Generation-Skipping Transfer Tax (GSTT) (GST)

Imposed (a) when there is a transfer of assets (outright or in trust and including life insurance proceeds) during lifetime or at death for the benefit of a person ("skip person") at least two generations younger than the donor/grantor ("transferor"), (b) when trust assets are distributed skipping one beneficiary's generation ("skip person"), or (c) when an intervening interest (such as an income interest) in a trust terminates by death, lapse of time, or otherwise (a "taxable termination"). Each individual is allowed a $1,030,000 exemption (indexed for inflation) and the tax rate is 55%, the same as the highest federal estate tax rate. The exemption is doubled for a husband and a wife and the GSTT is added to any applicable estate or gift tax.

Skip persons include unrelated descendants. Such an individual whose age is within 12½ years of the transferor is given the generation of the transferor. An individual more than 12½ to 37½ years younger than the transferor is given the next younger generation designation, and so forth.

A taxable distribution is a distribution of income or principal from a trust to a skip person, and the skip person must pay the GSTT. If the GSTT is paid by the trust, the tax is treated as an additional distribution. Income tax is also due on distributions of interest, although the GSTT may be deducted (as an itemized income tax deduction).

>>> Tip: For example, consider the case where a grandfather creates a $1,000,000 trust for his son; his son dies, and the beneficiary is now grandchild until the grandchild reaches age 21 when the trust assets are to be distributed to the grandchild. However, the son's death is a taxable termination and the trustee must pay a $550,000 GSTT.

>>> Tip: As another example, a grandfather leaves his son $1,000,000 in his will; his son disclaims the inheritance, resulting in the inheritance going to the grandchildren. A direct skip is triggered and $550,000 GSTT is due along with a 55% estate tax (that is, 110%). Worse yet, if the will provides that all taxes will be paid by the estate, the estate will pay the GSTT and estate taxes, plus the $1,000,000 without any reduction.

Generation-Skipping Trust (Dynasty Trust)

A trust created for the benefit of multiple generations more than a single generation removed from the transferor. Such trusts are also referred to as dynasty trusts. See Dynasty, see Trust and see Generation-Skipping Transfer Tax (GSTT) (GST).

Gifts and Gift Tax Exclusion (Federal)

The value of property you can irrevocably give or donate annually during your lifetime (inter vivos) without incurring any gift tax and without being required to file a gift tax return on April 15^th. The gifts must be of a present interest, not one that takes effect in the future. See Fair Market Value.

>>> Tip: There is no limit to the number of persons to whom you can make these gifts annually.

Property gifted with a value of $10,000 in $1,000 increments ($20,000 for married couples - "split gifts", both indexed for inflation in $1,000 increments) per recipient per year is free of federal and Louisiana gift tax and neither the donated property nor any subsequent appreciation or growth will be included in the donor's gross estate for federal estate tax purposes; usually such property will not be subject to the Louisiana inheritance tax or the generation-skipping transfer tax.

>>> Tip: Louisiana law permits spouses to consider a gift of community or separate property by one spouse to a third person as one made one-half by each spouse.

>>> Tip: The amounts that a donor pays directly to service providers for education tuition and medical care, gifts from one spouse to another, and gifts to charities are also free of federal gift tax and don't count against the $10,000 annual exclusion, as is the gratuitous rendering of services. See Educational Funding.

Gifts to a trust, partnership, limited liability company or corporation are considered gifts to each beneficiary, partner, member, or shareholder, respectively.

Some of the estate tax advantages to gifts are explained in Gross Estate.

Tax rates for gifts in excess of the exclusion are the same as estate tax rates. See Donation and see Unified Transfer Tax and Credit.

>>> Tip: The donor's reservations of a power over the donated asset, the reservation of the power to reinvest the donated asset in the donor or the reservation of the power to name new beneficiaries to change interests, to change the manner or time of the enjoyment may each result in an incomplete gift or cause the asset to be includable in the donor's gross estate under the federal estate tax. See Crummey Powers.

>>> Tip: A gift of assets (including stock, artwork, coin collections, antique furniture, and so forth) to a charity gives you a federal income tax deduction based on the value of the gift at the time of the gift and avoids capital gains tax. This may be more beneficial to you tax-wise than a cash gift. See Charitable Deductions Limitations.

