Presentation on theme: "HOW TO ADVISE YOUR CLIENTS UNDER THE NEW ESTATE TAX LAW A Presentation by: Alan S. Gassman, J.D., LL.M. Monday, February 7, 2011."— Presentation transcript:
HOW TO ADVISE YOUR CLIENTS UNDER THE NEW ESTATE TAX LAW A Presentation by: Alan S. Gassman, J.D., LL.M. Monday, February 7, 2011 Powerpoint presentation and other materials prepared by: Alan S. Gassman, J.D., LL.M., Jerome M. Hesch, J.D., MBA, Kenneth J. Crotty, J.D., LL.M. and Christopher J. Denicolo, J.D., LL.M.
and thereafter Annual Exclusion Gifts (Dont Count at All) $13,000 $13,000 (unless adjusted to $14,000) Tuition and Medical Direct Payment Exemption Unlimited Like Before Unlimited Like Before Unlimited Like Before Unlimited Like Before Lifetime Exemption$1,000,000 $5,000,000 (+ CPI in 2012) $1,000,000 Estate Tax Exemption$3,500,000 (less what is used of $1,000,000 exemption above) Unlimitedsee footnote* $5,000,000** (less portion of used lifetime gifting exemption) $1,000,000 (less portion of used gifting exemption?) Estate Tax Rate45%35%*35%55% Discounts and Installment Sales/GRATs, etc. Available Available initially (at least, not sure about rest of ) ???? Portability of First Dying Spouses $5,000,000 Exemptions No YesNot as presently legislated. 2 *Although the default is a $5,000,000 exemption, with a 35% tax rate, an election can be made to have no estate tax apply with respect to decedents dying in 2010, but the income tax stepped-up basis is limited for larger estates. **In addition to the above, the amount that passes estate tax free ($10,000,000 per couple) will increase with the cost of living beginning in 2012 in $10,000 increments.
Applies January 1, 2010 to December 31, Allows up to $5 million per person to pass estate tax free. Lifetime gifting exemption raised to $5 million for 2011 and The above items are to be adjusted for inflation beginning in 2012! Estate tax scheduled to go back to 2001 $1 million gifting and death exemptions and rates on January 1, 2013! Estate tax rates cut to 35%. Retroactivity for 2010 estates, with the option to elect out of the estate tax and instead be under the limited carryover basis regime. Portability of the $5,000,000 Estate Tax Exemption on the first dying spouse, if such spouse dies in 2011 or Elimination of carryover basis regime (unless an election is made to have no estate tax and for the carryover basis regime apply with respect to a 2010 estate). The State Death Tax Deduction continues to apply to estates of decedents dying in 2010, 2011 or 2012, instead of the State Death Tax Credit. Taxation of nonresident non-citizens (NRNCs) and Qualified Domestic Trusts (QDOTS) is unchanged – only a $60,000 exemption for NRNCs, and QDOTs are still subject to estate tax as if the assets thereof were included in the estate of the first dying spouse with allowance for all applicable credits of the first dying spouse (unless the surviving spouse becomes a U.S. citizen before his or her subsequent death). 3
4 According to Forbes Magazine, the number of Americans and their net worth as of January 2009 was as follows: $1 Billion 357 $5 Million 840,000 $1 Million6,700,000 $500,00011,300,000 This doesnt take into account the value of principal residences, life insurance, or increases of approximately 26% in 2009 and approximately 13% in 2010 in the S&P 500.
PROTECTIVE TRUST LOGISTICAL CHART First Dying Spouses Revocable Trust Surviving Spouses Revocable Trust $5,000,000* (Adjusted upward for inflation after 1/1/2011) Remaining Assets Family (By-Pass) Generation Skipping Trust (Not taxed in surviving spouses estate) QTIP Non- GST Trust (Marital Deduction Trust that is not generation skipping) Generation Skipping Trusts for Children Childrens Trust (or distributions) Surviving spouse can have the right to redirect how assets as distributed on second death. Benefits children and grandchildren. Not estate taxable in their estates. Benefits children. Taxable in their estates. Surviving Spouses Revocable Trust (Will include assets owned jointly on first death) $5,000,000* (Adjusted upward after 1/1/2011) Remaining Assets Generation Skipping Trusts for Children (Will merge with first dying spouses Generation Skipping Trusts shown on left) Childrens Trust (or distributions) Benefits children and grandchildren. Not estate taxable in their estates. Benefits children. Taxable in their estates. During both spouses lifetimes: Upon first death in 2011: During surviving spouses remaining lifetime: Upon second death: After deaths of both spouses: *Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000. *The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in
Gifting Allowances Gifting of up to $13,000 per person per year still does not need to be reported or cause use of the lifetime gifting exemption. Discounts with respect to use of limited partnerships, LLCs, and other vehicles were not changed. In addition there continues to be an unlimited gifting allowance for medical and educational expenses paid directly to medical providers, facilities and for tuition education institutions under Internal Revenue Code Section 2503(e). 6
Lifetime Reportable Gifting Exemption Since 2001, each person has had the ability to gift up to $1,000,000 during his or her lifetime, above and beyond the $13,000 per year per person allowance described above. Use of the $1,000,000 exemption causes a reduction in the amount that can pass estate tax free on a dollar for dollar basis. The gifting exemption for 2011 and 2012 has been increased to $5,000,000! This will allow many clients to shift income-producing assets to their children so that the children will be subject to income tax at lower rates than the parents would have. This may permit the children to gift the assets back to the parents if and when ever mutually agreed. The parents may retain constructive control of the gifted assets by using limited partnerships, irrevocable trusts, and interrelated structures. It may be possible to establish asset protection trusts which are outside of the estate of the donor, yet may be used for the benefit of the donor if there are hard times ahead. These will become popular and are not difficult to establish. 7
The Clawback Question Assume that a taxpayer utilizes his entire $5,000,000 lifetime gifting exemption to make a $5,000,000 gift in 2011 free of gift tax. Further assume that the taxpayer later dies in 2013 when the estate tax exemption has decreased to $1,000,000, and the estate tax rate has increased to 55%. Will the taxpayer have to pay estate tax based upon $4,000,000 of the $5,000,000 gift that he made in 2011? Although many commentators have expressed concern about a risk of this exemption clawback, the language of the Internal Revenue Code (and the relevant legislative history) indicates that any taxable gifts made by a taxpayer during his lifetime should not be subject to estate tax in the year of the taxpayers death. See Section 2001 (g), as enacted by the new law, and Section 2001(b)(2) as it existed immediately prior to the enactment of EGTRRA in See also Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976, pages (December 29, 1976). 8
The $5,000,000 Per Person Death Passage Exemption Will Now Be Portable If Both Spouses Die After 12/31/2010, or Thereafter If Extended Under prior estate tax law, the first dying spouse had to establish a trust or pass the $3,500,000 worth of assets directly to non spouse beneficiaries (and/or in non spousal trusts) in order to preserve use of the first dying spouses allowance. Under the new law, a surviving spouse will be able to use whatever portion of the allowance was not used by the first dying spouse. For example, if the first dying spouse leaves $1,000,000 outright to the children and the rest to the surviving spouse, then depending upon circumstances the surviving spouse may be able to leave $9,000,000 without estate tax on the second death, assuming that this law continues after
10 THE $5,000,000 LIFETIME GIFT AND ESTATE TAX ALLOWANCES WILL BE ADJUSTED FOR CHANGES IN THE CONSUMER PRICE INDEX BEGINNING 2012 BASED UPON ALL CHANGES IN THE INDEX OCCURING AFTER 1/1/2011. THE PORTABILITY EXEMPTION (DSUEA) WILL NOT INCREASE WITH CPI AFTER THE DEATH OF THE FIRST DYING SPOUSE. THE GOVERNMENT USES THE CPI FOR ALL URBAN CUSTOMERS, AS PUBLISHED BY THE UNITED STATES DEPARTMENT OF LABOR.
