2. Estate Planning Keeping More for Your Family
Presented by
Dennis L. Thomas CPA ABV JD LL.M.-Taxation
Strothman and Company

3. STROTHMAN ESTATE PLANNING TEAM
Judge Learned Hand; “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
Gregory v. Helvering, 69 F;2d 809, 810 (2d Cir. 1934)

4. ESTATE PLANNING PHILOSOPHY
Control
Retain cash flow to maintain accustomed manner of living
Minimize taxes
Incorporate charitable goals

5. AGENDA Introductions Estate Planning Process
Essential Estate Planning Documents
Revocable Trusts
Kentucky Inheritance Tax
Federal, Gift and Generation Skipping Transfer Tax
Irrevocable Trusts (Break)
Bypass Trusts vs. Portability
Valuation Planning
Tax Basis Adjustments
Questions

6. GOALS What do we want to accomplish with Estate Planning?
Give our loved ones peace of mind
Keep our loved ones out of court (to the extent possible)
Prevent disputes among our loved ones

7. ESSENTIAL ESTATE PLANNING DOCUMENTS!
Four Documents:
Last Will and Testament
Power of Attorney
Healthcare Directive
-Living Will
-Healthcare Surrogate
-HIPPA Release
Revocable Trust

8. LAST WILL AND TESTAMENT
A legal declaration by which you (the testator):
Name another person (the executor) to manage your estate; and
Direct the transfer of your assets at your death
Why “Essential”?
If you don’t have a Will, your assets will not be distributed according to your wishes, but according to Kentucky law.

9. LAST WILL AND TESTAMENT
Formalities for a Kentucky Will to be valid:
Must be at least 18 years of age
Must be of sound mind
Must be wholly in the testator’s own handwriting or signed in the presence of two witnesses who also sign in the presence of the testator and each other

10. GENERAL POWER OF ATTORNEY
Written permission to represent you or act on your behalf
Generally for dealing with your finances
“Durable” power of attorney = Not affected or made invalid by the maker’s incapacity
“Springing” power of attorney = Takes effect only after the maker’s incapacity

11. GENERAL POWER OF ATTORNEY
Why “essential”?
Without a power of attorney, court approval is required for anyone else to act on your behalf and perform most financial tasks

12. HEALTH CARE POWER OF ATTORNEY
Authorization of another (a health care surrogate) to make health care decisions for you when you no longer have decisional capacity
Why “essential”?
If you don’t name a health care surrogate, no one can act on your behalf with regard to health care decisions

13. AUTHORIZATION FOR DISCLOSURE OF PROTECTED HEALTH INFORMATION
HIPAA – major penalties for sharing health information
Names the individuals with whom doctors and hospitals can share your health information
Why “essential”?
Without this authorization, doctors and hospitals are prevented from sharing your health information with anyone

14. LIVING WILL
A set of written instructions that specifies what you want to have happen medically if you are no longer capable of making decisions
Directs withholding of life support, medicine, drugs, nutrition, and hydration if attending physician and one other physician determine that (1) you are permanently unconscious or (2) you have a terminal condition

15. LIVING WILL Why “essential”?
Without a living will, a hospital generally will not remove life support

16. THE “ESSENTIAL” ESTATE PLANNING
The Essentials:
At the minimum, Execute the 4 essential documents
Organize your affairs
Conduct a family meeting

17. TRUSTS What is a Revocable Trust? Benefits of revocable trusts:
Avoid probate
Confidentiality
Simplifies asset management if disability
No estate and gift tax savings

18. PROBATE What is Probate? A court-supervised, legal process
The validity of a Will is determined
The executor is appointed
The court oversees the gathering of assets, the payment of creditors, and the distribution of property to beneficiaries

19. PROBATE How do you avoid probate? Revocable Trust
Deeds – Joint with right of survivorship
Bank Accounts – Jointly owned or titled as paid on death accounts (POD)
IRA, Annuities and Life Insurance naming a designated beneficiary that survives the decedent

20. FIDUCIARY ROLES EXECUTOR GUARDIAN TRUSTEE POWER OF ATTORNEY
HEALTH CARE SURROGATE
HIPAA REPRESENTATIVE
ADVISORY COMMITTEE

21. KENTUCKY INHERITANCE TAX
Repeal of Kentucky Estate Tax - ATRA
Federal Estate tax – Credit for State death taxes
vs.
Federal Estate tax – Deduction for State death taxes

22. KENTUCKY INHERITANCE TAX
Class A Exempt Beneficiaries
Spouse
Children (blood, step or adopted as infant)
Grandchildren(blood, step or adopted as infant)
Sibling (whole or half)
Certain nonprofit organizations are exempt under KRS
Gifting in contemplation of death
No gift tax