>>> Tip: Naming a charity as a beneficiary of a tax deferred retirement fund avoids the accrued federal income taxes, and therefore may be more beneficial to you tax-wise than a cash gift.

>>> Tip: A gift of a residence to a charity, reserving the right to live in it for the rest of your life, gives you an immediate deduction based on the present value of the residence. This too may be more beneficial to you tax-wise and frees up cash (because of the tax benefit) which can then be invested. See Qualified Personal Residence Trust.

>>> Tip: It is possible to have a taxable gift under Louisiana law but not under federal law because the exemptions and exclusions are different.

Golden Parachutes

"Excess" payments to an officer, a stockholder, or a highly compensated individual contingent on a change in the control or ownership of the corporation; paying corporation may not deduct such payments as an expense and payments are subject to a 20% excise tax.

GRATs, GRITs and GRUTs

Permit you to have some use of transferred assets, avoid probate of these assets, and possibly save estate taxes.

»  GRAT

A grantor retained annuity trust. It is an irrevocable trust in which the grantor retains the right to receive payments payable annually or more frequently.

» GRIT

A grantor retained income trust which has been largely eliminated by current tax laws except where a personal residence is involved. See Qualified Personal Residence Trust.

» GRUT

A grantor retained unitrust. It is an irrevocable trust in which the grantor retains the right to receive a percentage of the trust's assets payable annually or more frequently and revalued annually.

See Trust.

Gross Estate (Under Federal Estate Tax)

The value of your taxable estate before deducting taxes, debts, and other expenses or liabilities. It includes probate assets and non-probate assets and income in respect of a decedent. The estate tax is assessed on a deceased individual's property valued at more than $675,000 (increasing in steps to $1,000,000 in 2006) with rates of as much as 55%. See Fair Market Value, Gross Estate, Income In Respect of a Decedent, Net Taxable Estate, and Unified Transfer Tax and Credit.

>>> Tip: Certain qualified family-owned businesses are not included.

Probate assets include your residence; stocks; bonds; cash; vehicles; equipment; household goods; and so forth; real, personal, tangible or intangible property that you own at death either in your name or property in which you own an undivided interest.

Non-probate assets include life insurance proceeds from a policy owned by the deceased or given to another within three years before death; certain annuities and retirement benefits payable to the decedent at least in part and after death to a surviving beneficiary; jointly held property; various qualified employee benefit plans, pension plans, profit sharing plans, 401(k) plans, IRAs, and certain gifts.

See Alternative Valuation Date, Estate Tax, Fair Market Value, Estate Taxation of Life Insurance, Gross Estate, Life Insurance Benefits Taxation, Life Insurance Trust, Net Taxable Estate, Qualified Family-Owned Business Interest, and Unified Transfer Tax and Credit.

If the beneficiary receives a lump sum benefit, the lump sum must be included in the gross estate. However, if the beneficiary receives installment (periodic) payments, then the present value of the beneficiary's income right must be included in the gross estate. This present value calculation is made in accordance with IRS valuation tables.

>>> Tip: "Retained control" includes situations where the estate keeps the right to vote stock in a corporation that the deceased "controlled". In this case, all the stock must be included in the gross estate if the deceased owned at least 20% of the voting shares, directly or indirectly through ownership by a spouse, child, or grandchildren, or by a legal entity including a partnership, the estate, a trust, or a corporation.

>>> Tip: "Recoverable transfers" include property which you transfer to a trust for the benefit of another if you keep the right to amend or revoke the trust, or if you are the trustee with the right to control the distribution of principal or income. See Living Trust and trust (revocable).

Life insurance included in the gross estate is insurance on the life of the deceased where the proceeds are payable to a beneficiary including the estate of the deceased if the deceased has any of several "incidents of ownership", such as direct ownership or the right to (1) change beneficiary, (2) cancel the policy, (3) assign the policy, (4) borrow the cash value, or (5) pledge the policy as collateral for a loan or obligation. Also insurance (other than term insurance) on the life of another but owned by the deceased must be included in the gross estate of the deceased in an amount approximating the cash value.