For Individuals Who Die or Died in 2010 A.Unless elect out as described below, subject to federal estate tax based upon a $5,000,000 death exemption and a 35% estate tax rate. Must file estate tax return if gross assets exceed $5,000,000. The $5,000,000 exemption reduced for prior use of $1,000,000 lifetime gifting exemption. B.Can elect to instead be subject to original 2010 carryover basis rules. File election later of: (i) 9 months after the date of death; or (ii) 9 months after December 17, 2010, which is Saturday, September 17, 2011, and allocate up to $1,300,000 ($4,300,000 if married) for date of death basis increases, and pay no estate tax. C.Example – John Smith dies unmarried with a $6,000,000 net estate. The estate can pay $350,000 in estate tax and receive a full step-up, or may alternatively elect to limit basis step-up to $1,300,000, and pay no estate tax. NOTE – Disclaimers of assets that were transferred on the death of a decedent that are normally limited to 9 months will be permitted through September 17, 2011 where the decedent died 2010 but before December 18,
Professor Heschs Example- Carryover Basis for an Individual Who Died in 2010? Senior died in 2010 owning a commercial office building, the only asset includible in his estate. Value:$14,000,000Land $40,000,000Building $54,000,000 Mortgage:($44,000,000) Equity:$10,000,000 _______________________________________________________________________________ History - Acquired in 1984 for $20,000,000 Allocated $4,000,000 to Land Allocated $16,000,000 to Building Depreciated $16,000,000 Current Adjusted Tax Basis $4,000,000 _______________________________________________________________________________ If the property is sold for $54,000,000, $16,000,000 of the gain will be ordinary income, and $34,000,000 of the gain will be capital gain. _______________________________________________________________________________ From a tax savings standpoint, is it better for Seniors estate to be subject to the estate tax and receive a stepped-up basis on the building, or to elect to have no estate tax apply and receive a carryover basis? 12
TO DIE OR NOT TO DIE IN 2010 – THAT WAS THE QUESTION Is it better to have an unlimited exemption in 2010 or is it better to afford the surviving spouse the opportunity to port the deceased spouses unused estate tax exemption if the decedent dies in 2011? The tax law will sometimes make people do things that they normally would not have done, including timing of death. Several commentators have expressed warnings that large discontinuities between estate tax laws provide incentive to change the timing of death, which causes a phenomenon that is termed death elasticity. United States Representative Cynthia Lummis (R-WY) has said that some of her Wyoming constituents were so worried about the reinstatement of federal estate taxes that they planned to discontinue dialysis and other life extending medical treatments so that they could die before December 31,
14 The following was drafted in December to explain this opportunity: There is a lot of confusion on the GST opportunity for It allows use of what remains of the clients $1,000,000 unified credit without using GST exemption for full skip transactions. Past the $1,000,000 a gift tax is incurred, which many people do not understand, and most people will not want to pay. It does not have to be to a grandchildren only trust. It can be to a 529 Plan or UGMA account for a grandchild or grandchildren, but the brokerage world has a hard time filling out forms and having these completed by 12/31. The following is a memo that goes into some detail on this, a sample Letter of Agreement to facilitate 2010 gifting is attached. We welcome any questions on this The Memo: Congress has recently passed legislation that raises the estate tax exemption to $5,000,000 per person on January 1, In addition, the lifetime gift tax exemption and the generation skipping transfer (GST) exemption will also be $5,000,000 per person on January 1, The 2010 GST Transfer Opportunity for December 2010 [News Item – Discussion of Allocation of GST Exemption Where A Zero Percent GST Gift Was Made In 2010 To A GST Exempt Trust]
15 GST tax generally applies to gifts to grandchildren and more remote descendants. When a donor makes a gift to grandchildren, the donor normally allocates some of his or her GST exemption to the gift so that the gift is not subject to GST tax. This allocation uses some of the donors lifetime GST exemption. This allocation is similar to the allocation of a donors lifetime gift tax exemption to taxable gifts to avoid the actual payment of gift tax on the gifts. A planning opportunity exists prior to January 1, 2011 for donors who would like to make gifts to or for grandchildren. Until the end of 2010, the GST tax rate is 0% instead of 35%. If a donor makes a gift to grandchildren before the end of the year, the gift may utilize some of the donors lifetime gift tax exemption. In 2010, the donor may elect to have the gift be subject to GST tax and no GST tax will actually be due because the tax rate is 0%. This will save the $5,000,000 GST exemption for later use by the donor. For example, if a donor makes a gift of $500,000 to a trust or a 529 Plan for grandchildren and has already used his annual exclusion for the grandchildren, the gift would use $500,000 of the donors lifetime gift tax exemption, but none of the donors GST exemption if the gift is made before the end of An example 529 Plan transaction document is attached. If the gift is made during 2010, the donor does not need to use any of his or her GST exemption because no GST tax is due on the transfer ($500,000 x 0% = $0). This allows the donor to keep the $500,000 of unallocated GST exemption for future use, without having to pay $175,000 ($500,000 x 35% = $175,000) in GST tax if the gift was made in 2011 and no GST exemption was allocated. Therefore, this donor would be able to transfer $500,000 more on death to a trust that could benefit his child or children and not be subject to estate tax at the level of the child or children. This is the advantage of preserving GST exemption while making gifts to grandchildren that might otherwise have become subject to a tax at the level of the child. If the gift was made on or after January 1, 2011, $500,000 of the donors GST exemption would be allocated to the gift to avoid the imposition of GST tax. This allocation would reduce the remaining GST exemption of the donor to $4,500,000 ($5,000,000 - $500,000 = $4,500,000) assuming that none of the donors GST exemption had been used on prior gifts. If the donor did not want to allocate GST exemption, the gift would be subject to GST tax at a 35% rate and the donor would need to pay $175,000 ($500,000 x 35% = $175,000). The 2010 GST Transfer Opportunity Continued
$10,000,000 CHILDREN AND GRANDCHILDREN GRANDCHILDREN Taxed in Children's Estate: $10,000,000 Not Taxed in Children's Estate: $5,000,000 $15,000,000 CHILDREN AND GRANDCHILDREN $5,000,000 $9,500,000 $5,000,000 $500,000 Taxed in Children's Estate: $9,500,000 Not Taxed in Children's Estate: $5,000,000 Passing to Grandchildren: $500,000 Taxed in Childrens Estate When They Die Not Taxed in Childrens Estate When They Die Taxed in Childrens Estate When They Die Not Taxed in Childrens Estate When They Die Net result – less assets passing that would become subject to federal estate tax on the death of children. Net result – More value passing to grandchildren without being subject to generation skipping tax or tax at the childrens level. Without 2010 $500,000 Grandchild GiftWith 2010 $500,000 Grandchild Gift Single Person with $15,000,000 Estate Tax and Lifetime Gifting Allowance 16
17 If a client made a GST transfer to a GST-exempt irrevocable trust that only benefits grandchildren and more remote descendants, and the client did not allocate GST exemption to the trust, then the client may have unintentionally caused the trust to not be 100% GST exempt. WHAT IF THE CLIENT ADDED TO A GST EXEMPT TRUST IN 2010 TO TRY TO TAKE ADVANTAGE OF THE ZERO GST TAX RULE?
