New York State Extends Tax Filing Deadline to May 17, 2021

New York State has extended the due date for personal income tax returns and related payments originally due on April 15, 2021 to May 17, 2021.

This follows the federal tax deadline which was also extended from April 15, 2021 to May 17, 2021. These extensions are due to the continued impact of COVID-19.

What this Means for New York State Individual Tax Filers

  • 2020 personal income tax returns originally due on April 15, 2021, and related tax payments, will not be subject to any failure to file, failure to pay, late payment, or underpayment penalties, or interest if filed and paid by May 17, 2021.
  • Interest, penalties, and additions to tax with respect to such extended tax filings and payments will begin to accrue on May 18, 2021.
  • Taxpayers do not need to file any additional forms or call the Tax Department to request or apply for relief.
  • Taxpayers unable to file by May 17, 2021, can request an automatic extension to file your return which will be due on October 15, 2021, if the extension request is filed by May 17, 2021, and any 2020 tax liability is properly estimated and paid with the extension request.
  • Direct debit payments schedules cannot be changed. To do so, you must cancel your current payment and schedule a new one.

What is Not Covered by this Extension

  • The deadlines for the payment or deposit of any other type of state tax, or for the filing of any state information return, remain unchanged.
  • This relief does not apply to estimated tax payments for the 2021 tax year that are due on April 15, 2021. These payments are still due on April 15, 2021.
  • Remittance of income tax withheld by employers required to be made using Form NYS-1, Return of Tax Withheld, must be made on time.

For questions, please contact:

Meredith Mazzola
Partner, Tax

Federal Tax Deadline for Individuals Extended to May 17

The Treasury Department and Internal Revenue Service has announced that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021 to May 17, 2021. The IRS will providing more formal guidance. Estimated federal tax payments and state tax filings are not extended and are still due by April 15, 2021.

Federal Income Tax Payments

  • Individual taxpayers may also postpone federal income tax payments for the 2020 tax year due on April 15, 2021 to May 17, 2021, without penalties and interest, regardless of the amount owed.
  • This applies to individual taxpayers, including individuals who pay self-employment tax. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17, 2021.
  • Penalties, interest and tax additions will accrue on any remaining unpaid balances as of May 17.

Guidelines for Individual Tax Payers

  • There is no need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief.
  • Those who need additional time to file beyond May 17 can request a filing extension until Oct. 15 by filing Form 4868 through their tax professional, tax software or using the Free File link on Filing Form 4868 gives taxpayers until October 15 to file their 2020 tax return but does not grant an extension of time to pay taxes due.
  • Taxpayers should pay their federal income tax due by May 17, 2021, to avoid interest and penalties.


The extension does not apply to estimated tax payments that are due on April 15, 2021. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. If you generally pay estimated taxes, your 2021 first quarter estimated tax payment is still due April 15, 2021.

State Tax Returns

The new federal tax filing deadline of May 17, 2021, only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax returns or payments.. Taxpayers will need to timely file and pay income tax returns in 42 states plus the District of Columbia according to each state’s applicable due date. State filing and payment deadlines vary and are not always the same as the federal filing deadline. Check with your state tax agencies for those details.

For more information, contact:
Meredith Mazzola
Tax Partner

Use It or Lose It: Utilizing Estate Tax Exemption Before It Goes Away

The U.S. imposes an estate tax of approximately 40% on the net estate of U.S. tax residents. The current exemption from estate tax is $11,700,000 per person, leaving very few estates actually subject to the tax. Under current law, the exemption will revert to $5,000,000, adjusted for inflation, on January 1, 2026. However, President elect Biden has proposed reducing the exemption to $3,500,000. After democratic wins in Georgia this change could be made as soon as this year.

Who Does this Affect?

The proposed change affects individuals with estates of $3,500,000 or more or married couples with more than $7,000,000. Your net estate includes the fair market value of all your assets worldwide net debts.

