Definitions

Charitable Remainder Trust: 

A charitable remainder trust, in general terms, is a trust created for the initial benefit of either the person creating the trust, or another person or persons, and for the subsequent benefit of one or more charities. The idea is to give away property to a charitable trust, retain an interest in the trust which is in the form of annuity or unitrust payments, and then allow the trust property to pass to charity upon termination of the trust. Even though the charity will not be receiving any property for many months or years, an income tax deduction is available presently, and the trust properties will be excluded from Federal estate taxes.


Family Limited Partnership:

A limited partnership created by and among members of a family (FLP) can be a useful estate planning tool. A FLP is a way to centralize the management of investments, thereby allowing one or several family members to manage a variety of investments for other family members. Importantly, as well, the interests held by the limited partners in the partnership are generally worth less than the underlying value of the partnership assets due to factors such as the ownership of a minority interest, lack of control, transfer restrictions, and the inability to demand distributions.


Gifts to 529 Accounts:

College savings accounts known as 529 accounts (after Section 529 of the Internal Revenue Code) can be an excellent way to remove property from one's estate and to save for a child's college education. The main advantage is that the earnings and most withdrawals are income tax free. Importantly as well, gifts to a 529 account not only qualify for the $13,000 annual gift tax exclusion, but five years worth of gifts can be made now and be treated as being made equally over a five year period. That means a married couple can presently give $130,000 to each beneficiary. The investments in the 529 account are not subject to Federal estate taxes either (unless death occurs within the five year period in which case part of the gift will be subject to taxes).


Gifts to one or more Irrevocable Investment Trusts:

A married couple can give as much as $26,000 each year to each of their descendants or other beneficiaries. These gifts do not need to be made outright, but instead can be placed in an irrevocable trust controlled by the parents. The control can last until the parents die, not just until the beneficiary reaches a specified age. These trusts can accumulate investments over time and thereby avoid considerable taxes.


Grantor Retained Annuity Trust:

A GRAT is a trust where the person creating the trust retains the right to receive a fixed annuity payment. The fixed amount may be a stated dollar amount or a fixed fraction or percentage of the initial fair market value of the property transferred to the trust, payable at least annually. The fair market value of the retained annuity interest is subtracted from the fair market value of the gift in determining the value of the transfer. Typically, a GRAT is used to transfer an appreciating asset that has considerable value. By retaining an annuity with a fair market value equal to the value of the asset transferred to the trust, either no or a relatively small gift is made, and all appreciation on the asset which accrues during the term of the trust will be passed to the next generation without imposition of gift taxes.


Grantor Retained Unitrust:

A GRUT is a trust where the person creating the trust retains the right to receive a fixed fraction or a percentage of the net fair market value of the trust property, determined annually. The fair market value of the retained annuity interest retained by the person creating the trust is subtracted from the fair market value of the gift in determining the value of the transfer. Typically, a GRUT is used to transfer an appreciating asset that has considerable value. By retaining a series of payments with a fair market value equal to the value of the asset transferred to the trust, either no or a relatively small gift is made, and all appreciation on the asset which accrues during the term of the trust will be passed to the next generation without imposition of gift taxes.


Life Insurance Trust to Own Insurance on Your Lives:

Although the proceeds of a life insurance policy generally pass income tax free to the named beneficiary, those same proceeds are typically included in the insured's estate and are subject to Federal estate taxes. By giving away the ownership of the life insurance on each of your lives to an irrevocable trust, or possibly to two irrevocable trusts, the proceeds can be excluded from such taxes. Other important benefits are available as well.


Lifetime Trusts Created by Parent(s) at Their Death:

Rather than inheriting property from one's parents directly, a more preferred method might be to inherit that property in a trust designed to last for one's lifetime. If properly structured, the trust property will pass to the next generation of beneficiaries without being subject to Federal estate taxes upon the initial beneficiary's death. A lifetime trust can avoid the stacking of inherited assets onto a person's already taxable estate, thereby avoiding unnecessary taxes. Lifetime trusts have the added advantage of being insulated from the claims of creditors and spouses in the event of divorce.  


Lifetime Trusts Created by Parents Now:

A trust created by one's parents and seeded with just a few thousand dollars can be an ideal entity to own future investments. Rather than continuing to make investments that are owned personally, the opportunity to own certain investments can be shifted to a generation-skipping, creditor-protected, and divorce-proof trust. The trust can be loaned money to make investments, and over time, considerable amounts of wealth can be shifted to the trust. Upon the beneficiary's death, the trust property will pass to the next generation tax free.