Where the deceased transfers any of these incidents of ownership within three years of death, the proceeds of the policy on the life of the deceased are included in the gross estate.

>>> Tip: A gift tax is triggered if the owner of a life insurance policy on the life of another designates a third party as the beneficiary. The reason is that when the insured dies, the owner is considered to have made a gift of the proceeds to such a beneficiary.

The adjusted gross estate determines whether special estate tax elections are available. These are the Section 303 election that covers stock redemptions to pay "death taxes" and administrative costs and the Section 6166 election that provides for an extension of time to pay estate taxes where the estate includes a large interest in a closely held business. The gross estate is adjusted by deducting debts, mortgage balances, taxes enforceable under state law, funeral and cemetery expenses, expenses of the estate administration (and losses during the estate administration); administration expenses include executor/executrix, legal, accounting, appraisal, and broker fees, along with court costs.

If the stock redemption and the extension of time to pay estate taxes elections are not exercised, all of these adjusted gross estate deductions are deducted to calculate the taxable estate, along with charitable deductions and a marital deduction for certain property transferred to a surviving spouse by will, by law, by survivorship right, by being the beneficiary of a life insurance policy or of a retirement plan, and so forth; the passing of the property cannot be conditioned on the spouse surviving the deceased by more than six months. A major exception to the marital deduction is where a qualified terminal interest of property (Q-TIP) election is applicable. See Marital Deduction and Qualified Terminal Interest Property Trust (QTIP).

Assets transferred to a trust or the proceeds of a life insurance policy or annuity where the surviving spouse only receives an interest for life cannot be deducted unless the surviving spouse receives all income annually or more often, and both receives and exercises an exclusive "general power of appointment". A power of appointment allows a person to designate the transferee of the of property (for example, a decedent or creditors of a decedent or the decedent's estate).

>>> Tip: Although Louisiana law generally does not authorize powers of appointment as such, when a power of appointment is desirable, equivalents are available which can achieve the same results, for example, a trust, granting special powers to the trustees.

Where the Q-TIP election is made, assets can qualify for the marital deduction even if the assets do not pass outright to the surviving spouse, provided the executor/executrix elects that the assets qualify for the marital deduction.

>>> Tip: If the value of the assets is deducted, it will later be subject to taxation in the estate of the surviving spouse. However, if the Q-Tip election is not made, the assets do not qualify for the marital deduction from the estate of the first spouse to die and will be subject to estate taxation, but will not be subject to estate taxation in the estate of the surviving spouse when that spouse dies.

These deductions result in the net taxable estate. However, certain gifts that are not includable in the gross estate must be added to the net taxable estate. The amount of such gifts is their value as of the date of death minus gift tax exclusions, and both charitable and marital deductions. The federal estate tax is reduced by the amount of gift taxes paid on the gifts which have been added to the net taxable estate.

Credits may be taken for: (1) the $220,550 unified credit (increasing in steps to $326,300 in 2005); (2) inheritance and estate taxes paid to any state or foreign country on assets included on the federal estate tax return; and (3) the federal estate tax paid on assets that were previously taxed (for example, taxed on the estate of the first spouse to die) within ten years. Larger estates are subject to a phase out of the unified credit and the lower estate tax rates are subject to a 5% surtax.

Lifetime transfers may be included in the gross estate if the decedent retained control of the property transferred, even if the retained control was relinquished, but the relinquishment took place within three years of death.

Gifts are not included in the gross estate except that gifts made within three years of death are treated as part of the gross estate to calculate whether any of three special estate tax elections are available to the estate; these elections (under Sections 303, 2032A and 6166 of the Internal Revenue Code) help those whose estate include a large interest in a closely held business or farm, and the effect of the three exceptions is to prevent an individual from qualifying for the elections by making gifts within three years of death. Section 303 covers stock redemptions to pay so-called death taxes and administrative costs; Section 2032A cover the valuation of farms and closely held businesses; and Section 6166 provides for an extension of time to pay estate taxes where the estate includes a large interest in a closely held business.