18 IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) Grantor allocates $100,000 of GST exemption with respect to this gift. After the gift, the Trust is 100% GST exempt ($100,000 of GST exemption allocated; $100,000 of assets at time of 2009 gift). Grantor establishes and funds Trust with $100,000 gift IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) Grantor does not allocate any GST exemption with respect to this gift. No GST tax results because the GST tax rate is 0% in However, the Trust is now only 1/3 GST exempt ($100,000 GST exemption allocated, $300,000 total assets in the Trust at time of 2010 gift), assuming no growth in $100,000 gift to the Trust in Grantor gifts assets to Trust to take advantage of 0% GST tax rate Grantor $200,000 Gift Grantor $100,000 Gift DISCUSSION OF ASSETS ADDED TO GST EXEMPT TRUSTS DURING THE YEAR 2010
19 IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) $10,000 Distribution to Grandchild Trust distributes $10,000 each to Grandchild and to Great-Grandchild. The entire $10,000 distribution to Grandchild is GST tax-free despite Grantor's 2010 Gift to the Trust because of the "move down" rule under IRC Section 2653(a). All future distributions to Grandchild will also be free of GST tax. Of the $10,000 distribution to Great-Grandchild, $6,667 will be subject to GST tax, and $3,333 will be GST tax-free. This is because the Grantor did not allocate GST exemption with respect to his 2010 transfer to the Trust. $10,000 Distribution to Grandchild 2011 Trust makes distributions to Grandchild and Great-Grandchild. SOLUTION: Allocate GST exemption to 2010 Gift to Trust, which would cause the Grantor have wasted the 2010 GST tax planning opportunity but would spare the incurrence of GST tax. Another option to consider is a qualified severance under IRC Section 2642 and the Regulations thereunder. DISCUSSION OF ASSETS ADDED TO GST EXEMPT TRUSTS DURING THE YEAR 2010 – PAGE 2
New Vocabulary Basic Exclusion Amount The $5,000,000 exclusion for estate tax, as increased with the CPI beginning in DSUEA The Deceased Spousal Unused Exclusion Amount – the amount of the taxpayers most recently deceased spouses Basic Exclusion Amount not used by him or her, assuming that he or she dies after December 31, Applicable Exclusion Amount The sum of (1) the Basic Exclusion Amount plus (2) the Deceased Spousal Unused Exclusion Amount. NOTE- Before the new estate tax law, the Applicable Exclusion Amount was not specifically defined, but was listed for the applicable years, and was described in relation to the unified credit which operated to shield an estate from tax. Porting and Ported Porting means the act of transferring a portability allowance to a surviving spouse by estate tax return election. When the porting is completed the exclusion has been ported. 20
Selected Deadlines Tax Filing Deadlines: 1. For estates of decedents dying after December 31, 2009 but before January 1, 2011: Unless an estate elects out of the Estate Tax System to have no estate tax apply, the estate tax return must be filed by the later of: (i) 9 months after the date of death; or (ii) 9 months after December 17, 2010, which is Saturday, September 17, The Monday thereafter is September 19, Disclaimers : Qualified Disclaimers with respect to property received by reason of the death of a decedent in 2010 must be may be filed by the later of : (i) 9 months after the date of death; or (ii) 9 months after December 17, 2010, which is Saturday, September 17, The disclaimer will be qualified for tax purposes assuming that state law permits a disclaimer later than 9 months from the date of death. 3. GST Allocations : Generation Skipping Tax allocation returns for transfers in trust or otherwise made after December 31, 2009 and before December 17, 2010 can be made within 9 months after December 17, 2010, which is Saturday, September 17, We now know that transfers made to GST exempt trusts in 2010 can be GST exempt if sufficient GST exemption is allocated to the transfer. 4. Portability Estate Tax Return and Election The estate of a first dying spouse must file an estate tax return and affirmatively elect to have portability apply, notwithstanding whether the first dying spouse would have had a taxable estate. 21
Clients can make significant gifts under the new $5,000,000 lifetime allowance, even if the gifting allowance goes down to $1,000,000 in These gifts can be to trusts that benefit the spouse and descendants (dynasty trusts). Many clients already have these types of trusts in place. Clients can transfer income-producing assets to children who have a lower income tax rates. Review current planning with advisers to maximize the advantages of this legislation. 22
23 Mrs. $7,000,000 Net Worth Mrs. $7,000,000 Net Worth Revocable Trust Mrs. $7,000,000 Net Worth Mrs. $7,000,000 Net Worth Revocable Trust Gifting Trust FLP $7,000,000 x 2.5% x.65 = $113,750 $7,000,000 x 97.5% x.65 = $4,436,250 MRS. $7,000,000 NET WORTH 2.5%97.5% Before Planning After Planning Expected tax: $2,000,000 x 35% = $700,000 Expected tax $0.