Planning Opportunities

The exemption from estate tax is actually a unified credit against estate and gift tax. This means that right now individuals can make gifts of up to $11,700,000 without incurring a gift tax. Gifts can be made outright to individuals or in trust. So long as the trust is irrevocable and meets certain requirements, the assets will no longer be included in the individual’s estate for estate tax purposes. There are several ways to do this:

Spousal Lifetime Access Trust (SLAT)
A SLAT is one type of irrevocable trust that can effectively transfer wealth outside of your estate while at the same time leaving a safety net for your spouse for his/her lifetime. Many estate tax plans focus on shifting assets to the next generation. While this is an effective strategy, depending on your age and your spouse’s age and your total assets, you may not be comfortable giving away all of your assets to a trust for your children and grandchildren.

While it may be tempting to create a SLAT for each spouse, such a plan should be carefully considered. First, depending on your circumstances it may make sense to keep one spouse’s exemption intact, even if it is reduced. Second, the Internal Revenue Service frowns on what is referred to as reciprocal SLATs, which means that if two SLATs are created they should be substantially different.

Generation Skipping Trusts
For those of you in a position to transfer wealth to the next generation the best option is a generation skipping trust. The trust can be set up to benefit your children and their descendants but if done properly will pass down multiple generations without any additional estate tax.

Whether you transfer assets outright to your children, or to a trust for your spouse or descendants, all appreciation on the assets transferred will be outside your estate for estate tax purposes. Further, in the event the estate tax exemptions decrease, as is likely to happen, if you have a gross estate in excess of $7,000,000 you will be using a portion of your unified credit for gift tax that will not later be available for estate tax. In other words, use it or lose it.

How to Address Uncertainty

Tax legislation could potentially be made retroactive to January 1, 2021. Therefore, careful planning should be done to make sure that if this happens there is not an inadvertent gift tax. This can be done with formula clauses, disclaimer provisions, and QTIP elections in a trust for a spouse. Ideally, legislation will be enacted prospectively but it’s best to be prepared.

Meredith Mazzola
Partner, Tax Group

Year-End Tax Planning: Steps to Take Now for 2021

During this election year, with the determination of the Senate seats not taking place until January 2021, taxpayers will be faced with uncertainty in their approach to planning. The outcome of the Senate will play a key role in whether the Biden Administration will move forward with several planned proposals. While it remains unclear whether there will be any significant tax changes next year, these are steps that taxpayers can take during the remainder of 2020 to be well-positioned for 2021 no matter who controls the Senate.

Potential Tax Proposals

There are several tax proposals to consider under the Biden Administration:

  • Capital Gain Tax: Would raise the capital gain rate from 20% to 39.6% for taxpayers with income over $1 million.
  • Charitable Donations: Itemized deductions would be capped at a 28% tax benefit compared to the current 37%, for those earning over $400,000, compared to 37% currently.
  • Estate Tax: Would reduce the gift and estate tax exemption to $3.5 million from $11.58 million.

2021 Considerations: Ways to Plan Now

Taxpayers may consider the following actions now to prepare for 2021:

  • For high-wealth clients, consider making larger gifts in December 2020 to utilize the current estate tax exemption
  • For individuals in the highest tax bracket, make charitable donations in December 2020 to maximize donation deductions
  • Move up any planned sales of assets to accelerate capital gains

We will continue to closely monitor updates in early January 2021 and will provide ongoing guidance on best practices to consider.

New York Permits Remote Witnessing and Notarization of Estate Planning Documents

On April 7, Governor Cuomo issued an executive order allowing the act of witnessing estate planning document required under New York State laws to be done using audio video technology. This expands the executive order issued on March 19, 2020 permitting remote notarization.

Requirements for Remote Witnesses

  • The person requesting that their signature be witnessed, if not personally known to the witness(es), must present valid photo ID to the witness(es) during the video conference, not merely transmit it prior to or after;
  • The video conference must allow for direct interaction between the person and the witness(es), and the supervising attorney, if applicable (e.g. no pre-recorded videos of the person signing);
  • The witnesses must receive a legible copy of the signature page(s), which may be transmitted via fax or electronic means, on the same date that the pages are signed by the person;
  • The witness(es) may sign the transmitted copy of the signature page(s) and transmit the same back to the person; and
  • The witness(es) may repeat the witnessing of the original signature page(s) as of the date of execution provided the witness(es) receive such original signature pages together with the electronically witnessed copies within thirty days after the date of execution.