Also, other transactions must be included in the gross estate if they take place within three years of death: (1) gift taxes paid, (2) life insurance policy proceeds from a policy given by the decedent, (3) when property rights are relinquished with respect to transfers with a retained life estate, (4) when property rights are relinquished with respect to general transfers taking effect at death, (5) when property rights are relinquished with respect to recoverable transfers, and (6) when property rights are relinquished with respect to general powers of appointment. A power of appointment allows a person to designate the transferee of property (for example, a decedent or a decedent's estate or creditors of the decedent or the decedent's estate. Transactions (3) through (6) are covered by Sections 2036, 2037, 2038, and 2041, respectively, of the Internal Revenue Code.

Of course, transfers made with respect to (3), (4), and (5) without the relinquishment of property rights (that is, transfers with "retained control" of the transferred property) are included in the gross estate.

Guaranteed Purchase Option

Provides a life insurance policy owner with the right to purchase additional amounts of permanent insurance at stated intervals or upon stated events without evidence of insurability.

Health and Disability Needs

See Accelerated Death Benefits, Critical Illness Insurance, Disability Buy-Out Insurance, Disability Income Insurance, Health Maintenance Organization (HMO), Managed Care, Medical Savings Accounts (MSA), Medical Supplement Insurance, Medicare and Medicaid, Medigap Insurance, Point of Service, Preferred Provider Organizations (PPO), and Qualified Long Term Care Insurance.

Health Maintenance Organization (HMO)

A managed care health plan that provides coverages of health-care costs and delivery of health care for a premium. Patients receive services from health care professionals employed by or under contract to the HMO. See Managed Care, Point-of-Service (POS), and Preferred Provider Organization (PPO).

Heir

Someone who receives a part of the estate of a deceased person who has not left a valid will (that is, intestate). See Legatee which is one who receives property by a will.

HIPAA (Health Insurance Portability and Accountability Act)

Provides health coverage for individuals with pre-existing medical conditions or factors.

Home Equity Loan

Interest on a loan (other than acquisition indebtedness, that is, a loan incurred in acquiring, constructing, or improving a qualified residence) that is secured by a qualified residence is deductible for federal income tax purposes even if the proceeds of the loan are used for personal expenses, provided that the loan is less than the fair market value of the residence less the acquisition indebtedness.

See Real Estate Investments references.

Immovable Property

Immovable property means in Louisiana real estate such as land and permanently attached buildings, and so forth. See Real Estate Investments references.

>>> Tip: Condominiums and leasehold investments in immovables are immovable property or real estate.

>>> Tip: Oil, gas, and mineral rights are not considered real estate in Louisiana.

See Real Estate Investments references.

Income In Respect Of A Decedent (IRD)

Amounts to which a decedent was entitled as gross income but which were not includable in the decedent's taxable income for the year of death. Examples are distributions for the decedent's IRA, interest, dividends, and compensation unpaid but owed to the decedent at the time of death, unpaid partnership income, and deferred compensation payments to a surviving spouse. The recipient beneficiary or estate receiving IRD will pay tax on such income just as the decedent would have (that is, as ordinary income or as capital gains). No stepped-up basis is available for computing gain or loss.

See IRA and Retirement Plans and Benefits.

Income Shifting Among Family Members

Shifting income among family members to reduce taxes; some examples are bargain sales, partnerships, limited liability companies, S corporations, leases, employment of family members to perform business services, and certain trusts and irrevocable life insurance trusts. See also Kiddie Tax for certain age limitations, Family Leases to Shift Income, Family Limited Partnerships, Family Members As Employees To Shift Income and Intrafamily Leases to Shift Income.

Inheritance Tax (Louisiana)

A tax on all inheritances, legacies, and on donations and gifts made in contemplation of death except where specifically exempted. A surviving spouse's one-half of community property is not subject to the tax and the usufruct of the surviving spouse is generally not subject to the tax. The surviving spouse is eligible for an exemption from the tax equal to the value of the inheritance, legacy, and any donation or gift in contemplation of death.

Donations and Gifts (and transfers of property for inadequate consideration) within one year prior to death are presumed to have been made in contemplation of death unless this presumption is overcome by sufficient evidence. Donations and transfers prior to one year of death may also be inquired into and subject to the tax if shown to have been made in contemplation of death and in avoidance of taxes.