24 Mrs. $7,000,000 Net Worth Mrs. $7,000,000 Net Worth Revocable Trust Gifting Trust FLP $7,000,000 x 2.5% x.65 = $113,750 $7,000,000 x 97.5% x.65 = $4,436,250 Gift trust purchased 97% LP interest for 97% x $7,000,000 x.65 = $4,413, year $4,413,500 interest-only Note payable at 1.53% interest = $67, per year. Note guaranteed by children. Forget everything to the left and simply marry someone who will predecease her and not leave her assets? :) $4,413,000 Note $200,000 Seed Capital 96.5% LP.5% GP $7,000,000 worth of assets 2% LP.5% GP MRS. $7,000,000 FROZEN
GRAT/PROMISSORY NOTE/SCIN/PRIVATE ANNUITY ALTERNATIVES FEBRUARY 2011 CLIENT AGE 70 25
26 Husband Husband's Revocable Trust Wife's Revocable Trust Wife FAMILY LIMITED PARTNERSHIP Children's Trust 49% 2% On first death 49% x $15,000,000 x.65 = $4,777,500. All fits into Credit Shelter Trust The Estate Tax Proof $15,000,000 Family
More About Portability 1. Spouse must be a U.S. citizen or resident. 2. No minimum term of marriage or anti-manipulation provisions. 3. Usable by the surviving spouse upon death, and probably for lifetime, but does not provide a GST exemption increase. Interestingly, the new Code provision does not directly address whether the surviving spouse may use the DSUEA to make lifetime gifts free of gift tax. However, the applicable Joint Committee on Taxation Report specifically provides that a surviving spouse may use his or her DSUEA for lifetime gifts or for transfers at death. So, if the surviving spouse dies with a $10,000,000 Applicable Exclusion Amount and wants to maximize benefits without the children being taxed, he or she can only leave $5,000,000 to a GST Trust for children and grandchildren, and the remaining $5,000,000 would have to be used on a Non-GST basis, and will thus be expected to be taxed at the childrens levels. 4. Unlike the surviving spouses own estate tax exemption, the DSUEA is NOT adjusted for inflation after the first death. 5. If surviving spouse (Client) remarries then a. If new spouse dies before Client, Client will have the DSUEA only of the new spouse. b. If Client dies before new spouse, new spouse can only receive up to $5,000,000 of the first dying spouses DSUEA but may use the rest in a Credit Shelter Trust. 6. The first dying spouse must file an estate tax return, even if not up to the taxable exclusion amount ($5,000,000) and the statute of limitations on the ability of the IRS to challenge the DSUEA amount begins to run only after the surviving spouse has filed an estate tax return. IMPORTANT – Provide in the Will or Trust that the fiduciaries are required to file an estate tax return for the first dying spouse, if requested by the surviving spouse, and have the surviving spouse be responsible for the costs thereof. Agree upon a personal representative or special administrator for this. 7. These rules sunset after
28 A married couple might provide for all assets to go to the surviving spouse, or to lock up up to $5 million on the first death to facilitate a credit shelter trust. CREDIT SHELTER TRUST SURVIVING SPOUSE INHERITS ALL ASSETS – USE PORTABILITY OF HIS OR HER $5 MILLION EXEMPTION 1. Uses the first dying spouses $5 million Generation Skipping Tax exemption (the ability to benefit children without being taxed at their level) – this is lost if portability is used. 1. No preservation of first dying spouses GST exemption, although a reverse QTIP election may be able to be made in some situations to preserve some of the first dying spouses GST exemption. 2. Assets can increase in value, to hopefully outpace inflation 2. No CPI or other value increase after first dying spouses death. 3. Better investment opportunities can be channeled to shelter trust assets. 3. Combined assets will be used to pay personal expenses and to hold wasting assets. 4. Co-Trusteeship can require conservatism.4. Surviving spouse may lose or give away the assets in remarriage or otherwise. 5. Can be protected from creditors of the surviving spouse.5. Not creditor protected. 6. Can borrow money from surviving spouse at the applicable Federal Rate (presently 1.53% for a 9-year Note), and it runs a greater rate of return on its own investment. 6. No ability to leverage with debt or otherwise.
Demonstrating the Fact that the $5,000,000 Generation Skipping Tax Exemption is Not Portable. 29 Use of Credit Shelter Trust to avoid estate tax and GST tax. First Deceased Spouse Second Dying Spouse $5,000,000 Credit Shelter GST Exempt Trust Total GST and Estate Tax Protected Amount $10,000,000 Non GST – Non Estate Tax Protected Share Portability Explanation First Deceased Spouse Second Dying Spouse All Assets Non GST – Non Estate Tax Protected Share $5,000,000 Share from Portability (will have to be subject to estate tax at level of children or will be subject to GST tax). $5,000,000 GST Estate Tax Proof Share The above assumes no growth – the $5,000,000 exemption, but not the portability allowance, is to increase with the CPI index increases after January 1, 2011, beginning January 1, $5,000,000 GST and Estate Tax Exempt Estate Tax Exempt but not GST Exempt On Second death:
Potential Effects of Inflation on the Estate Tax Exemption (Assuming 2.56% Annual Inflation and 5% Investment Performance) 30
Year Basic Estate Tax Exclusion Amount Added Inflation Adjustment (Rounded to Nearest $10,000) Total Applicable Exclusion Amount Adjusted for Inflation Possible Credit Shelter Trust Outperformance- 7% Growth Assumption Real Value of $5,000,000 in Year in 2011 Dollars, Assuming 5% Annual Inflation 2011$5,000,000$0$5,000, $5,000, $5,000,000$250,000$5,250,000.00$5,350,000.00$4,761, $5,000,000$510,000$5,510,000.00$5,724,500.00$4,535, $5,000,000$790,000$5,790,000.00$6,125,215.00$4,319, $5,000,000$1,080,000$6,080,000.00$6,553,980.05$4,113, $5,000,000$1,380,000$6,380,000.00$7,012,758.65$3,917, $5,000,000$1,700,000$6,700,000.00$7,503,651.76$3,731, $5,000,000$2,040,000$7,040,000.00$8,028,907.38$3,553, $5,000,000$2,390,000$7,390,000.00$8,590,930.90$3,384, $5,000,000$2,760,000$7,760,000.00$9,192,296.06$3,223, $5,000,000$3,140,000$8,140,000.00$9,835,756.79$3,069, $5,000,000$3,550,000$8,550,000.00$10,524,259.76$2,923, $5,000,000$3,980,000$8,980,000.00$11,260,957.94$2,784, $5,000,000$4,430,000$9,430,000.00$12,049,225.00$2,651, $5,000,000$4,900,000$9,900,000.00$12,892,670.75$2,525, $5,000,000$5,390,000$10,390,000.00$13,795,157.70$2,405, $5,000,000$5,910,000$10,910,000.00$14,760,818.74$2,290, $5,000,000$6,460,000$11,460,000.00$15,794,076.05$2,181, $5,000,000$7,030,000$12,030,000.00$16,899,661.38$2,077, $5,000,000$7,630,000$12,630,000.00$18,082,637.68$1,978, Potential Effects of Inflation on the Estate Tax Exemption (Assuming 5% Annual Inflation and 7% Investment Performance) 31 **Note the above chart assumes annual increase in the applicable CPI of 5% per year and that the current estate tax law is extended indefinitely for 2013 and beyond.