This applies to execution and attestation of wills, living trusts, appointment of health care proxies, powers of attorney and recording instruments affecting real property.

Requirements for Remote Notarization

  • The person seeking the Notary’s services, if not personally known to the Notary, must present valid photo ID to the Notary during the video conference, not merely transmit it prior to or after;
  • The video conference must allow for direct interaction between the person and the Notary (e.g. no pre-recorded videos of the person signing);
  • The person must affirmatively represent that he or she is physically situated in the State of New York;
  • The person must transmit by fax or electronic means a legible copy of the signed document directly to the Notary on the same date it was signed;
  • The Notary may notarize the transmitted copy of the document and transmit the same back to the person; and
  • The Notary may repeat the notarization of the original signed document as of the date of execution provided the Notary receives such original signed document together with the electronically notarized copy within thirty days after the date of execution.

For questions or additional information:

Meredith Mazzola

New York State Tax Deadline Extended to July 15

New York State has extended the deadline for personal income tax and corporation tax returns from April 15, 2020 to July 15, 2020. This is in keeping with the federal tax deadline which was extended to July 15. This extension applies to individuals, fiduciaries (estate and trusts) and corporations. Taxpayers will be allowed to defer all related payments due on April 15, 2020 to July 15, 2020, without penalties and interest.

What this Means for Filing Returns

  • Taxpayers do not need to take any additional steps to apply for relief. Returns due on April 15, 2020 will automatically be granted the filing and payment deadline extension and relief from penalties and interest. Taxpayers who are due a refund are still urged to file as soon as possible.
  • 2019 returns due on April 15, 2020, and related payments of tax or installments of tax, including installments of estimated taxes for the 2020 tax year, will not be subject to any failure to file or pay, late payment or underpayment penalties or interest if filed and paid by July 15, 2020
  • If you are unable to file by the new deadline you can request an automatic extension. Your return will be due on October 15, 2020, if the extension request is filed by July 15, 2020 and you properly estimate and pay your 2019 tax liability with your extension request.
  • Interest, penalties, and additions to tax with for extended filings and payments start to accrue on July 16, 2020.
  • If you already filed your 2019 return and scheduled your direct debit payment, it will not be automatically rescheduled to occur on July 15, 2020. You must cancel and schedule a new direct debit payment.
  • Fiduciary income tax returns are due September 30, 2020, for calendar-year taxpayers who request an automatic extension to file by July 15, 2020.


  • No extension is provided for any other type of state tax, or for the filing of any state information return.
  • Payment of income tax withheld by employers using Form NYS-1, Return of Tax Withheld, must be made on time.

For more information, visit:

Meredith Mazzola
Partner, Tax Group

IRS Filing and Payment Deadline Extended to July 15, 2020: What this Means for Individuals and Corporations

The Treasury Department and Internal Revenue Service have extended the federal income tax filing due from April 15, 2020, to July 15, 2020. The payment deadline was also extended to July 15, 2020.

The Treasury Department and Internal Revenue Service have extended the federal income tax filing due from April 15, 2020, to July 15, 2020. The payment deadline was also extended to July 15, 2020.

These steps are in an effort to provide special payment relief to individuals and businesses in response to the COVID-19 Outbreak. Income tax relief is expanded to all “persons,” including individuals, corporations, partnerships, trusts, and estates.

What This Means for Your Tax Filings

  • Taxpayers can defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all income taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.
  • Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief.
  • Individual taxpayers who need additional time to file beyond the July 15 deadline, can request a filing extension by filing Form 4868. Businesses who need additional time must file Form 7004.
  • Relief applies to only federal income tax (including tax on self-employment income) payments due April 15, 2020.
  • This does not apply to state tax payments or deposits or payments of any other type of federal tax. State filing and payment deadlines vary and are not always the same as the federal filing deadline. The IRS urges taxpayers to check with their state tax agencies for those details or view deadlines here.  As of March 23, 2020, the New York State Tax Department has not extended the deadline to file personal income tax or other tax returns.
  • It is unclear whether relief will apply to gift or estate tax returns or payments.