>>> Tip: The transfer of property intended to be effective at the death of the transferor such as a revocable trust (see Living Trust) that becomes irrevocable at the settlor's death causes the inheritance tax to apply to the value of Louisiana immovable property and the movable property of a settlor domiciled in Louisiana. The interest of a non-resident beneficiary of a trust owning Louisiana immovable property is subject to the inheritance tax.

All Louisiana immovable property and all tangible movable property physically in Louisiana and all tangible or intangible movable property owned by residents of Louisiana wherever situated are subject to the tax; however, the tax is not imposed upon the transfer of intangible movable property owned by a person not domiciled in Louisiana at the time of death. Louisiana immovable property and the movable property of a settlor domiciled in Louisiana which has been donated to a revocable trust (a living trust) is subject to the tax.

>>> Tip: Proceeds received by any beneficiary other than the estate of the decedent under any life insurance policy and certain qualified retirement or pension plans, trust system, annuity, or policy are not subject to the tax.

>>> Tip: Proceeds of a life insurance policy could in effect be received by the estate of the decedent if the named beneficiary predeceases the insured; therefore, it is wise to review designated life insurance beneficiaries often.

>>> Tip: "Either or" bank accounts in alternate names are subject to the tax unless there is evidence of a donation or transfer for valid consideration. However, U.S. Treasury securities so held are not.

Deductions include unpaid debts of the decedent as of the date of death, funeral expenses and administrative fees, one-half of community debts and all separate debts are deductible.

Taxable property is valued at its fair market value at date of death. However, an alternative valuation date of up to six months may be elected.

When Louisiana real estate is mortgaged in excess of 50% of its value, then the value less the mortgage balance may be discounted by an amount equal to 20% of the mortgage balance.

Exemptions from the inheritance tax and the rate of tax depend on the relationship of the heirs or legatees. Direct descendants including those by affinity (that is, the relationship between the decedent and the relatives of the decedent's spouse) and ascendants are each eligible for a $25,000 exemption. Collateral relatives including those by affinity and non-related persons are eligible for smaller exemptions.

>>> Tip: The rates vary from 2% to 10%, minus certain reductions which will result in the phasing out of the Louisiana inheritance tax by June 30, 2004, provided a succession proceeding has been opened within 9 months of death.

There is also an estate transfer tax on estates subject to the Federal Estate Tax; this is not scheduled to be phased out. If the Federal Estate Tax credit for state death taxes exceeds the Louisiana inheritance taxes due, then the difference between the federal credit and the Louisiana inheritance tax must be paid to Louisiana as an estate transfer tax.

The Louisiana gross estate is divided by the federal gross estate and the resulting ratio is multiplied by the total federal estate tax credit for state death taxes.

Installment Sale

A sale where the gain on the sale of property and the income tax on that gain can be spread over a period of time.

>>> Tip: Income tax is only due for each year in which the seller receives installment sale income. There must be at least one payment in the year following the year of the sale. The installment sale benefits do not apply where there is certain depreciation recapture, ‚ the property is publicly traded securities, and ƒ the property was sold in the ordinary course of business unless the property is unimproved residential lots, time-share units, or farm property. See Self-Canceling Installment Note (SCIN).

See Real Estate Investments references.

Interdiction

A court decree by which a person is declared to be incapable of managing his or her affairs or administering his or her property. A curator may be appointed to do so.

Intrafamily Leases to Shift Income

>>> Tip: When a family business is confronted with the need to buy or lease business property or equipment, income can be shifted for example by having your child in a lower tax bracket buy such assets and lease them to the family business. The lease payments would then be deducted by the business and taxed to the child. See Income Shifting Among Family Members, Kiddie Tax, and Real Estate Investments references.

Interest Deduction

All mortgage interest is generally deductible in full. Trade or business interest is generally deductible as a business expense, investment interest is generally deductible only to the extent of investment income but personal interest is not deductible except for certain student loan interest. See Business Deductions. Personal interest includes personal loans and interest on personal life insurance policy loans used to pay premiums on the policy.