33 Even More About Portability!! Example: Mabel dies before her husband John and leaves him a $4,500,000 DSUEA because she gifted $500,000 during her lifetime. John has never gifted and therefore now has a $9,500,000 Applicable Exclusion Amount. John remarries Greta who has used $2,000,000 of her gifting exemption. If John dies first he can leave up to $4,500,000 in a Credit Shelter Trust for Greta and/or for his descendants, and Greta can still have his entire $5,000,000 DSUEA. If Greta dies first John will be limited to a $7,000,000 applicable exclusion amount on death, unless he remarries and the new spouse dies first, in which event the new spouses DSUEA will apply. Key question on first date How large is your applicable exclusion amount?
POEMS ABOUT PORTABILITY Aunt Portabello had real agility And married old Fungus for his portability After his funeral she gifted $5 mill To her lovely children And then married Bill And survived him to leave her children another $5 million still If she had had $25 million She would have also then married and survived both Clyde and William She also liked Mel Who had a large NOL But under Code Section 382 It did not transfer well. Poor Uncle Clyde After Aunt Mildred died He lost her $5 million portability By marrying Matilda Who had other bountiful utility Because Matildas predeceased husband Phil Provided financial fertility Matilda had a QTIP to absorb her portability And wanted that of Clyde, but then she accidentally died So Uncle Clyde was limited to $5 million And although an active octogenarian Did not want to support a woman So resisted remarryin Until along came Lolita Nard Who really needed a Green Card So he married sweet Lolita But then died, so that her QDOT was even sweetah But despite all elation Portability will not index with inflation. And after 2012 may not even be in our nation. Marriage and mortality is complicated enough Without Congress giving us all this new stuff. 34
Methods of Providing a Stepped-Up Basis on the Surviving Spouses Death for Assets That Would Typically Be Held Under a Credit Shelter Trust to Avoid Estate Tax CHOICEADVANTAGESDISADVANTAGES 1. An independent advisor or committee will have the power to cause Credit Shelter Trust assets to be devised directly to the surviving spouse to get a stepped up basis on his or her death. 1. Easy to understand and insert into present and future trust documents. 1.Giving the surviving spouse outright ownership of assets can be unwise from a creditor protection, spendthrift, remarriage and undue influence standpoint, and this could result in many fortunes being lost. 2. Would cause the distributed assets to be included in the estate of the surviving spouse, which could be problematic if portability is not applicable at that time. 2. An independent committee is given the power to cause the Credit Shelter Trust to be a QTIP trust (a Clayton QTIP) so that it will be subject to federal estate tax on the surviving spouses death without having to transfer the assets out to the surviving spouse. 1. Works well if the family is best off with taking the marital deduction on the first death, and expects to have portability apply to eliminate estate tax on the second death. 2. Allows for continued protection of assets. 1. Not easy to explain this Clayton QTIP system to clients. 2. May require slightly more complicated drafting than a simple payment enablement clause as described in Choice Would cause the QTIP assets to be included in the estate of the surviving spouse, which could be problematic if portability is not applicable at that time. 3. In lieu of a devise to a Credit Shelter Trust, everything is devised outright to the surviving spouse, with the spouse having the ability to disclaim all or a portion of the assets into the Credit Shelter Trust. 1. Easy to understand and insert into present and future trust documents. 2. Would be simple to administer. 1. In some states this may expose assets to creditors of the surviving spouse if the creditors exist when the first dying spouse passes. 2. Surviving spouse loses his or her power to appoint how the assets in the Trust pass on his or her subsequent death (to the extent of the assets disclaimed into the Trust). 1. Allow a committee or independent advisor to give the surviving spouse a power to appoint all or a portion of the assets in the Credit Shelter Trust to creditors of her estate, or a broader appointment power only exercisable with consent of appointed non adverse parties. 1. Allows for continued protection of assets 1. Not easy to explain this choice to clients. 2. Uncertainty as to whether the law will allow this strategy without causing inclusion of all of the Trust assets in the surviving spouses gross estate. 35
Potential Codicil Language To Permit Decedents Heirs to Require and Pay for Portability Election and Form 706 Filing To preserve flexibility to opt for portability after the death of the first dying spouse, suggest a Codicil to the clients Will providing the surviving spouse with the right to require return preparation to facilitate portability (the filing of an estate tax return) and to possibly appoint a special administrator to serve for the purpose of signing the return, and to be compensated by the surviving spouse. Treasury Regulation Section allows a special administrator be appointed under local law to file and sign a federal estate tax return. In a situation where spouses have separate children, the children or advisors of the first dying spouse may prefer to serve as personal representatives and to control all aspects of estate administration, but the surviving spouse can be significantly benefitted by having the first spouses estate file an estate tax return and make a portability election. Potential language is as follows: I authorize my surviving spouse, _________, to appoint a board-certified estate planning lawyer, or a CPA who has done work for my family for at least 10 years, to serve as Special Administrator of this Last Will and Testament for the purpose of filing a federal estate tax return in order to assure that the DSUEA (Deceased Spouse Unused Exemption Amount) becomes available to my said spouse, with the Administrator to be compensated solely by my said spouse, and with any other expenses reasonably incurred by my personal representatives to accommodate such filing to be reimbursed to my estate. Said appointment and cooperation need only to apply if my spouse survives me and executes a confirmation that such expenses will be paid by my said spouse. Any dispute between the Administrator and my personal representative or representatives shall be resolved by _________________, CPA. 36
Potential Language to Amend Clients Revocable Trust to Allow for Credit Shelter Trust to Instead be a Clayton QTIP with Outright Disposition Rights in Case Family Prefers to Use Portability POTENTIAL LANGUAGE FOR AMENDMENT TO TRUST AGREEMENT I hereby appoint ___________________, __________________ and _______________ as Independent Fiduciaries for the purpose of determining whether, upon the event of my death, all Trust assets may be payable outright to my spouse, in view of the new estate tax law. In order to facilitate this, I understand that the Smith Family Trust that would be established under Section 4.02 ___ of this Trust Agreement shall be amended such that the Trustee of such Trust, with the consent of a majority of the Independent Fiduciaries, may pay all assets under such Trust and/or under the QTIP Trust that would be established under Article ____ of this Trust Agreement to my spouse, at any time and for any reason. Further, such Smith Family Trust (a) shall pay all income to my spouse, (b) shall be used solely for my spouse during said spouses lifetime, with any and all distributions to be made solely to said spouse, and that (c) the Trustee shall be required to keep the Trust assets under such Trust productive, provided that such requirements shall not apply except to the extent that my Personal Representative, upon the instructions from the majority of the Independent Fiduciaries, elects for such Trust to qualify for the federal estate tax marital deduction by making a Clayton QTIP Election pursuant to Internal Revenue Code Section 2056 and Treasury Regulation (b)-7(d)(3)(i). The above shall apply so that if a Clayton QTIP Election is not made, then the Family Trust and QTIP Trust described above shall operate as if this Trust Amendment had not been implemented. 37