More information can be found on the IRS Coronavirus Relief page.

Estate Tax Planning for New York Residents

The Tax Cuts and Jobs Act increased the Federal Unified Credit for 2019. The estate and gift tax exemption is $11,400,000* per person. What’s better is that for a married couple the Federal exemption is “portable” – this means that an individual can leave $11,400,000 to heirs and married couples can transfer up to $22,800,000 to their children without any estate tax or complicated planning.

New York Estate Tax

What does this mean for New Yorkers? Unfortunately, New York State’s laws are not as generous.  New York only exempts the first $5,740,000* per person.  Additionally, there are two features of the New York estate tax laws that make it challenging to plan for:

  • Unlike the federal exemption, there is no portability between spouses. This means that if you do not utilize the exemption when the first spouse dies you lose it.
  • New York taxes your estate based on a “Cliff”. Once an estate exceeds the exemption amount by 105% New York imposes a tax on the full gross estate, not just the amount over the exemption.

These two items are important to plan for because the New York Estate Tax is significant.  It ranges from 5-16%. Although there are challenges with the New York estate tax laws there are also opportunities.

Planning Opportunities

Make Gifts
New York does not have a gift tax.  With the increased federal exemptions you can make lifetime gifts up to $11,400,000 per person.  This allows for increased lifetime planning. Gifting can be done outright or in trust.  Some gift options to consider:

  • Put assets in trust for certain situations, such as your child is getting divorced, has a chemical dependency issue or is receiving government benefits that could be jeopardized by receiving a lump sum of money.
  • Make gifts to 529 accounts for your grandchildren so that the money can grow without additional income taxes

Add a “Santa Clause”
Plan for the Cliff with a “Santa Clause”.  Many individuals fall into the category of taxpayers whose gross estate falls just over 105% of the New York exemption (currently $6,027,000).  Consider the following example, Jane, a widow has a gross estate of $6,150,000.  Her estate would have to pay New York an estate tax of $529,000.   However, Jane’s will or Living Trust could contain a formula clause which allows her executor or trustee to make a gift charity, decreasing the taxable estate below the Cliff and causing the beneficiaries to end up with more.  For example, the executor could gift  make a gift of just over $125,000 that would cause the estate to only pay tax on the amount over $5,740,000 (less than $30,000).  The net result is that the beneficiaries get more and a charity benefits.

The “Santa Clause” will only benefit a few estates but if your estate hovers around the New York Exemption amount we highly recommend adding it to you estate plan.

Create a Flexible Estate Plan
Some older estate plans fund a credit shelter trust on the death of the first spouse up to the maximum Federal exemption.  If your plan does this the surviving spouse may end up paying New York State estate tax.  We recommend building in a flexible estate plan which allows the surviving spouse to fund a credit shelter trust via a “disclaimer.”  Each spouse would leave each other the remainder of their estate but allow the surviving spouse to “disclaim” or give up a portion of the estate and have it paid to a credit shelter trust.  With such uncertainty over both Federal and New York State estate tax exemption this allows the surviving spouse to tax plan at the time of death when there is certainty.

Utilize the Additional Federal Exemption Against
The increase in the Federal Unified Credit didn’t eliminate the Federal estate tax for all New Yorkers.  For those with gross estates greater than $11,400,000 per person consider utilizing the additional credit by making gifts to Grantor Retained Annuity Trusts (GRATs) or Intentionally Defective Grantor Trusts (IDGTs) to lower or eliminate your Federal estate tax as well.

Next Steps

Review your Estate Plan!  Every situation is different but many can take advantage of these opportunities as well as others.

*The Federal and New York exemptions are scheduled to be increased for inflation annually.

Family Wealth Trust


Chances are, you’ve already heard a lot about the attributes of Living Trusts and how important it is to avoid probate and legal quagmires, even lowering estate and/or income taxes and protecting privacy. Looking after these financial assets is only a part of planning for passing on your legacy. Typically, non-financial assets are more valued and often omitted when passing an estate to future generations. Focusing on complete “legacy planning” causes something more than a simple or bare bones Living Trust to be needed by most families. This special report details what a Family Wealth Trust can do for you and your family.