>>> Tip: Since the interest on such life insurance loans is not deductible, an alternative may be to borrow with a home equity loan mortgage and pay off the life insurance loan.

Interest-Free Loans

An employee benefit in the form of an interest-free loan in the maximum amount of $10,000 and for certain corporation-shareholder loans in the amount.

A similar $10,000 maximum loan applies to "gift loans" (interest-free or below market interest) between individuals where the loan is not for the purchase of income-producing assets.

>>> Tip: Unless an interest-free or low interest loan falls under an exception such as for example those outlined above, the IRS may recharacterize the loan and impute interest income to the lender but the individual borrower would not be allowed a deduction for personal interest.

IRA (Individual Retirement Account or Annuity, or Traditional IRA or Regular IRA)

A contributor may deduct $2000 contributions each year if the contributor's individual earned income or alimony reaches that amount and the contributor has not reached age 70½. An additional contribution for a non-working spouse may also be deducted. Limitations on the deductibility of the contribution apply if the taxpayer is an active participant in a qualified pension plan. See Retirement Plans and Benefits. The deduction is reduced when the taxpayer's modified adjusted gross income (AGI) exceeds certain amounts. For example, with a joint return, the amount is currently between $52,000 and $62,000 when both husband and wife are active participants, and between $150,000 and $160,000 for a spouse who is not an active participant. However, non-deductible contributions may be made in this case and in the case where at least one spouse is an active participant in a qualified pension plan, but the growth is tax-deferred and distributions of principal are tax-free.

The AGI limits for single individuals and heads of household is being increased in phases. Currently, the range is $32,000 to $42,000, increasing to a range of $50,000 to $60,000 by 2005.

Accumulated funds are not taxable until they are actively distributed on or after age 59½. Distributions before that age are subject to a 10% penalty unless the distributions were made because of disability, for medical expenses totaling more than 7.5% of adjusted gross income, to pay for a first residence, to pay for certain college expenses, to pay for health insurance premiums while receiving unemployment compensation, after death, or where the distributions were made at least annually in substantially equal payments for the life or joint life expectancies of the taxpayer and a designated beneficiary.

Usually, distributions must begin at retirement but not later than April 1^st following the calendar year that the taxpayer reaches age 70½.

IRAs may be used to "roll over" distributions from qualified pension plans to avoid current taxation.

See Education IRA, Roth IRA, and Income In Respect of a Decedent, Estate Tax (Federal), and Generation-Skipping Transfer Tax.

Key Person Insurance

Life insurance that funds a business to protect it from the loss of the talent and skills of a deceased key employee and the resulting profit reduction. See Disability Buy-Out Insurance. The employer is the owner of the policy, pays the premium, and is the beneficiary. Although the premium is not a deductible business expense, the death benefits are not taxable income.

>>> Tip: Since the death benefit increases the value of the business, it increases the estate tax on the employee's ownership of the business (if the employee is an owner). Worse yet, if the employee owns 50% more of the business and names a third party as beneficiary, the entire death benefit is included in the employee's estate because of the employer's incidents of ownership in the policy.

Kiddie Tax

Investment income (from any source) of a child under age 14 is taxed at the highest marginal rate of the child's parent except for relatively small amounts of such unearned income ($1,400 in 2000).

>>> Tip: Shifting income to your child is best done after the child reaches age 14.

See Income Shifting Among Family Members.

Legatee

One who receives property by a will. See heir which is someone who inherits property of a deceased person who has not left a valid will.

Leveraged Benefits

Employment fringe benefits that are either not ever taxable or are not currently taxable to the employee, but are currently deductible by the employer. Leveraged benefits may include employer paid life and disability insurance premiums, medical expense reimbursements, increased vehicle mileage allowances, and physical exams.

Life Insurance Benefits Taxation

Any benefits that the policy owner elects to receive during the owner's lifetime are subject to income taxation as ordinary income (that is, not capital gains) on the difference between the premium and the amount received. However, certain policy dividends and premiums for accidental death benefits or for the waiver of premium because of disability are excluded from the cost (that is, the gross premiums).

Benefits that the owner receives other than in a lump sum are subject to annuity tax rules.