23. KENTUCKY INHERITANCE TAX
Class B beneficiaries include:
Niece/Nephew (blood)
Daughter-in-law/Son-in-law
Aunt/Uncle
Great Grandchild
Class C beneficiaries include any beneficiary not in Class A or Class B or is not exempt under KRS

24. KENTUCKY INHERITANCE TAX
Inheritance Amount Over
Class B Beneficiary Rates
Class C Beneficiary Rates $ 0% 6%
$ 1,000 4%
$ 10,000 5% 8%
$ 20,000
10%
$ 30,000
12%
$ 45,000
14%
$ 60,000
16%
$100,000
$200,000

25. FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX
Unlimited marital deduction – 1981
Recent U.S. Supreme Court case of United States v. Windsor 133 S. Ct (2013)

26. CURRENT DEVELOPMENTS FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX
Annual exclusion gifts at $14,000 per donee from each donor for 2013 and 2014 tax year
TAX YEAR
ANNUAL GIFT EXCLUSION
1979 – 2001
$10,000
2002 – 2005
$11,000
2006 – 2008
$12,000
$13,000
(est.)
$14,000

27. EXEMPTION AND RATES AFTER AMERICAN TAXPAYER RELIEF
CURRENT DEVELOPMENTS FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX
EXEMPTION AND RATES AFTER AMERICAN TAXPAYER RELIEF
ACT OF 2012 (ATRA)
TYPE OF
TAX
2014 EXEMPTION AMOUNT *
RATES
ESTATE TAX
$5,340,0000
40%
GIFT TAX
GENERATION SKIPPING TRANSFER TAX (GSTT)

28. EXEMPTION COMPARISON

29. IRREVOCABLE GIFT TRUST
Assets generally estate tax exempt
Annual exclusion gifts – “Crummey Withdrawal Rights”
Use of the gift tax exemption

30. LEVERAGING THE EXEMPTION
Irrevocable Life Insurance Trust
Irrevocable Life Insurance
Trust Wife, Trustee
Husband
Initial Gift Life Insurance Cash Value:
Beneficiary:
Wife, Then
Children
Annual Gift of Premium
Payment
Notices to Crummey
Beneficiaries

31. IRREVOCABLE GIFT TRUST
Dynasty Trusts
Use of the GST tax exemption
Rule against perpetuities repealed in Kentucky

32. TAXATION OF TRUSTS INCOME TAX IMPLICATIONS Grantor Trusts
Complex and Simple Trusts
Qualified Subchapter S Trusts (QSST)
Electing Small Business

33. Trust Tax Rates After American Taxpayer Relief Act of 2012 (ATRA)
If taxable income is:
The tax rate is:
Not over $2,450
15%
$2,451 - $5,700
25%
$5,701 - $8,750
28%
$8,751 - $11,950
33%
$11,951 and up
39.6%*
Note that Long-term capital gain rates were increased to 20%
*Plus a 3.8% Medicare surtax on unearned income exceeding the top tax bracket

34. TRUST TAX PLANNING ESTATE TAX EFFECTIVE INCOME TAX EFFECTIVE NO
REVOCABLE TRUST
YES
IDGT
“CLIFFORD” TRUST
TESTAMENTARY TRUST

35. IRREVOCABLE GIFT TRUST
Nontax benefits of using a Dynasty Trust
Creditor protection issues

36. BYPASS TRUST PLANNING What is a Bypass Trust?
What is the planning strategy?
How is the planning strategy implemented?
Assets funding a Bypass Trust are:
Not subject to estate tax
Generally held in trust for the life of the surviving spouse and benefits the children and grandchildren at the death of the surviving spouse
Potentially subject to higher income and capital gains tax rates

37. Last Will and Testament
BYPASS TRUST PLANNING
Last Will and Testament
Executor = Spouse Provision to leave personal property by memorandum, then to Spouse, if living and if not, then to children.
Residue distributed to Revocable Trust
Wife’s Estate mirrors Husband’s
Revocable Trust
Fund A for Spouse outright in fee and free of trust
Fund B in trust for Spouse’s benefit
(currently equal to $5,250,000
less any prior gifts)
Distributes to Children

38. BYPASS TRUST PLANNING Last Will and Testament Revocable Trust
Executor = Spouse Provision to leave personal property by memorandum, then to Spouse, if living and if not, then to children.
Residue distributed to Revocable Trust
Wife’s Estate mirrors Husband’s
Revocable Trust
Fund with the use of a disclaimer
Fund with remaining assets
Fund A for Spouse outright in fee and free of trust (or in trust)
Fund B in trust for Spouse’s benefit
(currently equal to $5,250,000
less any prior gifts)
Distributes to Children