REVISED PROTECTIVE TRUST LOGISTICAL CHART SHOWING CLAYTON Q-TIPS First Dying Spouses Revocable Trust Surviving Spouses Revocable Trust $5,000,000* (Adjusted upward for inflation after 1/1/2011) Remaining Assets Family (By-Pass) Generation Skipping Trust (Not taxed in surviving spouses estate) QTIP Non- GST Trust (Marital Deduction Trust that is not generation skipping) Generation Skipping Trusts for Children Childrens Trust (or distributions) Surviving spouse can have the right to redirect how assets as distributed on second death. Benefits children and grandchildren. Not estate taxable in their estates. Benefits children. Taxable in their estates. Surviving Spouses Revocable Trust (Will include assets owned jointly on first death) $5,000,000* (Adjusted upward after 1/1/2011) Remaining Assets Generation Skipping Trusts for Children (Will merge with first dying spouses Generation Skipping Trusts shown on left) Childrens Trust (or distributions) Benefits children and grandchildren. Not estate taxable in their estates. Benefits children. Taxable in their estates. During both spouses lifetimes: Upon first death in 2011: During surviving spouses remaining lifetime: Upon second death: After deaths of both spouses: *Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000. *The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in Possible Clayton QTIP which would qualify for the estate tax marital deduction. The assets in the Clayton QTIP would be includable in the surviving spouses gross estate, but the surviving spouse can use some of his or her DSUEA, and could make a reverse QTIP election to utilize any portion of the first dying spouses unused GST exemption. 38
39 DYNASTY WEALTH PROTECTION TRUST 1.Grantor can replace the Trustee at any time and for any reason. 2.Protected from creditors of Grantor and family members. 3.Can benefit spouse and descendants as needed for health, education and maintenance. 4.Per Private Letter Ruling the Grantor may be a discretionary beneficiary of the trust and not have it subject to estate tax in his or her estate. But be very careful on this! The Trust would need to be formed in an asset protection jurisdiction and there is no revenue procedure on this. 5.Should be grandfathered from future legislative restrictions. 6.May loan money to Grantor. 7.May own limited partnership or LLC interests that are managed at arms length by the Grantor. 8.May be subject to income tax at its own bracket, or the Grantor may be subject to income tax on the income of the trust, allowing it to grow income-tax free unless or until desired otherwise. If the Grantor is a beneficiary it must remain a disregarded Grantor Trust. Assets gifted to trust and growth thereon. Trustee
40 Multiple Grantor Trusts allow for significant flexibility. Each Irrevocable Grantor Trust is Defective for income tax purposes but may be toggled off separately from the others Irrevocable Grantor Trust #4 Irrevocable Grantor Trust #3 Irrevocable Grantor Trust #2 Irrevocable Grantor Trust #1 CLIENT Age 55 Married with $15,000,000 net worth in 2011 (before planning). Earns $500,000 a year more than family is spending. In second marriage – 2 children by prior marriage. 1 child in present marriage. For spouse (age 56) and common new child and future descendants. Spouse can receive benefits only when authorized by an adverse party beneficiary (a common descendant) to allow for toggling off. Same as defective grantor trust #1, but formed in asset protection trust jurisdiction with Grantor is discretionary beneficiary – wife loses beneficial interest upon divorce. For children of prior marriage. Divisible into separate Trusts for each separate child of the first marriage at the discretion of replaceable Trustee. Grantor is discretionary beneficiary For children of prior marriage. Divisible into separate Trusts for each separate child of the first marriage at the discretion of replaceable Trustee. **Each Trust receives $1,000,000 gift in Wife as TrusteeChild as Trustee Wife as Trustee
.5% GP % LP – % + 2.7% = 3.8% total in % GP 1.1% LP 44 IRREVOCABLE TRUSTS FOR DESCENDANTS HUSBANDWIFE 529 PLANS HUSBANDS REVOCABLE TRUST PROMISSORY NOTES LIMITED PARTNERSHIP WIFES REVOCABLE TRUST LIFETIME Q- TIP TRUST Homestead $650,000.5% GP 97.90% (96.8% LP in 2011) Other assets - $20,000,000 May owe parents $11,500,000 in notes shown on the right (Will the transfer of a note to a limited partnership and/or a QTIP Trust trigger income tax when the note is a defective grantor trust installment sale note?) $6,500,000 Promissory Note $6,500,000 x.984 x 65% = $4,157,400 Homestead $650,000 $4,807,400 QTIP pays all of its income to Wife, plus amounts as she needs for health, education and maintenance. $5,000,000 Promissory Note (Fair market value of Note may be worth less than $5,000,000.) TYPICAL YEAR-END 2010 ESTATE TAX PLANNING UPDATE FOR OVER $10,000,000 MARRIED COUPLE OWED $11,500,000 IN NOTES
QPRT Trust Planning Demonstration 45 Gift Component (with respect to each QPRT) Value of ½ of Home at End of QPRT Term Assuming 7% Growth Estate Tax on Value at End of Term Assuming 35% Estate Tax Rate Estate Tax Savings on ½ of Home at End of QPRT Estate Tax Savings on Entire Value of Home at End of QPRT Estate Tax SavingsAfter 16 Years Assuming 7% Growth on ½ of House Estate Tax Savings After 16 Years Assuming 7% Growth on Entire House 6 Year QPRT Gift % % $645,314.05$225,859.92$132,193.23$264,386.96$350,633.96$701, Value of Gift $267, Year QPRT Gift % % $738,820.06$258,587.02$176,295.43$352,590.85$362,009.05$724, Value of Gift $235, Year QPRT Gift % % $845,875.08$296,056.28$225,022.09$450,044.17$373,266.45$746, Value of Gift $202, Year QPRT Gift % % $968,442.38$338,954.83$278,937.54$557,875.08$384,283.35$768, Value of Gift $171, Year QPRT Gift % % $1,108,769.68$388,069.39$338,648.12$677,296.25$394,879.38$789, Value of Gift $141, Year QPRT Gift % % $1,269,430.41$444,300.64$404,848.7$809,697.15$404,848.57$809, Value of Gift $112, Age of Client 68 Initial Value of Home $860,000 Fractional Discount Assumed 15.00% Discounted Value of ½ of Home $365,500 Probability of Death Before Certain Age Current Age 68 2 years (70) 4.18%6 years (74)14.31%10 years (78)27.33%20 years (88)68.53% 4 years (72)8.92%8 years (76)20.45%15 years (83)47.24%
46 COMPARISON OF METHODS TO PURCHASE HOMES FOR THE CHILDREN $250,000 Exemption on Sale of Home $50,000 Homestead Exemption and 3% Per Year Cap on Valuation DivorceControlNotes Father and Mother loan money to the child. Child purchases and owns home. Child gets income tax exemption. Child gets homestead exemption and cap. Loan will be repaid to parents. Equity may be subject to claim by spouse if this is not waived by Prenuptial Agreement. Child controls the house. However, we may be able to call the Note to force a sale. Note: Child gets equity above Note. Father and Mother own the home and the child lives in the house. No.Generally no. However, it may be possible to obtain these with a 99-year lease. Better protected.Father and Mother control. Via Child Funded Homestead Bypass Trust Child gets income tax exemption. Child gets homestead exemption and cap. Better protected.Mother would be Trustee of the Trust and would retain control. Note: Credits may be able to get into the Trust. It may be possible for Mother to transfer the house to the childs individual name in the event of a Creditor issue. Direct Client Funded Homestead Bypass Trust. NoChild gets homestead exemption and cap. Better protected.Mother would be Trustee of the Trust and would retain control. Note: The $250,000 exemption is lost, but no creditor of the child should be able to get the assets. One-half purchased by child and one-half owned by Father and Mother One-half. One-half, better protected. Each controls one-half.