Lifetime Trusts:

Rather than giving your beneficiaries their inheritance outright, you can instead place the inherited property in individual, lifetime trusts for their benefit. Lifetime trusts, also commonly referred to as generation-skipping trusts, are trusts which last for the lifetime of the beneficiary and then pass to the next generation of beneficiaries without being subject to Federal estate taxes upon the death of that beneficiary. These trusts have the added advantages of being insulated from the claims of creditors and spouses in the event of divorce. If desired, the beneficiary of a lifetime trust can be allowed to serve as the sole trustee of the trust after attaining a specified age.


Making of Annual Exclusion Gifts:

Each year, any person can give to any other person as much as $13,000 in cash or other property without any gift tax consequences. A married couple, therefore, can give $26,000 each year to any one person. Over time, a considerable amount of property can be given away, none of which will be subject to Federal estate taxes upon death.


Making of Charitable:

Gifts to charity during lifetime generally qualify for an income tax deduction, and the property given away will not be subject to Federal estate taxes. Similarly, gifts to charity made at death qualify for the Federal estate tax charitable deduction. Therefore, considerable Federal estate taxes can be saved by making gifts to charity either during lifetime or at death, or both.


Payment of Tuition Expenses or Medical Bills:

In addition to the $13,000 annual exclusion, payments can be made to the provider of education (such as a private school, college, or university) or for medical expenses (such as doctors' bills, medical insurance premiums, and prescription drugs) and none of the payments will be treated as taxable gifts. Importantly, though, the payments must be made directly to the provider, and if the payment is made to the student or recipient of the medical care, even as a reimbursement for payments already made, then the payment will be treated as a gift. The tuition and medical expense exclusions provide an opportunity for considerable amounts of wealth to be shifted to one's descendants or other beneficiaries without any transfer tax consequences.


Qualified Personal Residence Trust:

A qualified personal residence trust (QPRT) is a trust created to own an interest in a home. The QPRT benefits the person who creates it for a specified number of years and then terminates and passes to children (or other beneficiaries) or to trusts for their benefit. A QPRT is one of the last very favorable techniques available to allow wealthy individuals to transfer huge amounts of property to the next generation without generating Federal gift and estate taxes.


Revocable Trust: 

Revocable Trusts can be beneficial because the assets that are owned by the trust at death pass to the beneficiaries named in the Revocable Trust (or to trusts for their benefit) without the need for probate. Revocable Trusts are also more private and allow a successor trustee to step in and manage the trust should incapacity become an issue. Often, Revocable Trusts can save time, court costs, and attorneys' fees, and they have other benefits as well. In addition, a Revocable Trust (as opposed to a Will) makes it harder for a person to win a lawsuit challenging the validity of the trust instrument. 


Second to Die Life Insurance Trust: 

Because Federal estate taxes for most married couples are due nine months following the death of the last to die of the spouses, a common strategy to pay the taxes is to purchase second to die life insurance. This type of insurance insures the lives of both spouses and does not pay out benefits until both spouses have died. Because two people live longer than one, the premiums are lower for a given amount of life insurance. Second to die life insurance is an option to be considered, and if it appears to be a worthwhile planning option, the optimal ownership arrangement for the policy is in an irrevocable life insurance trust. 


Supplemental Needs Trust:

In order for a disabled individual to qualify for Medicaid or other governmental benefits, that individual needs to have extremely limited resources. If money or property is left directly to any such individual, it may be impossible to qualify for benefits until the inheritance is spent. A Supplemental Needs Trust is a way to leave property to a disabled individual while still allowing him or her to qualify for government benefits.


Tax-Planned Wills or Revocable Trust: 

Under Federal law, spouses have the opportunity to create a trust, commonly referred to as a "bypass" trust, upon the first spouse's death, and thereby save considerable Federal estate taxes upon the surviving spouse's death. Such a trust can save as much as 35% of the value of the assets in the trust under current law. When a married couple's estate is large enough, a marital trust can be created as well. Both the bypass trust and the marital trust can be created within a revocable trust agreement or within each spouse's Will. The property of these trusts cannot be distributed to new spouses, new children, or to creditors, but are instead earmarked for the children or other beneficiaries of the spouse who died first.







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