Providing for and protecting your heirs, along with passing on your values and your wisdom… are the most common reasons for creating a Family Wealth Trust. In the case of minors, a trust allows a parent to provide for a child without giving the child control over the property. The parent can also mandate how, or even when, the property is to be distributed and for what purposes.

A trust is also a useful tool for taking care of heirs who have mental impairments or lack investment experience. The trust document can establish that all money is controlled by a trustee with sound investment experience and judgment. Likewise, a trust preserves the integrity of funds when the recipient has a history of extravagance. It can protect the property from an heir’s spendthrift nature as well as from his or her creditors.

This is also true of persons who may feel pressure from friends, con artists, financial advisors and others who want a slice of the pie. A Family Wealth Trust can make it extremely difficult for a recipient to direct property to one of these uses.

A “spendthrift” provision in a Family Wealth Trust is often used to further preserve the integrity of assets. It prohibits the heir from transferring his or her interest and also bars creditors from reaching into the trust.  Family Wealth Trusts are relatively easy to update, modify or revoke in most cases. A will, however, is difficult to change, and establishing one requires many formalities.


One popular benefit of a Family Wealth Trust is the avoidance of probate. Because property in the trust is not considered part of an estate, it does not have to undergo this sometimes lengthy process. The property is instead administered and distributed by the trustee, according to the specific terms of the trust.

Probate expenses can be significant. Costs vary according to the size of the estate and what it includes. It also varies by state. Some have very expensive and onerous procedures, while others offer a streamlined version of probate.

Avoiding probate means not only avoiding hassle and expense, but also saving time. Probate can extend the amount of time before an heir receives an inheritance by months, years – even longer if the will is contested. Not only can this create hardship among the heirs, but the property in the estate may also suffer. Many assets must be carefully managed to preserve and enhance their value. Losses may easily occur during this interim period.

There is an emotional price to pay, too. Survivors may be continually reminded of the loss of a loved one as the process drags on.

Probate can also lead to loss of privacy. Wills and probate are public matters, whereas a Family Wealth Trust keeps the estate private. Typical probate documents list all assets, appraised value and names of new owners. This information becomes available to marketers, media, creditors and con artists.

If the estate includes real property in more than one state, the process becomes even more complex. An ancillary administration is required to probate out-of-state real estate. As you can imagine, “double probate” is even more time-consuming, expensive and emotionally taxing than a single probate process.

Probate also allows the original owner’s creditors a shot at the property. Although there is still some controversy about the extent of its creditor-shielding benefits, a Family Wealth Trust generally makes it much more difficult for an estate to be consumed by creditor claims.


Family Wealth Trusts are harder to contest than wills. Part of the reason is that trusts usually involve ongoing contacts with bank officials, trustees and others who can later provide solid evidence of the owner’s intentions and mental state. A Family Wealth Trust that has been in place a long period of time is less likely to be challenged as having been subjected to undue influence or fraud. And because it is a very private document, the terms of the trust might not even be revealed to family members, allowing less opportunity for challenges to its provisions.

A Family Wealth Trust also avoids the painful ordeal of “living probate.” That’s what happens when a person is no longer competent to manage property, whether because of illness or other causes. Without a Family Wealth Trust, a judge must examine whether you are in fact incompetent, and all of the embarrassing details of your incompetence will be dragged out in court. The judge will appoint a guardian – perhaps someone you would not want to manage your affairs. Guardians act under court supervision and often must submit detailed reports, meaning that the process can become quite expensive.

With a Family Wealth Trust, your designated trustee takes over management of trust property and must manage it according to your explicit instructions in the trust document. The terms typically set standards for determining whether you are incompetent or not. For example, you may specify that your doctor must declare you can no longer manage your financial and business affairs.


Family Wealth Trusts also provide a way for beneficiaries to receive the guidance of professional asset managers. A bank may be named as a Successor Trustee or Co-Trustee, allowing an experienced trust department to manage the assets.