PROFESSOR HESCHS COMMENTS 52 New Estate Tax Law, Same Estate Planning Techniques Techniques have not changed because of the new law only the priority of the applicable techniques has changed For clients with a certain level of wealth (depending on the age of the client at the time of the gift), an outright gift to a grantor trust may be all that is necessary to significantly reduce a clients estate tax exposure. The grantor trust status of the trust requires the grantor to pay the income taxes associated with the trusts income, which depletes the grantors taxable estate and allows the assets of the trust to essentially grow tax-free. A low cash value, high death benefit or term life insurance policy with a decreasing death benefit can be used to cover any estate taxes that would result from the grantor dying prematurely, before the grantor trust status of the trust has fully depleted the grantors taxable estate. If an outright gift to a grantor trust does not eliminate the grantors taxable estate, then other estate planning strategies should be considered, such as GRATs, Installment Sales to Grantor Trusts and Charitable Lead Annuity Trusts.
53 Senior Before Tax Planning These examples assume that Senior is age 56 in 2011, has $500,000 per year in living costs, annual inflation is 1%, and that Seniors annual earnings are equal to 5.45% of his Investment Assets (i.e., the balance of assets in his gross estate). The estate tax rate is assumed to be 35%, and Senior and his Spouse are assumed to have not used any of their $10,000,000 combined lifetime gifting exemption. $49,000,000 in Investment Assets Total of Seniors Assets After Gifts$35,666, Pre-Discounted Value of Gifts$13,333, Seniors Total Investment Assets Before Gift$49,000, Projected Living Costs($24,443,186.68) Projected Lifetime Earnings$162,914,03.07 Tax on Earnings($75,425,261.34) Projected Balance of Gross Estate in 2050$112,045, Estate Taxes if Senior Dies in 2050($35,715,968.77) Balance$76,329, YearPre Discounted ValueEarningsTax on EarningsLiving CostsBalance in Gross Estate $49,000, $13,333,333.00$2,670,500.00$1,117,604.25$500,000.00$50,052, $2,727,882.82$1,141,618.96$505,000.00$51,134, $2,786,811.70$1,294,474.03$510,050.00$52,116, $2,840,346.38$1,319,340.89$515,150.50$53,122, $2,895,165.47$1,344,804.36$520,302.01$54,152, $3,189,777.02$1,481,651.43$546,842.64$59,689, $3,522,145.68$1,636,036.67$574,737.11$65,937, $3,897,713.46$1,810,487.90$604,054.48$73,000, $4,322,743.88$2,007,914.53$634,867.32$80,996, $4,804,448.00$2,231,666.10$667,251.94$90,060, $5,351,129.92$2,485,599.85$701,288.49$100,350, $5,972,354.72$2,774,158.77$737,061.25$112,045, Senior The Result of No Tax Planning Balance in Gross Estate$112,045, Estate Taxes($35,715,968.77) Balance Passing to Descendants$76,329, Plan Balance After Estate Taxes$76,329, End Result PAGE 1 OF PROFESSOR HESCHS ILLUSTRATION
54 PAGE 2 OF PROFESSOR HESCHS ILLUSTRATION RESULTS OF A $10,000,000 OUTRIGHT GIFT TO IRREVOCABLE GRANTOR TRUST SPLIT WITH SPOUSE SENIOR AFTER TAX PLANNING IRREVOCABLE GRANTOR TRUST $10,000,000 Outright Gift, Valued to Account for a 25% valuation Discount (Pre-Discount Value of $13,333,333) No Gift Tax Incurred On Gift Because Gift Is Split With Spouse to Use their Combined $10,000,000 Lifetime Gifting Exemption $49,000,000 in Investment Assets Total of Senior's Assets After Gifts$35,666, Pre-Discounted Value of Gifts$13,333, Senior's Total Investment Assets Before Gifts$49,000, Present Value of Gift($13,333,333.00) Gift Tax$0.00 Projected Living Costs($24,443,186.68) Projected Lifetime Earnings$68,868, Tax on Earnings($29,951,870.09) Tax on Grantor Trust Earnings($45,473,391.24) Projected Balance of Gross Estate in 2050$666, Estate Taxes if Senior Dies in 2050($233,428.78) Balance$433, Pre-Discounted Value of Gifts$13,333, Cumulative Earnings on Trust Assets$97,865, Projected Balance of Trust Assets in 2050$111,198, These examples assume that Senior is age 56 in 2011, has $500,000 per year in living costs, annual inflation is 1%, and that Senior's annual earnings are equal to 5.45% of his Investment Assets (i.e., the balance of assets in his gross estate) and the Trust's annual earnings are equal to 5.45% of Trust Assets. The estate tax rate is assumed to be 35%, and Senior and his Spouse are assumed to have not used any of their $10,000,000 combined lifetime gifting exemption, except with respect to the $10,000,000 outright gift indicated above.
