Final answer:
Actions I and III can reduce a client's gross estate by moving assets outside of their control. A GRAT (once its term is exceeded, assuming survival of the client) and an irrevocable trust where the client has no control are effective methods; whereas a revocable trust and an irrevocable trust with retained client control do not reduce the gross estate.
Step-by-step explanation:
To reduce a client's potential gross estate for premortem liquidity planning, certain actions can be taken to transfer assets out of the client's estate. The following actions may reduce the client's gross estate:
- I. Placing assets in a grantor-retained annuity trust (GRAT) with a 10-year term that names the client's child as remainderman can reduce the gross estate as the assets in the GRAT are removed from the estate after the term, provided the client survives the term.
- II. Placing assets in a revocable living trust that disperses its assets to the client's child at the client's death will not reduce the gross estate because the trust is revocable, and thus the assets remain within the client's control and estate.
- III. Placing assets in an irrevocable trust in which the client is neither a beneficiary nor trustee effectively removes those assets from the client's gross estate because the client relinquishes control and beneficial interest in the trust assets.
- IV. Placing assets in an irrevocable trust in which the client as sole trustee has discretion to distribute income does not reduce the gross estate because the client retains significant control over the trust assets.
Of these options, both I and III are correct ways to reduce the client's potential gross estate for estate planning purposes.