Of course, eliminating or reducing taxes is one of the primary goals of estate planning. Trusts allow for a highly flexible approach to taxes. Income taxes can be slashed by transferring income-producing assets to a recipient in a lower tax bracket. Through the use of trusts, the state and federal government’s estate tax exclusions can be doubled, without the filing of an estate tax return unless the decedent had more than the respective state or federal applicable exclusion. And some trusts are a prudent destination for annual gifts that fall within the government’s tax-free gift allowance.


A trust may not be needed by all individuals and families. Depending on the terms, trusts can result in some loss of control.

Also, it is important to transfer all titled property into the trust on a regular basis to keep it current. Property outside the trust is part of the individual’s estate, and will trigger the probate process you hoped to avoid by creating the Family Wealth Trust. Formal transfers of property into the trust are required even when you and the trustee are the same individual.

A Family Wealth Trust costs more than a will to create, although it saves large amounts later through its probate-avoidance feature. Deeds will be necessary for transferring real property into the trust, and that will also involve some additional expense. Also, attention must be paid to keeping the trust current. That means making sure all property is in the trust, and adjusting it for changed circumstances; for example, after the birth of a child or the dissolution of a marriage.

If these seem like minor disadvantages, you’re right. For most people, the attention and initial expense involved in a Family Wealth Trust is worth the significant benefits for family and other heirs: the avoidance of probate, the tax advantages, and the preservation of privacy and independence.

© American Academy of Estate Planning Attorneys, Inc.

Asset Protection

In the face of litigation, there are proven strategies that will ethically preserve your wealth. Your most powerful weapons will be a variety of estate planning tools, including the Family Limited Partnership, the Irrevocable Life Insurance Trust, the Children’s Trust, and Foreign Asset Protection Trusts.


One way to place asset beyond the reach of potential plaintiffs is to transfer property to your children. Like most parents, you’ve probably been acquiring an estate not only for your benefit while you are alive but also to help your children and grandchildren. The IRS will allow you to give up to $15,000 per person per year absolutely free of gift tax. If both spouses join in the gift, you can give up to $30,000 per person a year, gift tax-free. (As indexed for inflation.)

By giving property to a Children’s Trust each year, you can shift the income from your high tax bracket to the lower tax bracket of your children or grandchildren who are age 14 and older. Unfortunately, children under age 14 must pay most of their taxes at the same rate as their parents.

Once the Children’s Trust is sufficiently funded, it can pay the cost of a child’s education. That way the expenses are paid with discounted tax dollars. (However, remember that parents or grandparents can pay tuition costs directly as a tax-free gift.)

If you own a business, you can gift its equipment and furniture to the Children’s Trust and have the trust lease it back to the business. Under this plan, the business gets a legitimate tax deduction, and the rental income is earned by the trust potentially at lower tax rates. Plus, the benefit of the depreciation is given to the trust.

Having a Children’s Trust or a Family Limited Partnership also promotes family investment values. The children now have an identifiable stake in the family’s financial success. It goes a long way toward helping them understand the value of money and wise investments.

How does the Children’s Trust protect assets? Well, all assets transferred to the trust are no longer in your name or owned by you, and are, therefore, outside the reach of plaintiffs or creditors, whether yours or your children’s. However, you can’t transfer assets when you have pending claims or lawsuits against you. Transfers at that time will violate something called the fraudulent transfer law. This will allow the courts to ignore the gifts to the trust and permit your creditors to seize them.

The Children’s Trust also has probate avoidance and estate tax reduction benefits. All assets transferred to the trust are no longer a part of your estate. That means when you die, those assets will not go through probate and they will not be subject to federal estate tax.

If you had three children and gave each of them $30,000 in trust per year for 10 years, that would amount to $900,000 of tax-free gifts to their trust. At death, none of that $900,000 would be subject to federal estate tax.

Before creating a Children’s Trust as part of an asset protection program, ask yourself whether you can permanently do without the benefits of the property. Once title is transferred into the trust, there is no going back. This trust can’t be revoked or amended, so only transfer the assets that won’t be needed by you to meet your personal expenses.


