FLPs can be created, documented, funded and maintained by the multifamily office team.
The estate planning specialists on the team, working with outside legal counsel, will propose the FLP, suggest terms, review drafts and oversee execution of the necessary documents.
The investment advisory professionals on the team will help to select the assets for funding the FLP, set up the custody accounts and assist with the transfers of assets.
The tax and accounting professionals on the team will obtain tax identification numbers for the FLP, keep track of dates for tax filings and payments and coordinate cash flow needs for tax payments with the investment advisory professionals.
The income tax professionals will prepare and file the appropriate income tax returns for the FLP, issuing K-1 forms to the partners, and will prepare individual tax returns for the individual partners.
If any trustees involved in the planning are partners in the FLP, the tax professionals will, if engaged to do so by the trustees, prepare annual trust income tax returns and coordinate cash flow needs for estimated income tax payments with the investment advisory professionals.
The estate planning professionals, in consultation with outside counsel, will arrange any appraisals and the preparation and filing of appropriate gift tax returns.
Annual FLP meetings will be scheduled by the MFO client service director-often the primary income tax advisor on the team- and it will be documented in the files.
The team will periodically review asset performance in the FLP and opportunities for additional gifting, such as with increased gift tax exemptions.
GRATs
Another frequently used estate planning vehicle is the grantor retained annuity trust (GRAT). A GRAT is an irrevocable trust designed to transfer future appreciation of an asset free of gift or estate taxes, after the grantor has received all payments of a reserved annuity payable from the GRAT assets for a period of years. If the annuity is structured to have a present value equal to or only slightly less than the value of the assets contributed to the GRAT, the upfront taxable gift on creation of the GRAT is zero or extremely small. If the assets in the GRAT appreciate at a rate higher than the modest interest rate prescribed by the IRS, the excess appreciation, if any, passes at the end of the annuity period free of gift taxes to the grantor's intended beneficiaries or to continuing trusts for their benefit. If the GRAT assets fail to outperform the IRS interest rate, the assets will all come back to the grantor in the form of annuity payments and another GRAT can be attempted, if desired.
The MFO team can be very effective in assisting clients in implementing and administering GRATs. Attention should be paid to initial asset allocation, and the valuations of GRAT assets and asset performance should be frequently reviewed to identify opportunities to lock in GRAT success (or failure, to be followed by another GRAT with the now depressed assets) as asset values fluctuate. How might this play out?
The multifamily office team should look for opportunities to recommend GRATs for appropriate clients, often with a series of "rolling GRATs." A rolling GRAT structure takes the annuity payment received by the grantor from one GRAT and rolls it into a new GRAT. In this way, the process of passing excess appreciation on the asset to the beneficiaries continues.
The investment advisory professionals will be consulted about the selection of GRAT assets.
The investment advisory professionals will set up custodial accounts for each GRAT and will oversee the funding of each GRAT.
Ongoing review of GRAT performance by the team may uncover the opportunities to lock in significant gains in a GRAT through asset swaps.
The tax advisors on the MFO team will calculate the gift element upon creation of the GRAT and will prepare and file appropriate gift tax returns.
The tax advisors will prepare appropriate grantor trust income tax returns for the GRAT and report the GRAT income on the client's individual tax returns.
New GRATs can be anticipated, created and funded with assets swapped out of successful or failing GRATs or with annual annuity distributions coming out of each GRAT.
Conclusion
An integrated approach to estate planning and wealth management, employing a multidisciplinary group of professionals working as a team, is more likely to be successful transferring wealth and minimizing taxes for clients. Wealthy clients who embrace this approach can achieve their wealth transfer goals early enough to negate the need for transfers at death, which result in higher taxes. Success in reaching wealth transfer goals can free clients to enjoy their wealth, pursue philanthropic goals earlier in life or leave a larger charitable legacy at death.
James R. Cody is director of estate and trust advisory services at Harris myCFO Inc. in Palo Alto, Calif.