55 SENIOR AS A RESULT OF TAX PLANNING IRREVOCABLE GRANTOR TRUST Balance in Gross Estate$666, Estate Taxes($233,428.78) Balance Passing to Descendants$433, Pre-Discounted Value of Gifts$13,333, Cummulative Earnings on Trust Assets$97,865,35.00 Projected Balance of Trust Assets in 2050$111,198, Plan Balance After Estate Taxes$111,632, Savings From Making $10,000,000 Gift:$35,302, PAGE 3 OF PROFESSOR HESCHS ILLUSTRATION RESULTS OF A $10,000,000 OUTRIGHT GIFT TO IRREVOCABLE GRANTOR TRUST SPLIT WITH SPOUSE
56 YearGiftsTrust ValueTrust EarningsTax on Trust EarningsClient Earnings Tax on Clients EarningsLiving CostsClient Net Worth $35,666, $13,333,333.00$14,060,000.00$726,667.00$304,109.99$1,943,833.35$813,494.26$500,000.00$35,992, $14,826,270.00$766,270.00$320,683.99$1,961,612.84$820,934.97$505,000.00$36,307, $15,634,301.00$808,032.00$375,330.72$1,978,780.00$919,143.31$510,050.00$36,482, $17,384,878.00$898,507.00$395,786.25$1,996,658.27$927,447.77$520,302.01$36,767, $17,384,878.00$898,507.00$417,356.60$1,996,658.27$930,778.03$520,302.01$36,767, $22,667,549.00$1,171,533.00$544,177.03$2,018,244.13$937,474.40$546,842.64$37,021, $29,555,444.00$1,527,522.00$709,533.86$1,994,623.92$926,502.81$574,737.11$36,382, $38,536,335.00$1,991,683.00$925,136.99$1,906,029.96$885,350.91$604,054.48$34,464, $50,246,212.00$2,596,888.00$1,206,254.55$1,725,855.72$801,659.98$634,867.32$30,750, $65,514,322.00$3,385,994.00$1,572,794.15$1,418,545.14$658,871.95$667,251.94$24,546, $85,421,888.00$4,414,882.00$2,050,712.62$936,248.06$434,887.23$701,288.49$14,928, $111,378,686.00$5,576,414.00$2,673,854.22$215,940.91$100,304.55$737,061.25$666, PAGE 4 OF PROFESSOR HESCHS ILLUSTRATION DEMONSTRATING SPREADSHEET RESULTS FOR SENIOR AFTER OUTRIGHT GIFT OF $10,000,000 BASED UPON ASSUMPTIONS SHOWN ON ILLUSTRATION PAGE 2 (POWERPOINT PAGE 54)
58 PROFESSOR HESCHS COMMENTS CONTINUED Fixed Term Charitable Lead Annuity Trust Example– How to Take Advantage of Financial Leverage After the Clients Death If an 80 year old client establishes a 20-year, Zeroed Out Charitable Lead Annuity Trust with a $10,000,000 contribution, then over $14,000,000 in assets will remain in the CLAT for Clients descendants, free of estate tax. This example assumes a Section 7520 rate of 1.8% (the December 2010 Section 7520 rate) and an annual return of 7% on trust assets. Upon Clients death, nothing is included in his estate, even if he dies during the annuity term. Therefore, if Client dies during year 10 of the 20 year Fixed Term CLAT, then there is still 10 years of financial leverage that will occur after his death. This can yield remarkable results for Clients descendants, as indicated by the chart on the following slide.
59 20 YEAR CHARITABLE LEAD ANNUITY TRUST -- $10,000,000 Contribution, "Zeroed-Out Therefore no gift tax is paid and no gift exemption is used to fund the trust – anything remaining after the 20 annual payments to charity can pass to the Grantors children. Assumes a 25% discount on assets contributed (a real value of $13,333, contributed). Assuming a 1.8% Interest Rate (the December 2010 Section 7520 rate) YearContribution to Trust Trust Earnings at 7% Annual Return Annual Annuity Payment to CharityTrust Balance 2011$10,000,000$700,000.00($599,826.05)$10,100, $ -$707,012.18($599,826.05)$10,207, $ -$714,515.21($599,826.05)$10,322, $ -$722,543.45($599,826.05)$10,444, $ -$731,133.66($599,826.05)$10,576, $ -$740,325.20($599,826.05)$10,716, $ -$750,160.14($599,826.05)$10,866, $ -$760,683.52($599,826.05)$11,027, $ -$771,943.55($599,826.05)$11,199, $ -$783,991.77($599,826.05)$11,384, $ -$796,883.37($599,826.05)$11,581, $ -$810,677.38($599,826.05)$11,791, $ -$825,436.98($599,826.05)$12,017, $ -$841,229.74($599,826.05)$12,258, $ -$858,128.00($599,826.05)$12,517, $ -$876,209.14($599,826.05)$12,793, $ -$895,555.95($599,826.05)$13,089, $ -$916,257.05($599,826.05)$13,405, $ -$938,407.22($599,826.05)$13,744, $ -$962,107.90($599,826.05)$14,106, Amount Passing to Descendants After Expiration of Annuity Term: $14,106,680.40
60 SPEAKER BIOGRAPHIES: Jerome M. Hesch, J.D., MBA practices law in Miami, Florida and is Of Counsel to the Carlton Fields Law Firm. He is also the Director of the Notre Dame Tax & Estate Planning Institute and has published numerous articles, several Tax Management Portfolios, and co-authored a law school casebook on Federal Income Taxation, now in its third edition. He has appeared for groups such as the AICPA, the University of Miami Heckerling Institute on Estate Planning, the University of Southern California Tax Institute and the New York University Institute on Federal Taxation. He has participated in several bar association projects, such as the Drafting Committee for the Florida Revised Uniform Partnership Act and preparing the ABAs comments on the IRSs proposed private annuity regulations. He received his BA and MBA degrees from the University of Michigan and a JD degree from the University of Buffalo Law School. He was with the Office of Chief Counsel, Internal Revenue Service, Washington, D.C. from 1970 to 1975, and was a full-time law professor from 1975 to He is currently an adjunct professor of law at the Florida International University and the University of Miami law schools. Alan S. Gassman, J.D., LL.M. is an attorney practicing in Clearwater, Florida with the firm of Gassman, Bates & Associates, P.A. Mr. Gassmans primary practice focus over the past 25 years has been the representation of high net worth individuals, physicians and business owners in estate planning, taxation, and business and personal asset structuring. In 2009 and 2010 Mr. Gassman authored and co-authored the following published articles. Creditor Rights Under Private Annuities and Grantor-Retained Annuity Trusts in Florida, The Florida Bar Journal, July/August, Unconventional Uses of 529 Plans Should Not Be Ignored By Taxpayers and Their Advisors, BNA Tax & Accounting, March 11, Dont Overlook the Benefits - Tax and Otherwise - of Private Operating Foundations Estates, Gifts and Trusts Journal, 11/12/2009. After Olmstead: Will a Multiple-member LLC Continue to Have Charging Order Protection?, The Florida Bar Journal, December Recent Adventures in Florida Tenancy By The Entirety - Important Developments Leimberg Information Systems, Inc., June 18, One Good Reason Not To Do A Roth IRA Conversion, Leimberg Information Systems, Inc., September 11, Mistakes Doctors Make Managing Their Practices and Investments, Leimberg Information Systems, Inc., May 20, In 2010 Mr. Gassman presented the following Webinars for professionals; Interesting Interest; Minimum and Maximum Interest Rates for Intra- Family Transactions and Applications of the OID Rules to Intra-Family Debt Obligations, BNA Tax & Accounting with Professor Jerry Hesch, August 18, 2009, Individual and Group Medical Practices: Tax, Health Law, and Creditor Protection Planning, BNA Tax & Accounting, March 2, Mr. Gassman can be contacted at or by phone at The Gassman, Bates & Associates, P.A. website is Kenneth J. Crotty, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Bates & Associates, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. His address is Christopher J. Denicolo, J.D., LL.M. is an associate at the Clearwater, Florida law firm of Gassman, Bates & Associates, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. His address is