You probably already know several reasons why life insurance is important. Young families need it to replace part of a breadwinner’s income. Mature Americans find it provides their heirs with a source of funds to pay estate taxes.

Life insurance can do all this and shield assets from litigation at the same time. How? By use of the Irrevocable Life Insurance Trust (ILIT). An ILIT is a good idea even if you don’t worry about suits or creditors, because it allows the full value of your life insurance to pass tax-free to heirs. Without an ILIT, the government will count the face value of an insurance policy in calculating your taxable estate. Anything over the estate tax exclusion is subject to “death tax” at a 40% rate.

When you set up your ILIT, you name a trustee other than yourself, most likely a beneficiary. The trustee purchases a life insurance contract on your life with funds you provide. If you have an existing policy, you can assign ownership of it to the ILIT, but there are conditions imposed on these transactions that should be carefully considered before you do so. For instance, if you die within three years of the transfer, the life insurance contract will be included in your estate.

As we saw in the case of the Children’s Trust, a taxpayer may give up to $15,000 (indexed for inflation) annually to another person free of gift taxes. Other than the per-person rule, there’s no limit on the total amount you can give away. For example, if you have five children and eight grandchildren, you and your spouse could give each one $30,000, for a total of $390,000 annually, gift tax-free. That can buy a lot of life insurance. By carefully following the IRS rules, you can employ this gift tax exemption to make the policy’s premium payments.

Reducing your estate tax liability is a powerful incentive for considering the ILIT. But that’s just the beginning of the long list of benefits it provides.

The ILIT gives you control over how proceeds from your life insurance policy are spent. You control who receives the proceeds and how they receive them. Whatever distribution strategy makes most sense for you and your loved ones, the ILIT gives you the opportunity to put it in effect.

And, of course, there’s its important asset protection benefit. Over the years, your premiums and interest earnings can accumulate to considerable sums, making cash value policies a tantalizing target for creditors. When the policy is owned by the ILIT, however, it is out of the reach of creditors.


A Family Limited Partnership (FLP) is one of the most popular estate tax and asset protection planning devices. An FLP is simply a limited partnership similar to the real estate or business operating limited partnerships with which many are familiar. When you transfer your business and investment assets into an FLP, you receive in return:

General Partnership Interest: Generally, you receive just 2% of the total partnership interests in the form of general partnership interests. That means that you control all of the decision-making for the FLP’s activities.

Limited Partnership Interest: You receive the remaining 98% of the FLP in the form of limited partnership interests. Limited partnership interests give the limited partner very limited rights in partnership income and activities. While general partners may not treat a limited partner unfairly, a limited partner essentially has no meaningful control or rights.

You are now the proud owner of your very own FLP. You are the 2% general partners and control the partnership. Now what happens? You will give your children some of your limited partnership interests. That means that the partnership has partners other than just you.

As a general partner, you have complete control and access to the assets and income of the FLP in accordance with terms you designed. If you have given your children 10% of the FLP, they are entitled to 10% of any distributions that you decide to make, but they cannot force you to make any distributions.

Note: If estate tax reduction is one of the other purposes of the FLP, additional restrictions may be required.


If you are successfully sued, all the plaintiff is able to receive is a “charging order.” That’s a judgment against the partner that tells the partnership that any distributions of profit that would otherwise be made to the debtor partner must instead be paid to the plaintiff/creditor. But the plaintiff has no power to interfere in partnership matters.

The charging order is a very hollow victory. Because the general partners decide if profit is to be distributed to the partners, the general partners can withhold distributions for partnership purposes and the creditor receives nothing.

Obviously, the creditor does not just go away, but because the charging order provides so little leverage, creditors frequently settle the claim for less than face value. Those who might consider filing an unjustified lawsuit may change their minds when they realize that all they will receive is a hollow charging order.


The ultimate asset protection tool is a Foreign Asset Protection Trust.

What is a Foreign Trust? In many ways a Foreign Trust looks exactly like a Domestic Trust. The trustor is you, the person who transfers the assets to the trust. The trustee is a trust company, experienced in asset management, whose business is operated outside of the United States in a jurisdiction that does not recognize United States judgments.

