless tax-sensitive countermeasures are employed.

Life insurance, unlimited in amount, can be placed in irrevocable trusts available to surviving spouses, children, and (by utilizing carefully drafted provisions avoiding the Generation-Skipping Tax) grandchildren, circumventing the Sheltered Amount threshold.

Joint tenancy (the poor man's will) avoids probate. But the price can prove unacceptable where husband and wife's combined estates exceed the Sheltered Amount. The untutored, who place all their assets in joint tenancy, can needlessly subject themselves to federal estate taxes to the extent their combined estates exceed the Sheltered Amount.

Marital deduction and credit shelter trusts defer (but do not avoid) federal estate taxation until the surviving spouse's death. QTIP marital deduction trusts paying all the income to the surviving spouse (and, if desired, discretionary principal, too), permit a married person to divert the entire trust principal remaining at the surviving spouse's death to the first dying spouse's children, charities, or others. This is particularly important where the surviving spouse is not parent of all (or any) of the children.

Emerging tax strategies include integrating a family's investments with a Family Limited Partnership ("FLP") so designed that limited FLP ownership interests can be gifted to younger generation family members or retained by the senior generation, at substantial discounts from underlying asset value. Systematic gifting of discounted-value FLP units, utilizing (I) annual gift tax exclusions, and if appropriate, (ii) the donor's $1,000,000 lifetime gift tax exemption, permits senior family members to remove significant amounts from federal estate taxation. At the same time, those seniors, as general partners, can retain measured control over investment decisions.

Family businesses can also be structured in the form of tax-favored limited liability companies or limited liability partnerships. These newly authorized business entities, fortified by protective buy-sell agreements, can target tax and asset protection objectives. More traditional S and C corporations still serve usefully where appropriate, but placing S corporation stock in discretionary trusts for younger family members requires tax-sensitive drafting.

Revocable trusts ("living trusts"), which permit an investor to avoid both guardianship (in event of incapacity) and probate (in event of death), can serve, where appropriate, in lieu of wills. Durable powers of attorney for business and health care purposes complement and protect estate planning objectives.

Special estate planning is required for persons with disabilities and their families. Special Needs Trusts can shelter assets and preserve disabled person's eligibility for available governmental services or benefits.

Written by Congress, expanded by IRS regulations, and construed ultimately by courts, our tax laws represent a continuing cascade of complexity. Navigating between proliferating federal tax rules and frequently revised state statutes demands disciplined and continuous study. We work in concert with your accountants, insurance advisors, and trust officers to reach your estate and business planning objectives.