39. PORTABILITY
Allows surviving spouse to use unused exemption of deceased spouse
Must file a Federal estate tax return at the death of the first spouse to claim use of the decedent’s unused portion
Appreciating assets in surviving spouse’s estate vs. Bypass Trust where the appreciation of assets outside the surviving spouse’s estate

40. Tax on assets above combined exemption amounts
PORTABILITY
Husband
ASSETS
Wife
EXEMPTION AMOUNT
Tax on assets above combined exemption amounts
Children

41. TRUST DECANTING Evaluate trustee’s power to decant
Must have the power to distribute principal
Evaluate trustee’s duties in connection with decanting
Determine the applicable law
Differences between old and new trust must be permitted under Kentucky statute
Address trustee’s risk
Can be minimized by obtaining a release or consent from the beneficiaries

42. FAMILY COMPANIES/VALUATION PLANNING
CHOICE OF ENTITY
CORPORATION
(Incorporated)
PARTNERSHIP
(Agreement)
LIMITED LIABILITY COMPANY (LLC)
(Organized)
C Corporation
General
Sole Proprietorship
S Corporation
Limited
Partnership

43. FAMILY COMPANIES/VALUATION PLANNING
Types of LLC membership interest
Voting or Participating
Non-voting or Non-participating
Things to consider when forming a new LLC
Ownership structure
Management
Business Purpose
Assets
Potential gifting to the next generation
Tax Status of Entity

44. FAMILY COMPANIES/VALUATION PLANNING
Valuation discounts applied to transfers of non-voting/non-participating interests in an entity:
Lack of Marketability
Lack of Control
Fractional interest discounts available on transfers of interest in assets such as:
Real Estate
Note Receivable

45. HOW BASIS IS DETERMINED FOR SALE PURPOSES
ADJUSTMENTS TO BASIS
EVENT/ASSET TYPE
ADJUSTED/
NOT ADJUSTED
HOW BASIS IS DETERMINED FOR SALE PURPOSES
Death
Adjusted
Fair Market Value (FMV) At Date of Decedent’s Death
Gift
Not Adjusted (unless gift tax paid)
Lesser of FMV (at the time of the gift) or Donor’s Tax Basis*
IRA,401(k), Annuity and Installment Sales
Not Adjusted
Carryover Basis of Decedent
Life Insurance
Adjusted to Death Benefit/Not Taxable*
N/A (Note: no estate tax either if owned by a child of the decedent or an irrevocable trust)

46. ENTITIES ADJUSTMENTS TO BASIS C CORPORATION S CORPORATION PARTNERSHIP
IRC §754 Election
SOLE PROPRIETORSHIP

47. DEDUCTIBILITY OF MEDICAL EXPENSES
“Qualified Long Term Services” are considered medical expenses and are deductible for income tax purposes. (IRC§7702B)
The portion of care attributable to medical care is the only portion deductible when the principle reason for care is not medical.
(Treas. Reg. § (e)(1)(v).

48. DEDUCTIBILITY OF MEDICAL EXPENSES
FACILITIES
Nursing Home
Personal Care
Assisted Living

49. DEDUCTIBILITY OF NURSING HOME EXPENSES
Since the primary purpose of a nursing home is to provide medical care, the entire cost is tax deductible as a medical expense.

50. DEDUCTIBILITY OF ASSISTED LIVING EXPENSES
A licensed health care practitioner has to certify that the resident is unable to perform at least 2 out of 6 of the activities of daily living OR that they require substantial supervision to protect their health and safety due to severe cognitive decline.
Obtain a statement from the licensed health care professional at least once every 12 months.

51. CURRENT DEVELOPMENTS DEDUCTIBILITY OF MEDICAL EXPENSES
Deductible when medical expenses exceed the following:
7.5% of AGI (in 2012)
10% of AGI if the taxpayer is under 65 (starting in 2013)
10% of AGI for every taxpayer (starting in 2016)
Care provided by non-medical personnel is deductible when it is for a person with dementia needing 24 hour care. (Estate of Baral)

52. THE TAXPAYER FAMILY IRREVOCABLE TRUST
ESTATE PLAN FLOW CHART
JOE TAXPAYER JANE TAXPAYER Disclaimer CHILDREN CHILD’S ESTATE GRANDCHILDREN
WILL
WILL
THE TAXPAYER FAMILY IRREVOCABLE TRUST
REVOCABLE TRUST
REVOCABLE TRUST
FAMILY TRUST
GIFT
INCOME
RESIDUE

53. DENNIS L. THOMAS CPA ABV JD LL.M.-TAXATION Partner
Strothman and Company Certified Public Accountants and Advisors 1600 Waterfront Plaza 325 W. Main Street Louisville, KY