In a typical trust, the trustee is given discretion to accumulate or distribute trust income among a specified class of beneficiaries. You may be one of the named beneficiaries, together with your spouse, children, or grandchildren.

One unique feature of this kind of trust is the role of the “Protector.” The trust protector is a person who has the power to take virtually any actions necessary to protect your trust. The term of the trust may be limited to a period of years. You can often specify that the trust will last for a term of 10 years with several optional renewal periods.

One way to use a Foreign Trust is to set it up and then transfer your cash, securities and other liquid portable assets to an account established under the name of the trust at a bank of your choice in a foreign jurisdiction.

We’ve found that many people are reluctant to transfer their assets out of the country or give up the day-to-day control of their investments unless it’s absolutely necessary. To solve these concerns, planners combine the best elements of the Foreign Trust with the management and control of the limited partnership. Under this arrangement, you and your spouse are the general partners with total management and control over the partnership assets. But instead of you and your spouse holding a limited partnership share, you transfer that interest to a trust in a favorable foreign jurisdiction.

As the holder of the limited partnership interest, the foreign trustee has no right to interfere with management of the partnership. You alone manage your finances. Even though the trustee holds the limited partnership certificate, the assets themselves are physically located in the United States. This set-up provides maximum flexibility and sound lawsuit protection.

One of the most appealing features of a Foreign Asset Protection Trust is that it produces absolutely no income tax benefits. Under current tax law, the trust is simply ignored for tax purposes. Like the Living Trust, all of the income is reported and tax is paid on your personal income tax return. The reason this is attractive is that it allows you to create your foreign trust without interference or objection by the IRS. Because it doesn’t affect your income tax liability, the government really pays little attention to these trusts.

We’ve seen that the Foreign Asset Protection Trust is easy to set up and there are little or no tax consequences. We’ve also seen that when the Foreign Asset Protection Trust is combined with a domestic limited partnership, you retain complete management and control over your finances.

So what role does the Foreign Trust play and why is it touted to be the ultimate in creditor protection? The simple answer is that U.S. courts and judges have no jurisdiction over the foreign trustee and the limited partnership interest.

Let’s say a judgment has been handed down against you. Your first move would be to liquidate the limited partnership and make a distribution of each partner’s share. The Foreign Trustee would receive the vast majority of partnership assets, and these would now be held offshore.

Obviously, if your creditor wants to get his hands on the property, he will have to travel to the foreign jurisdiction and ask the local court to enforce his U.S. judgment. Whether he wins or loses in the foreign court depends on the laws of the jurisdiction you chose as the home of your trust.

Selecting a Jurisdiction

That’s why selecting the proper jurisdiction for your Foreign Trust is a matter of critical importance. You should consider the following factors:

  • Communicating with the trustee must be very convenient.
  • Look for a well-developed telephone system and for a country that conducts its business affairs in English.
  • Look for an area with a long tradition of trust law and for experienced trustees who understand their role in asset protection planning.
  • Find a country that does not tax income earned by your trust.
  • Your jurisdiction should impose harsh penalties on anyone who discloses confidential trust and banking information.
  • The country should make it very difficult for a creditor to file suit against your trust and should not recognize or enforce U.S. judgments.
  • There should be no restrictions on your right to move currency or assets in or out of the country and, finally, the jurisdiction should have a stable government built on sound English and American legal principles.

Here’s a list of some of the more popular jurisdictions for your asset protection trust that have all of the important features we mentioned. The first four, the Bahamas, Bermuda, Barbados and the Cayman Islands, are located right offshore and are easily reachable by air. They have long been known for their international banking and asset protection activities. For example, the Cayman Islands is home to more than 530 operating banks and trust companies and has in excess of $425 billion in total assets under management.

The Cook Islands are a group of islands in the South Pacific. Between 1901 and 1965, they were part of New Zealand. In 1965, they became independent and self-governing under their own constitution. The Cook Islands have no income tax and have been developing in recent years into the jurisdiction of choice for asset protection planning.

© American Academy of Estate Planning Attorneys, Inc.