Death benefits received by a beneficiary are not subject to income tax, however, benefits that the beneficiary receives other than in a lump sum are subject to income taxation of the interest portion. See Life Insurance (Transfer for Value). See Estate Taxation of Life Insurance, Gross Estate (Under Federal Estate Tax) and Inheritance Tax.

>>> Tip: A gift tax can be due unexpectedly where the owner, the insured, and the beneficiary are three different persons (for example, a wife, a husband, and their child, respectively); the death benefits are not included in the husband's gross estate, but the wife is deemed to have gifted the benefits to the child. She will have to pay the gift tax with assets other than the death benefits to the child because a transfer from the child to the mother to pay the gift tax is a taxable gift itself. See Gift Tax Exclusion and Gifts.

Life Insurance (Group)

Term life insurance provided to employees by an employer. The premium is a deductible business expense that is not taxable income to an employee provided the death benefit is $50,000 or less. The part of the cost attributable to death benefits in excess of $50,000 is taxable income to the employee.

Life Insurance (Term)

Provides only income tax free death benefits for a specific term and no cash value. Premiums increase with the insured's age. Such insurance owned by the decedent on the life of another will not result in any significant value being included in the gross estate. See Estate Liquidity Life Insurance.

Life Insurance (Transfer for Value)

If a policy is transferred (for example, sold) or if a beneficiary is named in exchange for valuable consideration (that is, not as a true gift) under certain circumstances, some of the death benefits may be taxable to the buyer or beneficiary as ordinary income. However, if a policy is transferred by the owner to the insured, to a partner of the insured, to a partnership which has the insured as a partner, or to a corporation which has the insured as a shareholder or an officer, thenthe policy is not subject to the transfer for value tax rules.

>>> Tip: Unfortunately, the transfer of an existing policy from one shareholder of a corporation to another (for example to fund a cross-purchase agreement between shareholders where a surviving shareholder buys the stock of a deceased shareholder with the death benefits of the transferred policy), is subject to taxation by the purchaser upon the purchaser's receipt of death benefits.

>>> Tip: Similarly, where a corporation transfers a policy to a shareholder (for example, where a corporate redemption agreement is replaced by a shareholder's cross-purchase agreement) the transfer is subject to taxation. See Estate Taxation of Life Insurance.

Life Insurance Trust (Irrevocable or Revocable)

An irrevocable trust is one that owns life insurance policies so that the proceeds payable at death will not be included in the insured's taxable estate, but the insured does not want to give the policy to the beneficiary outright. See Gross Estate and Trust.

>>> Tip: The best way to avoid estate tax problems is to have a third party (such as for example a trust or an adult child) apply for, own, and make premium payments on the policy. See Estate Taxation of Life Insurance. If an existing policy is given to the trust, the insured must survive the date of the gift by three years to avoid estate taxation.

>>> Tip: A revocable trust may be useful for example when estate taxes are not a consideration and the insured does not want to give the policy to the beneficiaries outright or does not want to have the insurance proceeds payable directly to the beneficiaries until they are older.

Life Insurance (Universal Life)

Provides term life income tax-free death benefits with a cash value that accumulates interest income tax-free. It usually provides higher interest rates than whole life. The policy owner can determine how much of the premium is allocated to death benefits and how much to cash value, and the premium payments can be varied each year.

Life Insurance (Variable Life)

Provides a varying but guaranteed minimum income tax-free death benefit and an unguaranteed cash value which varies with the performance of the investment in which the premiums are invested; the investments can frequently be directed by the policy owner. The premium is typically fixed. The investment opportunity is greater than universal or whole life insurance.

Life Insurance (Whole Life) (Permanent Life)

Provides income tax-free death benefits and an income tax-free accumulation of cash value, unless the owner elects to receive cash benefits during his lifetime, by borrowing or withdrawing, for example at retirement.

>>> Tip: You may borrow the cash value with interest. Unpaid interest is added to the loan, but the policy will be terminated if the loan with accrued interest exceeds the cash value of the policy. The cash value is then used to pay the loan. However, you can be taxed on the difference between the cost of the policy and any cash value in excess of the cost, even if the cash value is used to pay the loan.

