The client has already established an irrevocable life insurance trust and made all her allowable annual exclusion gifts of $11,000 per person to all of her children and grandchildren.

The attorney’s question was simple: "How can I minimize the estate and gift taxes to be paid by my client?"

He had obviously put a lot of thought into the situation before he asked for advice. All he could come up with were two possible options, which he wanted to discuss. One was whether he could have his client prepay the tuition for her grandchildren and the other was whether it would be helpful for him to establish a family limited partnership (FLP) for her and attempt to claim a modest discount on her partnership interest. He also wanted to know if there were any special rules on how the FLP should be structured if his client decided to proceed in that fashion.

As you can imagine, these are not new questions. Many clients put off doing any significant estate or tax planning until the grim reaper is knocking at the door. By then, any options to save tax, avoid probate, or reduce administration costs may be limited.

The facts of this case suggested several alternatives. First, even though the doctors are telling the client she may not make it through the year, it doesn’t hurt to plan as if she will be with us for some time to come. Often a Power greater than modern medicine intervenes and overcomes medical prognoses. An option that cannot hurt the client and could very well help her would be to fund 529 Plans for each of her grandchildren. The client won’t incur any risk since if she dies, the value of these gifts is just added back into her estate. But each year she lives will remove $11,000 per grandchild from her taxable estate. The money will be available to her grandchildren to be used by them for their room and board.

Next, she could pay the university tuition for each of her grandchildren directly to their universities. These payments are not treated as gifts, so they reduce her taxable estate dollar for dollar.

Another option is to pay (or even pre-pay) her children’s and grandchildren’s medical expenses, including insurance premiums, directly to the medical providers and insurance companies. Again, these payments are not treated as gifts, so they reduce the size of her taxable estate.

Instead of an FLP, I usually recommend that a client establish a limited liability company (LLC) with voting and non-voting units. This is a matter of personal preference, but I’ve found most professionals in Oklahoma find the LLC somewhat easier to establish and administer than an FLP.

If she creates an LLC, the client could contribute her $2.3 million in marketable securities to it and her children could each contribute cash on a pro-rata basis and receive appropriate voting units in the LLC. For example, let’s assume the client has two children and wants the LLC to be funded with a total of $1 million. Each of her children could contribute $10,000 and receive one voting unit in the LLC. The client would contribute $980,000 worth of marketable securities and receive one voting unit and 97 non-voting units in the LLC. The purpose of the LLC would be to centrally manage the assets in an investment pool.

If the LLC Operating Agreement contains the right language, her interest in the LLC should be valued at far less than the $980,000 face value of the securities because of available discounts.

The IRS usually objects to the granting of discounts, so be sure to work with an attorney who is knowledgeable of the LLC and tax rules and be prepared to fight with the IRS for these discounts. If everything is done correctly, your chances of success are quite good.

In this case, the client has $2.3 million, not just $980,000, in securities to invest in the LLC, so the children’s contributions will probably need to be larger, but the total amount of discounts will be substantially greater, as well

Many states collect an estate tax in addition to the federal estate tax. Since this client owns a condominium in Florida, it might be worthwhile for her to relocate there and make her domicile to Florida since it doesn’t collect either an estate or an inheritance tax.

While this client still has some options available to her, much more could have been done for her had she begun planning her estate while she was younger and still in good health.

Waiting until the last minute to plan your estate limits your choices and increases the likelihood that your estate will not be handled expeditiously or cost-effectively.