Limited Liability Company (LLC)

A legal entity which affords its owners (called members) the limited liability of corporation stockholders together with the tax and management advantages of partnerships without the restrictions of S corporations. See Family Limited Partnership and S Corporation. Provides a method for the economic benefits of a business interest and other assets to be transferred to family members at reduced values while parents as managers retain control which reduces the parents' taxable estate.

>>> Tip: Members have no liability for LLC debts.

>>> Tip: Gifts can be made to the LLC of assets such as an apartment building which is not otherwise easily divisible.

>>> Tip: Gifts of membership interests to children can be made within the annual gift tax exclusion. Unified credit can be used to transfer larger membership interests thereby reducing the parents' taxable estate. See Unified Tax Transfer and Credit.

>>> Tip: Membership interests can be subject to valuation discounts insofar as they represent minority interests or lack marketability. Gifts do not receive a stepped-up income tax basis.

>>> Tip: As an alternative, the parents could make gifts of an asset to children who will then contribute the asset to the LLC in exchange for membership interests.

See Appropriate Ownership of Property and Business Interests and see Gift Tax Exclusion and Gifts.

Living Trust (Probate Avoidance Trust)

A trust created during your lifetime sometimes recommended to protect your assets and for other reasons, including avoiding probate. A revocable living trust may usually be amended or revoked at any time prior to death.

>>> Tip: A revocable living trust does not necessarily avoid probate or reduce taxes.

>>> Tip: Assets in a revocable living trust are part of the transferor's gross estate and the income is taxable to the settlor (creator) during the settlor's lifetime. Louisiana immovable property and the movable property of a settlor (creator) domiciled in Louisiana which has been donated to a revocable living trust are subject to the Louisiana Inheritance Tax.

>>> Tip: A revocable living trust can become irrevocable at the death of the settlor (creator) or can be terminated at the settlor's death.

>>> Tip: Disadvantages include the possibility of losing the homestead exemption on a family home transferred to a trust, Louisiana inheritance taxes and federal estate and gift taxes may be due on transfers, the costs of establishing and maintaining such trusts may offset the cost savings of avoiding probate; a Durable power of attorney may be easier and cheaper because with a power of attorney there are typically no annual or periodic accounting fees, investment adviser fees, legal fees, and so forth.

>>> Tip: A settlor's (creator's) interest in a revocable living trust or irrevocable can be considered resources for Medicaid qualification purposes.

>>> Tip: A custodian trust under the Louisiana Uniform Custodial Trust Act is often less complicated and more flexible than a full revocable; it will terminate on or before the death of the beneficiary.

>>> Tip: See Life Insurance Trust (Irrevocable or Revocable).

See What Is A Living Trust?

Living Will (Declaration)

Is your declaration that if you should have a terminal and irrevocable condition, you do not want to have your life futilely and unnecessarily prolonged by artificial means such as a respirator. It sets out your wishes about what life-prolonging treatments should be provided or withheld if you become unable to communicate these wishes for yourself. See Durable Power of Attorney and Power of Attorney. It is not a will.

>>> Tip: A living will may be in conflict with tax consequences of death within three years of certain actions such as relinquishing control of property transferred or the transfer of property. See Federal Estate Taxation of Life Insurance and Gross Estate.

>>> Tip: The statutory form of living will is arguably very fundamental for knowledgeable clients and does not incorporate the full statutory definitions of certain terms used, but it may be supplemented with other medical decisions such as, for example, those found on certain medical questionnaires. Also the statutory form does not point out that the witnesses may not be related to the declarant by blood or marriage and may not be entitled to any portion of the estate of the person from whom life-sustaining procedures are to be withheld or withdrawn.

See What is a Living Will?

Long-Term Care Insurance

Provide services such as nursing home care, assisted living, home health care, adult day care and similar services necessitated by illness, accident or age. Medicare only pays for 20 days of skilled nursing care, daily amounts over $95.50 for the next 80 days and all costs; thereafter, Medicaid pays for custodial care only after the patient depletes many assets to qualify. See Accelerated Death Benefits, Critical Illness Insurance, Life Insurance, Medicare and Medicaid, Medigap Insurance, Reverse Mortgage, and Viatical Settlements.